CA - Onex 2023 Annual Update: Lukewarm Year

2023-04-21 06:44:37 ET

Summary

• Onex's performance for 2022 was lukewarm, with FEAUM growth at only 3%, and a challenging fundraising environment reported for new funds ONCAP V and OP VI.
• The whole PE industry has been impacted by macroeconomic factors, such as inflation, rising interest rates, and recession fears.
• Onex's current stock price is trading at a considerable discount to book value, and the company possesses lots of cash to engage in stock buybacks or pursue acquisitions.

2023 Update

I wrote an article on Onex (ONEXF) last year and entered a position in the company. I review my positions once a year and now it's time to see how Onex is doing. Onex's performance for 2022 was lukewarm. FEAUM (Fee earnings assets under management) growth was only 3%, and Onex is reporting a challenging fundraising environment for their new funds ONCAP V and OP VI. Their Private Equity portfolio only returned 3%, but this does compare favorably to declines of about 18% for the S&P 500 in 2022. Invested capital per share was up 6% while FRE declined to -44M from -28M in 2021.

Key Metrics

Source: Author created table, data from Onex annual reports

Onex performance is partly due to macro environment. If we look at the whole PE industry, Bain reports in their 2023 market outlook report that private equity fundraising declined 20% from 2021 to 2022. Due to the uncertainty arising from inflation, rising interest rates, and recession fears.

Fundraising for the new funds ONCAP V and OP VI will continue into 2024 per Onex's Q3 2022 investor call . Management also stated that the company should hit FRE positive in 2024. If you remember in my last article the company was projecting 65B in FEAUM and around 120M in FRE (Fee related earnings) by 2026.

Even though the fundraising environment is tough I expect Onex to raise more capital in the new funds than the last ones. If you look at performance the previous funds OP V and ONCAP IV have returned 27% and 23% IRR's. Each fund Onex has raised in the past has been bigger than the last one. The last couple for both ONCAP and OP have been 20-40% bigger than the prior ones. So I'm expecting OP VI and ONCAP V to be 9B and 1.5B respectively. That would go a long way to helping Onex reach its 2026 FEAUM target.

An exciting development in 2022 was Onex starting a fund in infrastructure.

Onex Transportation Partners has also officially begun fundraising for the first close expected in the first half of next year.

- Q3 2022 Transcript Onex

Infrastructure is a large opportunity that will definitely help Onex grow that FEAUM. For example Brookfield (BAM) recently closed on their fifth infrastructure fund raising $20B .

Value

At the current trading price of $0.30 on the dollar, adjusting for cash on the balance sheet, the company appears to be a very attractive buy. The management has been actively buying back stock, with Onex purchasing over 6 million shares in 2022.

The CFO mentioned in the Q4 2022 conference call that the company has a large cash balance and is not close to its minimum cash balance. They find their share price attractive and are considering buying more this year. Additionally, the management has expressed interest in making acquisitions, which could be advantageous given the recent downturn in private equity firms' share prices. These acquisitions could help the company reach its FEAUM target.

Risks

The biggest risk for Onex is fundraising for the new funds. In the Q4 2022 Conference call that the challenging fundraising environment could be due to Investors putting more money with the bigger PE firms.

In TPG Inc.'s (TPG) Q4 2022 conference call , management confirmed Onex saying their LP's consolidated funds to them (they had a pretty good year). We'll probably know by the end of 2023 how all the funds are doing and how much they will raise.

Conclusion

The year 2022 proved to be challenging for both Onex and the industry at large. However, the success of Onex's latest funds ONCAP IV and OP V, combined with their previous accomplishments in fundraising, gives me confidence in their ability to weather this difficult period. Moreover, Onex's current stock price is at a considerable discount to book value, and the company possesses lots of cash to engage in stock buybacks or pursue acquisitions. I remain optimistic about Onex's prospects and will continue adding.

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