Private equity trailblazer Gerry Schwartz brought leveraged buyouts to Canada and delivered outsize gains for much of his nearly four decades at the helm of Onex Corp.
Now, at age 81, his reluctance to relinquish control of the firm he founded has fueled a growing sense of frustration among those who see it as another distraction for Onex, on top of lackluster recent returns, a loss of talented employees and fundraising struggles.
Investors and analysts were caught off guard when Onex announced its succession plan last year. Schwartz has the right to appoint most of the board, but that’s supposed to end once he steps down as chief executive officer. In November, though, the company proposed extending Schwartz’s voting control until 2028 while elevating president Bobby Le Blanc to CEO this year.
“The surprise was Schwartz’s decision to remain a controlling shareholder,” Canaccord Genuity analyst Scott Chan said in a phone interview.
Even some investors in the company’s buyout funds were dismayed. That’s partly because of a belief that Onex needs to have an orderly succession to make it easier to retain investment talent, according to a person with knowledge of discussions between the firm and its limited partners.
Investors generally want to see a formal succession plan for CEOs over 50 to protect the firm’s investments, said Ted Bililies, managing director at consulting firm Alix Partners. “Sometimes with founder-led private equity firms, there’s almost a cult of the founder, that it becomes almost disloyal to be thinking about succession when in fact it’s just good risk management,” he said, speaking about the industry and not Onex specifically.
Onex declined to make executives available for an interview, referring instead to their recent public comments.
“We made progress in 2022, but we recognize there is much more work ahead to deliver on our objectives,” Schwartz told investors during a February 24 conference call. “The next few years will be pivotal.”
‘Feeling the Impact’
All buyout firms are grappling with the most difficult fundraising environment since the 2008 financial crisis. The sharp rise in interest rates has made financing deals more expensive and bank loans harder to get.
Onex’s woes, however, seem particularly pronounced. The firm, which targeted $8 billion for its sixth flagship fund when it began raising cash last year, has generated just $2 billion so far, which includes $1.5 billion of its own money. Last May, Le Blanc told analysts that Onex expected to wrap up fundraising by the first half of 2023. That has now been pushed into early 2024.
The firm’s previous buyout fund, which debuted in 2017 with $7.2 billion, struggled to deploy capital during a boom period for private equity. Several bids failed, including one for Modulaire Group, a designer of modular workspaces that was instead sold for about $5 billion to a unit of Canadian rival Brookfield Asset Management Inc. Onex also lost out on deals for Italian specialty paper maker Fedrigoni and Spanish sintered stone producer Neolith Distribucion.
Institutional investors are “allocating more of their investing dollars to the larger consolidated alternative-asset managers, given today’s still uncertain environment,” Le Blanc told analysts in February, and Onex is “feeling the impact.”
The Toronto-based company, with $51 billion of assets under management as of December, may be caught in the middle. It lacks the scale of firms like Brookfield or Blackstone Inc., but it’s also not small and specialized.
Financial troubles at some of its portfolio companies have also weighed on returns.
Medical-imaging firm Carestream Health, which Onex had owned for 15 years, went bankrupt last August. In 2019, the private equity firm ceded control of Survitec Group — a provider of marine, defense and aerospace survival equipment — to creditors.
Overall, the firm’s flagship Onex Partners funds were flat last year, outpacing public markets, with gains in some funds being offset by losses in its fourth buyout fund. The latter includes Parkdean Resorts, a U.K. owner of campgrounds and holiday parks that’s now in talks to refinance £600 million ($749 million) of senior debt coming due next year.
There are some bright spots. Onex Credit is one. A $1.2 billion private debt fund of 2019 vintage returned 21 percent as of the end of last year, and a 2016 fund also ranked in the top quartile, according to the company.
The credit group, which manages $26 billion across strategies such as collateralized loan obligations and opportunistic credit, is aiming to raise $1.5 billion for another credit fund for final close later this year, Le Blanc told analysts.
“We’re adding new investors to our platform, drawn to our fundamental credit expertise, ability to navigate tough markets and long-term track record,” he said.
Brain Drain
Even the credit arm hasn’t been immune to upheaval, though. In 2020, Onex hired Jason New, formerly of Blackstone, as co-head of the group, and then tapped Conor Daly to run the European CLO platform. Both were gone by last year. New didn’t respond to a request for comment and Daly declined to comment.
The duo was part of a number of staff exits. The slow pace of deploying funds, weak performance and management’s unwillingness to seriously consider investment proposals from staff were contributing factors to some of the departures, according to three former employees who asked not to be identified discussing personnel matters.
Meanwhile, Onex shareholders wait for progress. The shares, down 32 percent over five years, are trading at a massive discount to the firm’s net asset value. The stock trades at less than half of Onex’s own investments of about C$131 a share.
That’s a much bigger discount than can be “reasonably justified,” CIBC Capital Markets analyst Nik Priebe wrote after Onex’s most recent earnings report. The depressed stock price has left Onex insiders with 7.6 million options that can’t be exercised because they’re underwater.
Holding On
A lawyer by training, Schwartz left Canada in 1968 for Harvard Business School before joining Bear Stearns in the early 1970s alongside Jerome Kohlberg, Henry Kravis and George Roberts, who later founded KKR & Co.
Schwartz returned to Canada with that leveraged-buyout formula and started Onex in 1984. Three years later, it became the first among its peers to go public, beating Blackstone by almost two decades.
In its early years, Onex put large chunks of its own capital into acquisitions, often assembling groups of co-investors on a deal-by-deal basis. The firm didn’t start a flagship buyout fund for larger deals until 2003, but it was a huge winner, generating an internal rate of return of 38 percent. None of the subsequent vintages were able to top that — though some smaller Onex funds that concentrate on mid-market buyouts have produced returns of 25 percent or better.
Now, with shareholders poised to vote on the succession proposal, Schwartz, Le Blanc and the management team have started to make changes.
Last month, the firm abandoned plans to expand its Gluskin & Sheff wealth management division, which it acquired only four years ago, offloading it to Royal Bank of Canada. CIBC’s Priebe called the move a “negative development” and a surprise, but said it’s mitigated by the fact that RBC will include Onex funds on its product list for financial advisers.
And Onex is also bending to investors’ concerns about Schwartz’s grip, tweaking its succession plan so that his control would end by 2026 instead of 2028. “I am grateful to shareholders for their continued support and for providing feedback on the voluntary proposal,” Schwartz said in a statement.
The plan goes to shareholders for a vote on May 11. If they reject it, however, Le Blanc will not get his promotion. Schwartz would remain CEO, in order to keep his voting control.
