Onex Corporation, the Canadian private equity behemoth, has long been a subject of Wall Street scrutiny. Its recent performance, while solid, has left some analysts questioning its long-term growth potential. But a deep dive into their Q1 2024 earnings transcript reveals a story that's far more compelling than a cursory glance might suggest. Hidden within the dry language of financial statements and management commentary lies a powerful narrative of a company strategically positioning itself for a massive rebound, driven by a powerful engine they're calling their "hidden gem."

This "hidden gem," as CEO Bobby Le Blanc terms it, is Onex's structured credit platform, specifically their Collateralized Loan Obligation (CLO) business. While CLOs have often been painted with a broad brush of skepticism, stemming from their association with the 2008 financial crisis, Onex's approach to this asset class is anything but reckless. In fact, it's a masterclass in strategic execution and capital efficiency, a testament to the company's deep understanding of risk and its ability to generate outsized returns in less-explored corners of the market.

The numbers tell a compelling story. In 2023, Onex issued seven new CLOs, five in the U.S. and two in Europe, raising over $2.8 billion in fee-generating assets under management (FGAUM). This performance translated into a staggering 24% return on Onex's invested capital within their credit strategies. But the true brilliance lies in the capital efficiency achieved within the CLO platform. Since 2020, Onex has gone from holding over 85% of their CLO equity to just over 50%. This means that while FGAUM has surged over 50% in the past three years, Onex's actual equity exposure in CLOs has decreased by 25%, a reduction of over $100 million.

Think about that for a moment. Onex is essentially growing its structured credit business, generating substantial management fees and achieving remarkable returns, all while significantly reducing its own capital exposure. This strategic brilliance is a testament to the team's prowess, led by Ronnie Jaber, who has steered the CLO business into a top 10 global issuer position. And what's even more remarkable is that this entire segment of their business doesn't even factor into their hard NAV calculation.

"CFO Chris Govan stated: "Our structured business is a bit of a hidden gem and as you know, its value is not at all reflected in our hard NAV.""

Onex's CLO FGAUM Growth vs. Onex's Equity Exposure

The following chart visualizes the capital efficiency of Onex's CLO platform, showcasing FGAUM growth alongside the reduction in Onex's own equity exposure.

Now, imagine the impact on Onex's overall valuation when this "hidden gem" is fully recognized by the market. We believe that as the CLO business continues to scale, driven by continued investor demand and the team's aggressive approach to new issuances, the market will have no choice but to acknowledge the true value it represents. This, coupled with the company's proactive share buyback program, which has reduced share count by 10% over the last two years, capturing approximately $440 million of hard NAV, paints a picture of a company primed for a significant revaluation.

Beyond the CLO story, Onex is exhibiting further signs of a coming rebound. Their private equity teams, while acknowledging a slower than usual deal pipeline, are actively pursuing realization opportunities, aiming to deliver more DPI (distributed to paid-in capital) to their limited partners. This, coupled with the anticipated $275 million net proceeds from the pending sale of ASM, will further bolster Onex's liquidity, providing ample ammunition for share buybacks and other strategic initiatives.

Moreover, the company's commitment to disciplined expense management is already bearing fruit, with cost savings initiatives delivering tangible benefits. While full-year FRE (fee-related earnings) performance is expected to decline in 2024 due to management fee reductions, fundraising plans are projected to drive progress in run rate FRE throughout the year.

In conclusion, the current market undervaluation of Onex represents a compelling opportunity for investors seeking exposure to a private equity giant poised for a significant rebound. The company's strategic focus on its high-growth, capital-efficient CLO business, coupled with a robust liquidity position, proactive share buybacks and a commitment to expense management, provides a solid foundation for future value creation. We believe that as the market begins to recognize the true potential of Onex's "hidden gem," the company's share price will inevitably reflect its intrinsic value, rewarding investors who were astute enough to see beyond the surface.

Hypothesis:

Onex's share price will experience a significant upward revaluation within the next 12-18 months, driven primarily by the continued growth and market recognition of their structured credit platform, particularly the CLO business.

Supporting Numbers:

CLO FGAUM growth: Over 50% in the past three years.

Reduction in Onex CLO equity exposure: 25% (over $100 million) since 2020.

CLO return on invested capital: 24% in 2023.

Share buyback impact: 10% reduction in share count over the last two years, capturing approximately $440 million of hard NAV.

Anticipated ASM sale proceeds: $275 million.

"Fun Fact: Onex's first major investment was in a Canadian airline called Sky Regional Airlines. The airline was later sold to Air Canada, marking Onex's first successful exit and establishing their reputation for generating strong returns in niche markets."