Onex Corporation, the Canadian private equity giant, recently released its Q1 2024 earnings transcript, brimming with optimism and pronouncements of growing momentum. While analysts focused on the usual metrics – fee-generating assets under management (FGAUM), fundraising progress, and deal pipelines – a subtle yet powerful shift in Onex's strategic direction seems to have gone largely unnoticed.

Hidden amidst the discussions of CLO performance and renewed normal course issuer bids, a small revelation hints at a potential cash-generating powerhouse within Onex's portfolio: Convex, a de novo insurance venture initiated just four years ago. Bobby Le Blanc, Onex's CEO, casually mentioned that Convex generated a staggering $450 million in net income last year, a figure that dwarfs typical EBITDA figures bandied about in earnings calls.

This revelation is significant for several reasons. Firstly, it underscores Onex's ability to identify and nurture high-growth, profitable businesses even outside its traditional private equity comfort zone. Convex's performance paints a picture of a company firing on all cylinders, capitalizing on a favorable industry environment and Onex's astute investment strategy.

Secondly, Convex's success hints at a potential accelerated monetization timeline. Unlike many other portfolio companies, Convex's de novo structure and lack of debt offer multiple liquidity paths. Le Blanc specifically mentioned IPO, strategic acquisition, and dividend payouts as potential options. Given Convex's impressive profitability and growth trajectory, even a partial realization or dividend payout could translate into a significant windfall for Onex.

Here's where the intrigue deepens. Le Blanc expressed confidence that Convex's net income will see "meaningful improvement" in 2024, barring any unforeseen industry upheavals. Assuming a conservative 10% growth in net income, Convex could be looking at $495 million in net income this year alone. Extrapolating this trend, it's not unreasonable to envision Convex becoming a billion-dollar net income generator within the next few years.

This potential financial behemoth is not reflected in Onex's hard NAV, further contributing to the disconnect between the company's intrinsic value and its current share price. As Onex continues to streamline its operations, prioritize profitability, and capitalize on lucrative monetization opportunities, Convex could become a crucial driver of shareholder value creation.

Consider this: Onex repurchased 3.5 million shares in 2023, capturing approximately CAD 225 million (USD 167 million) of hard NAV. A single year of Convex's projected net income, even without accounting for potential growth, could fuel two years' worth of aggressive share buybacks.

The Convex revelation, buried within an otherwise standard earnings transcript, reveals a powerful undercurrent of value creation quietly brewing within Onex's portfolio. As the sleeping giant awakens, investors would be wise to pay close attention to the whispers of this burgeoning cash machine.

Onex's FGAUM Growth

Onex's Fee-Generating Assets Under Management (FGAUM) have shown steady growth, particularly fueled by the successful CLO (Collateralized Loan Obligation) business.

Onex's Investment Strategy

Onex is known for its disciplined investment approach, focusing on long-term value creation.

"Fun Fact: Onex's founder, Gerald Schwartz, was a law school classmate of BlackBerry founder, Jim Balsillie."