Welcome to Onex second quarter 2023 conference call and webcast. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session with pre-qualifying analysts. At that time, if you have a question, please press star one one on your telephone keypad. If you'd like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. I will now turn the conference over to Jill Homenuk, Managing Director, Shareholder Relations and Communications at Onex. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us. We're broadcasting this call on our website. Hosting the call today are Bobby Le Blanc, Onex's Chief Executive Officer, and Chris Govan, our Chief Financial Officer. Earlier this morning, we issued our second quarter 2023 press release, MD&A, and consolidated financial statements, which are available on the shareholder section of our website and have also been filed on SEDAR. Our supplemental information package is also available on our website. As a reminder, all references to dollar amounts on this call are in U.S., unless otherwise stated. I must also point everyone to our webcast presentation for our usual disclaimer and cautionary factors relating to any forward-looking statements contained in today's presentation and remarks. With that, I'll now turn the call over to Bobby.
Good morning, everyone. Onex had an active and productive three months. Since our last earnings call, we monetized several investments, closed our first continuation vehicle, aggressively bought back shares, and continued to make progress on cost management. Despite ongoing challenges within the fundraising environment, we are acting decisively on the priorities within our control. Our balance sheet and liquidity position are a competitive advantage, particularly in today's market conditions. Our pro forma cash position currently stands at approximately $1.4 billion, an increase of almost 30% since last quarter end. We achieved this through a combination of targeted actions that enhanced our liquidity and produced DPI, or a return of capital for our limited partners. The sales of our Celestica shares returned total net proceeds of $275 million for Onex shareholders.
While we enjoyed a long and productive relationship, the decision to act is consistent with our desire to be active managers of our own capital, similar to how we're approaching fund investing. A strong balance sheet and liquidity position affords us enhanced flexibility to invest and grow our business. We continue to believe that one of the best investments we can make right now is an investment in our own shares. We know the value of our investing capital and the long-term potential of our business. After slowing our buyback program earlier this year, we actively reentered the market in May and have since repurchased approximately 1.6 million shares. Notwithstanding the strong performance of our shares in Q2, we continue to see our shares as materially underpriced relative to their intrinsic value. I will now turn to some business updates, starting with Gluskin Sheff.
By the end of July, we had already transferred half of the Gluskin Sheff advisors to their new firms. Many of our funds are now on Fundserv, a major accomplishment, and we are processing over CAD 700 million of initial in-kind client transfers, meaning the funds will remain under Onex management. This number should ramp up in the coming months as more clients are transferred. We continue to expect that all advisor and client transfers will be completed by the end of the year. All the teams involved are working hard to ensure a well-managed transition. The infrastructure we have created and the service and marketing model we are developing will continue to serve existing clients well and will be flexible and scalable as we work to build out our platform. You'll hear more about how we plan to do that on Investor Day.
Across our platforms, our teams remain active, creating opportunities where available, despite the continued challenging environment. At the end of June, our CLO team priced our third USCLO this year, adding about $440 million of fee-generating AUM, bringing the total raise from our CLO platform to nearly $1.2 billion this year. All the debt classes were oversubscribed. Three of the 19 investors were new to the Onex platform. With our consistent performance and increasing marketing presence with overseas investors, we continue to achieve strong results in growing this business. Both of our Falcon funds are actively fundraising. For Falcon Fund VII, we have already closed on approximately $500 million of third-party capital. The fund has begun investing.
In direct lending, our BDC continues to have very stable performance, and we expect to hold a closing of our unlevered direct lending strategy this fall. The ONCAP team remains active with fundraising and has been successful in completing new investments in a tough market. They recently completed a significant investment in Biomerics, merging it with the medical business of Precision Concepts, an ONCAP IV portfolio company. This creates a powerful platform to build future returns and generates DPI for ONCAP IV investors. The investment in Biomerics was the last platform investment for ONCAP IV and the beginning of ONCAP V's investing period. In addition, the team recently completed an investment in a US-based provider of before and after-school childcare programs. The ability to invest in high-quality, attractive opportunities in challenging deployment conditions is a testament to the ONCAP team's strong sourcing expertise.
We expect these early investments for ONCAP V will resonate well with LPs as we continue fundraising. Recently, we talked about the potential of using continuation vehicles within private equity. I'm pleased to announce that at the end of July, we closed our first CV. Onex Partners IV has sold its remaining investment in Ryan, LLC to the CV, returning about $117 million to Onex when funding occurs later this year. Onex Partners has entered into a five-year agreement to manage the CV, retaining approximately $600 million of fee-generating AUM. Across our organization, we continue to align our cost structure with our revenue expectations, leading to the restructuring charge in Q2 that we telegraphed last quarter. The charge incorporates the changes previously announced within the Onex Partners platform, as well as actions to streamline our corporate functions.
Our business units are being given more autonomy to determine the support they require and, with that, more accountability to drive profitability. Although decisions that impact people are always tough, this approach will lead to a more flexible model and one that creates the right foundation for us to continue to grow. Efforts to enhance efficiencies and reduce complexity across Onex will continue into the fall, with a particular focus on out-of-pocket spend. As I look ahead, despite the still uncertain environment, I see several bright spots on the horizon. Our job right now, one where we made good strides this quarter, is to create certainty where we can by acting decisively. We are focused on the job at hand and executing with pace and discipline. We'll continue to update you on our progress and look forward to seeing many of you on September 28th.
With that, I'll turn it over to Chris.
Thanks, Bobby, and good morning, everyone. Our second quarter investing capital per share of $98.87 is up nearly 3% quarter-on-quarter and 9% in the last 12 months. In Canadian dollars, investing capital was just shy of CAD 131 per share, up 12% year-over-year, which includes the impact of a stronger US dollar. We added to our liquidity in the quarter with realizations from Celestica and Ryan Specialty Group. Consequently, our cash and near-cash position today is about $1.4 billion, representing 18% of our pro forma investing capital, or roughly CAD 23 per share.
Given this strong capital position and the inherent value we see in our shares, Onex bought back 1.6 million shares in the last few months, capturing about CAD 95 million of hard NAV for our continuing shareholders. Looking at private equity, in the second quarter, we saw broad-based gains across the PE portfolio and in each of our core verticals other than consumer. Direct investments were up 11%, with more modest 2% and 4% increases at OP and ONCAP, respectively. Turning to credit, Onex recognized a CAD 27 million gain, or 4% return in Q2, driven by an increase in the fair value of CLO investments, consistent with the returns in the underlying leveraged loan market. Overall, performance remains strong across our credit funds in Q2.
Our team continues to capitalize on defensive positioning, building its track record to attract new investors to the platform. Our CLOs continue to deliver strong risk-adjusted returns with below-market default rates and strong equity distributions. The CLO portfolios are also defensively positioned, ranking in the top quartile in several risk-based metrics, including exposure to loans rated CCC and to those trading below 80% of par. Given the long-term nature of Onex's commitments to our investment platforms, it's useful to step back from the details of quarterly performance. When you do that, over the last five years, Onex's investing capital per share has enjoyed an 11% CAGR, which compares favorably to the MSCI World Mid Cap Index's 6% return over the same time frame. Moreover, we've generated those returns with relatively low volatility.
Investing capital per share has had a negative return in just one of the last 10 fiscal years. Continuing to efficiently compound shareholder capital through our investment platforms will remain a key source of long-term value creation at Onex. Let's turn to the asset management side of the business. Onex ended the quarter with $34.3 billion of fee-generating AUM, substantially unchanged from year-end. Additions to FGAUM, including a close of ONCAP V in April and several CLOs so far this year, were substantially offset by some realization activity and net redemptions associated with the Gluskin transition. In June, we priced our third new USCLO of the year, which will add about $440 million to Q3 FGAUM. As Bobby mentioned, we recently agreed to sell Ryan, LLC to a single asset continuation vehicle managed by Onex Partners.
This is our second realization event for Ryan, the first being the sale of a minority stake in the back half of last year. Onex's share of the proceeds from the CV transaction will be about $117 million. The transaction price reflected a modest discount to Ryan's most recent valuation, so this transaction and the previous partial sale were both done at a considerable markup to the valuation prior to our launch of the sales process last year. The CV transaction crystallizes a 25% gross IRR and a 2.7x multiple of capital for Onex. We're really pleased with this outcome, providing about $250 million of distributions to our LPs at a time when many are over-allocated, while allowing Onex Partners to increase and extend the duration of its fee-generating AUM.
Run rate annual management fees should be a little over $3 million during the CV's initial term, and Onex will have a carried interest opportunity on about $600 million of AUM. As Bobby mentioned, we're also pleased with the progress of the Gluskin Sheff transition. As expected, we saw some redemptions to cash in the first few months following the March announcement, which did have a negative impact on our fee-generating AUM. Now that transfer and client capability has been extended to RBC clients, we expect to see a ramp-up of in-client transfers, where we continue to manage the underlying assets. The teams are working hard, and it's good to see the transition is occurring smoothly and on pace. Turning to fee-related and distributable earnings. Onex reported an overall FRE loss of $4 million in Q2, including $4 million of earnings from the asset management platform.
The improvement in Q2 FRE largely reflects the streamlining of the OP team early in the quarter, as well as costs being taken out of Gluskin faster than the decline in management fees. We expect this benefit at Gluskin to begin narrowing in Q3 as lower management fees will be charged on assets transferred in kind to reflect the shift from wealth management to asset management services for these clients. As I indicated last quarter, with OP V's committed fee period slated to end late this year, PE's 2023 FRE contribution will be relatively unaffected by the OP VI fundraising pause.
However, there will be a meaningful step down in fees going into 2024, which we are working to mitigate, both through changes to our cost structure and new fee earning strategies, such as the Ryan continuation vehicle, that leverage the Onex Partners team and its key long-term relationships. Looking at distributable earnings, Q2 was relatively strong, with $367 million of DE, driven by the partial realizations in Celestica and Ryan Specialty Group, as well as regular quarterly CLO distributions. Onex's ability to consistently generate DE allows us to allocate capital and create value for shareholders. In this case, Q2 saw us resume regular stock buybacks and provide support to enhance the performance of our asset management platforms. As indicated last quarter, and as Bobby touched upon in his remarks, we've been conducting a comprehensive review of our operating and cost structure.
This led to a restructuring charge of $15 million in Q2, associated with the Onex Partners platform and our corporate support groups. The underlying changes will streamline our operations and align our cost structure for the current and anticipated operating environment. The changes associated with this charge and some additional cost savings initiated earlier in the year will reduce our run rate expenses by a little over $25 million annually. To be clear, those savings do not include the significant reduction in costs that will come from the wind down of our wealth management operations. Our work to further optimize the business is ongoing, with the next phase being focused on out-of-pocket spend. We look forward to providing you a fulsome update on the business at our Investor Day on September 28th and hope to see you there.
That concludes the prepared remarks, and so we'll now be happy to take any questions.
Certainly. Once again, ladies and gentlemen, if you do have a question at this time, please press star one one. One moment for our first question. Our first question comes from the line of Nik Priebe from CIBC Capital Markets. Your question, please?
Okay, thanks. Just on your activity building balance sheet liquidity over the past few months. I'm interested to hear a little bit more about the intended use of proceeds from those recent secondary sales. I know you alluded to recommencing buyback activity in the quarter, but would the proceeds be earmarked for anything else specific? I'd also be interested to hear what your appetite might be towards M&A in general.
Yeah, clearly, hi, Nic, it's Bobby. Clearly, share buybacks were top of mind when we began to increase our liquidity on the balance sheet. There's obviously warehousing of deals. We did that with ONCAP. You'll see that we invested $250 million in their last few deals. That's warehousing, you know, many of those dollars for LPs and for co-invest for LPs. We're open to doing something, and we'll do something similar for Onex Transportation Partners to give them a deal or two before they go out and commence fundraise. We are thinking about some inorganic things as well. They're not far enough along for me to share with you.
All of those types of things are, are the reason why you want good liquidity in this type of environment.
Okay, fair enough. Then maybe just shifting over to Chris. I, I think in your prepared remarks, you alluded to a meaningful step down in fees going into 2024. Can you just elaborate on the source of that? Like, my thinking was that fees would decline upon step down when a successor fund is raised, you know, which obviously for Onex Partners won't be anytime soon, or if monetization activity accelerates and the capital is returned to LPs. So what's the dynamic that's driving the step down in 2024? Can you just help us quantify the magnitude of that?
Sure, yeah. As is typical, I think, in private equity funds, the, the step down in fees comes at the earlier of the, the, a successor fund beginning to draw fees or the end of the commitment period. And in the case of OP Five, its five-year commitment period comes to a close in November. At that point, fees will move from, you know, approximately 1.6%-1.7% of committed capital, and it'll step down to 1% of invested capital. That's, that's the step down that's coming. We gave you this number, I think, last quarter as well. It's about $40 million in terms of annual fees that will see a step down at that point.
Got it. Okay, that's helpful. Then maybe my last question before I pass the line, I just wanted a point of clarification on Gluskin Sheff. Is there expected to be any FRE contribution from the investment management business that is staying with Onex, or is that just being wound down over time? Like, I'm just wondering if that's an area where you'll need to invest in wholesaling capabilities to support that business, or is the overall spend expected to be relatively modest there?
No. The goal is to make that asset, that part of our asset management business profitable. We will be investing in wholesalers in the Canadian market, you know, initially to make sure our products are being well understood within RBC and, you know, over time, other firms that will want to distribute our products. That we need and want to make that into a profit center. Again, a lot of the legacy costs associated with Gluskin are being unwound throughout the remainder of this year. The revenue line will decrease as the fees that we charge for our products go down in the retail market, the cost structure is also going to go down.
When you have those two things together, if we can begin to scale that AUM, that should be a profitable business over time. That's the goal anyway.
Okay, very good. That's it for me. Thanks.
Thank you. One moment for our next question. Our next question comes to the line of Geoff Kwan from RBC Capital Markets. Your question, please.
Hi, I just wanted to follow up on that. I apologize if I missed it, but has there been any update in terms of the Onex products that will go on to the RBC shelf? Then any color on kind of the fee revenue structure of that? I know you mentioned kind of lower fees, but also that there's lower expenses.
You know, as, as I think Chris mentioned, this Fundserv transfer, you know, allows our products to be transferred in kind into new accounts at, at RBC and other, you know, asset managers, wealth managers across, across Canada. It takes, operationally, it takes some time to get those accounts open. They began to open in July, the U.S. dollars that we were able to retain, that, that % was actually pretty good that we saw in July. We'll have to watch that trend, obviously, for the rest of the year as more of these accounts are open and the account owners have the option whether to stay with our products or trade out of them. So far, they've been relatively sticky, which is, which is good news.
I'm sorry, was there a second part of your question?
I think you kind of answered, but I guess is, is it all of the legacy, or if legacy is the right word, but all the Gluskin Sheff funds, but also I was thinking also the Onex Credit Partners.
Yeah, those, those will stay. They're not liquid, like some of the other Gluskin products, so there, there's not an opportunity to exit those products. They don't have a liquidity feature until, you know, the investments are crystallized. No, those products are going over and staying in accounts as well.
Okay. I had a question on the M&A side. I know you mentioned nothing's far enough there, but would it be, or I guess, how's the way to think about what you are looking at? Is it?
potential acquisitions that would add new skill sets, to the business or some, to distribution, or I'm just trying to get a sense of directionally, what you're kind of looking at?
Yeah. While we certainly could and, and may look at things that would, you know, put us into new categories, right now, our focus is to try to leverage our institutional knowledge where we have, you know, long-standing and really good reputations by industry. I can't get any more specific than that, but you ought to think about it as leveraging our expertise in areas that you would agree that we have a, a long-standing and, you know, powerful network, if you will.
Okay. If I can maybe ask one last question, is, Convex. It was a kind of a different investment when you initially made it, kind of more earlier stage, but it had a very experienced management team that had built insurance businesses from scratch before. Just wondering if there's an update in terms of how that investment is going?
Yeah, the investment's actually going quite well. This will be the first year, and it's, it's, we're in the, in the midst of our fourth year, just the beginning of it, with that business. Look, we- let's see how the wind season goes and then what property damage might come. You know, we're expecting or budgeting that business to do more than $400 million of net income this year. When you think about the book value, that ROE, you know, will be sort of mid-teens, and we still haven't totally grown in to that cost structure in terms of our premium growth from this point forward. We're, we're actually really pleased with the performance of that business to date. Again, we did that without leverage, so risk adjusted, we're, we're especially pleased.
Look, but let's see how the wind season goes for the next few months. This should be a very good year for Convex. The other thing that's benefiting Convex is when we made the investment, rates were essentially zero, right? Our, you know, billions of dollarsof invested assets are now, you know, earning 5%, 6%, you know, as the lower rate investments roll off and the higher roll in, and it's a double A on average portfolio. You're gonna really begin to see the benefit of investment income begin to come through the income statement that we haven't seen for the first three years. Then finally, the rate market in the property casualty specialty in particular, continues to be a very hard market.
You know, what that means in layman's terms is, you know, we're getting paid more money to take on the same unit of risk, this year compared to last year. All of those things together, I'm quite optimistic about Convex.
Okay, perfect. Thank you.
Thank you. One moment for our final question for today. Our final question for today comes from the line of Graham Ryding from TD Securities. Your question, please.
Hi, good, good morning. Maybe I could just start with, you know, you were quite active with some realizations in the quarter from, you know, starting with your direct investments and then I guess, post-quarter, some of your private investments. Should we still expect you to try to be quite active, particularly on the, on the private investment side, from some of those OP portfolio investments, to try to sort of show your LP investors evidence of performance and, and value behind that NAV? Is that still part of your focus over, you know, the, I guess, in sort of the, the near term?
Yes, it, it is definitely our focus. Can't get into anything specific, but our LP base has made it clear that DPI is important to them right now. Chris mentioned in his comments, you know, the, the weighting of PE for a lot of our institutional partners is, you know, is, is overweight. You know, we're trying to help for ways to, to fix that. Again, you know, you shouldn't view that as, as panicked creation of DPI. We're doing it very thoughtfully, and it'll be, it'll be not only thoughtful in terms of when and how, but relative to our marks.
Okay, understood. I think you said cash levels are at $1.4 billion, but does that include some of the proceeds that you've realized from Ryan, LLC, et cetera? Should we expect you to continue to be active with buybacks at that level of cash?
Yeah, that $1.4 billion, Graham, it's Chris, is pro forma for the post-quarter-end activity, including the, you know, the final sale of Celestica and some normal courses we've been buying. Yeah, I'd say that at $1.4 billion of cash and where our stock trades, we're, we're still looking to be active, and you should expect that.
Great. On the Gluskin piece, it sounds like you've moved some assets over to Fundserv as of July. If you gave us a percentage, I apologize, I think I missed it, but how, how much of those assets have you been able to retain after they've shifted over to, to the Fundserv structure?
Yeah. In July, there was a total movement of just under $900 million, with $700 million of that being assets we retained. Those were transfers in kind, where we know we're now the asset manager, for RBC clients and continue to earn fees. That's a good-
Graham, that's a good number, obviously, but Graham, remember, that's, that's just the first month. We got to, we got to really follow that closely for the next five months.
Understood. Then there would be some remaining assets that still need to be shifted over, I guess, because there's I think there's, like, $5.1 billion total AUM within Gluskin?
We think it's going to sort of happen, you know, sort of on a month-by-month basis as clients make decisions around where they want to take their business going forward, what wealth management firm they want to take their business to. Then also as part of that decision will be whether to retain Gluskin Sheff managed funds or not. It'll be a month-by-month process with clients, you know, every client sort of on a different timeline, I think, in terms of their decision making.
Okay, understood.
Just to be clear, whether just to be clear, it's whether the clients want to retain our products, not whether we want to continue to manufacture our product. We definitely want to continue to manufacture our products.
Understood. Okay, then any, any sort of progress with your, with RBC in terms of an agreement or a partnership to distribute your private credit, private credit strategies down that, through their path?
Yeah, we're working on that, real time with them. The partnership has been a good one so far. You know, I've been dealing with a gentleman named Dave Agnew day-to-day, you know, on that topic, and the whole firm's been an excellent partner so far. I'm optimistic that those products will be coming on the shelf within due course as well.
Okay, understood. My last question, if I could. You gave some color on the fundraising. Could you just sort of recap what the plan is, what the status is for ONCAP, Onex Transportation fund, and then just credit? What, what should we be looking for? What are you targeting in terms of fundraising?
For Onex Transportation Partners, you know, we won't formally launch fundraising. We're doing pre-meetings, right, until, you know, we have at least one deal warehoused. That'll be sort of proof of concept for that team, and we do have some opportunities that are relatively far along there. I don't think you should expect to see fundraising until you see that, a first deal close. ONCAP will likely be in market through Q1 of next year. Again, even with a track record of an ONCAP or a Falcon, which are both extraordinary track records, it's a slower fundraising environment. There's just no question about it. The time that is taking us, you know, to raise the dollars is much longer than we're used to.
You know, probably think 2x, like maybe, maybe even more in the case of ONCAP. They, they raised money really quickly in the past. You should expect it to be more measured and, and more slow, but they are making progress and, and, and, and closing on, on new dollars. Falcons is sort of in the same situation as ONCAP. I believe their, their, their fundraising goes through Q1, maybe even a little bit into Q2 of next year. Again, they have a large anchor LP for that fund already, that, that, that is helpful in, in raising the rest of the, of the outside dollars, but again, slower than they're used to.
Remember, their, their last two funds are top quartile, and, and where that product sits in, you know, sort of a, in a, a risk-adjusted sense, you know, they're, they're able to attract or, or, or underwrite sort of 16%-17%, you know, returns only 6x, 7x through a capital structure. And when you look at senior credit trading at 10 or 11, that's a pretty good premium for the next turn or turn and a half. And, you know, that, that, that's the story that I think will ultimately resonate with that fund.
Great. That's the mezzanine fund you're referring to there?
Yes. Sorry. Yes. Yes.
Okay. Thanks. That's good for me.
Thank you.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Bobby Le Blanc for any further remarks.
Thanks for joining us today for the questions. If you have any follow-up questions, feel free to call Jill or any one of us. I hope you enjoy the rest of your summer. Thanks. See you in September.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Thanks, Jonathan.