With markets strong, Onex eyes opportunities to cash out

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Private equity pioneer Onex Corp. is living the dream these days.

After spending the better part of two years hunkered down through what company executives recently described as a "sluggish" period for initial public offerings, Onex and its private equity peers have experienced a sea-change in market sentiment. Surging equity markets and robust takeover activity mean PE firms are now seeing opportunities to exit investments through either IPOs or the outright sale of businesses to rival companies.

It's the perfect dynamic for a PE company that wants to exit an investment, as sellers have the luxury of playing off public markets against strategic buyers, running what investment bankers call a "dual track process" for selling a business.

Toronto-based Onex, founded in 1984 and currently managing a $24-billion (U.S.) portfolio, is said to be exploring the sale of two holdings, brokerage USI Insurance Services and trade show staging company Emerald Expositions Inc. As is their custom, Onex executives declined to comment on their plans for these two businesses. In a report on Onex published last month, CIBC World Markets analyst Paul Holden said: "We would not be surprised to see the monetization of investments in USI and Emerald Expositions in 2017."

Onex has already tapped a resurgent IPO market to take profits on a major holding. In January, the company sold a portion of its stake in Jeld-Wen Holding Inc. as part of the door and window maker's $575-million debut on the NYSE. Onex invested in the company in 2011. Jeld-Wen went public at $23 a share and is now changing hands at $30.

Rival PE firms are behind three other well-received Canadian IPOs. Financial backers cashed in by selling stakes in clothing retailer Aritzia Inc. late last year and restaurant chain Freshii Inc. in January, along with the soon-to-be-public parka maker Canada Goose Holdings Inc.

But not all recent exits by PE firms have taken the form of public offerings. With merger and acquisition activity playing out at a heady pace, due in part to low interest rates and a supportive credit market, Canadian PE companies have posted significant gains this year by selling businesses to competitors. For example, Brookfield Business Partners L.P. sold bathroom fixtures maker Maax Bath Inc. to rival American Bath Group in January. Brookfield pocketed $140-million, or 2.8 times its investment in the business, which was acquired in 2008. American Bath is a private company, controlled by Dallas-based PE firm Lone Star Funds.

Onex has already hired investment bankers to guide the potential sale of USI, according to a recent report from Reuters. Onex acquired the insurance brokerage in 2012 for $2.3-billion, putting $700-million of equity in the transaction. With Onex's backing, USI made a series of acquisitions that are now contributing to the company's results. CIBC's Mr. Holden noted that earnings before interest, taxes, depreciation and amortization (or EBITDA) are up 38 per cent over four years to $353-million annually.

Trade show company Emerald Expositions was purchased in 2013 for $950-million, with $350-million of equity from Onex. The same game plan of rolling up smaller rivals over the past three years boosted EBITDA by 64 per cent to $159-million a year, according to the CIBC analyst.

Over a storied career, Onex founder Gerry Schwartz has shown a deft and unsentimental touch when it comes to exiting investments. If everyone else in the market is a buyer, Mr. Schwartz and his colleages will be sellers. In recent months, it's become clear that the Onex team has an opportunity to cash in holdings in at least two businesses, at a time when both IPO and M&A markets are booming. Deals are coming, and the only debate is over how Onex chooses to exit.