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opinion

This generation’s most celebrated investor, Warren Buffett, once said that only when the tide goes out do you discover who’s been swimming naked.

Well the tide is out, courtesy of a global pandemic. And one of this country’s most celebrated investors, private equity pioneer Gerry Schwartz, would like everyone to know he’s wearing his swimsuit.

Mr. Schwartz, founder and chief executive at Onex Corp., fired out a letter last week with an underlying “we got this” message to investors spooked by a downturn that cut the company’s stock price in half, a drop sparked in part by what turned out to be an epically ill-timed takeover of WestJet Airlines Ltd.

Echoing the reassuring tone coming from CEOs at rival asset managers, Mr. Schwartz explained the Toronto-based company has the cash and management skills needed to weather the COVID-19 storm.

Analysts subsequently crunched the numbers and reached the same upbeat conclusion. Even if they all but write off the value of WestJet, acquired in December for $3.5-billion, investment banks say Onex’s deep pockets and stable of 36 solid businesses can carry the company through any foreseeable downturn. With the stock trading at a never-before-seen 44-per-cent discount to the underlying value of its holdings, analyst Geoffrey Kwan at RBC Dominion Securities called Onex his “contrarian best idea” for investors.

In reaching out to investors, Mr. Schwartz blended empathy with optimism. He also notably never mentioned WestJet, instead highlighting that no one company in Onex’s portfolio accounts for more than 5 per cent of the company’s invested capital.

Mr. Schwartz’s real focus was on cash, which Onex spent recent years stockpiling by selling a number of holdings when equity markets were hitting all-time highs. When markets turned in March, the company was sitting on $2.8-billion, and had no debt. Cash is Mr. Schwartz’s swimsuit. Private equity fund managers with highly leveraged portfolios and no access to capital are the folks swimming naked right now.

“Onex is criticized from time to time for having too much cash,” Mr. Schwartz said. “With the current crisis, though, its purpose should be clear. It ensures that we can continue investing through good and bad times – it also ensures that we are never a forced seller.”

Again, without mentioning WestJet and its many planes now parked empty, the billionaire, who has been doing leveraged buyouts for five decades (and too many market meltdowns to count), set out a game plan for keeping a business like an airline functioning.

“All our businesses will be affected by the crisis. A few will suffer near total shutdown for some time. During that time, they will consume cash and much of that cash will be lost for all time,” Mr. Schwartz said. “Then, those businesses will re-open and again serve their customers and generate cash.”

How much pain does Onex face from a shutdown at WestJet? Not as much as you might think. While the sticker price on the acquisition was $3.5-billion, a hefty helping of debt plus equity from clients meant Onex itself committed just $345-million to the deal. In a report Tuesday, Mr. Kwan said in his worse-case scenario for the airline still puts a $130-million value on the WestJet stake.

At its current share price, analysts say investors are also assigning next to no value to Onex’s US$1-billion portfolio of credit-based investments, mostly made up of collateralized loan obligations, or CLOs. Again, Mr. Schwartz is taking a longer-term view, saying in his recent letter: “We are confident that, in the fullness of time, our CLO equity will recover its value.”

The recent drop in Onex’s share price translated into something in the neighbourhood of a $400-million hit to Mr. Schwartz’s net worth. How does an experienced investor react to that kind of setback? Mr. Schwartz devoted a few lines to putting the downturn in perspective, concluding his letter by saying: “We hope all our clients and limited partners are doing what we’re doing: remaining calm, looking for opportunities to make great investments and above all else, not being driven by fear or panic to sell as markets find their bottom.”