Onex Prepares To Launch Third Buyout Fund

Firm: Onex Corp.
Fund: Onex Partners III LP
Target: Undisclosed
Placement Agent: Credit Suisse (likely)

Anticipating a market chock full of troubled companies over the next few years, Onex Corp. is poised to raise its third large buyout fund, Onex Partners III LP.

Toronto-based Onex Corp., one of the rare private equity firms that trades on a public market, has not yet disclosed a target, but the firm’s previous fund took in $3.75 billion, which it raised in five months.

Expect marketing to begin shortly and to continue over the next six months. Some prior limited partners have already signaled their intent to commit, according to Onex Corp. Managing Director Andrew Sheiner. “Those that we’ve talked to have been very supportive and keen to come into our next fund, and come in in a meaningful way,” he said. Onex Corp. itself plans to take a 20 percent to 40 percent stake in the fund. The firm holds a 41 percent stake in the $3.75 billion Onex Partners II LP, and a 24 percent stake in Onex Partners LP, the firm’s $1.70 billion debut vehicle.

With the recent purchase of Husky Injection Molding Systems Ltd., a Canadian manufacturer of injection molding equipment used to manipulate plastic into shapes, Onex Partners II LP is between 75 percent and 80 percent invested. The $960 million deal needs to be approved by shareholders at a December meeting. In August, the firm completed the $5.6 billion acquisition of Allison Transmission, a carve-out from General Motors Corp. that Onex bought alongside The Carlyle Group. Each buyout shop kicked in $750 million for the deal.

Onex Corp. operates as a bit of a three-legged stool, with the Onex Partners funds buying large companies; ONCAP operating in the lower middle-market space; and Onex Real Estate Partners, which invests in real estate and may soon raise a fund from third parties.

All told, Onex Corp. has built roughly 60 companies through 150 add-on acquisitions over its three branches. The firm is known for carving out divisions of U.S. multinational corporations and turning them into stand-alone companies. For example, Carestream Health Inc. was once part of Eastman Kodak Co.; Hawker Beechcraft Inc. came from Raytheon Co.; and The Warranty Group was a carve-out from Aon Corp.

Some LPs in Onex Partners’s first two funds had expected the firm to do more Canadian deals, a source told Buyouts. But Sheiner said the company has always been clear it would operate wherever deals are found. “We’re a Canadian company, but really a North American buyout firm. The vast majority of the companies we buy are based in the U.S. For us, operating in Toronto is no different than having a head office in Chicago or San Francisco or Boston,” he said.

With Onex Partners III LP the firm plans to continue its practice of acquiring good companies with bad balance sheets. Examples include Loew’s Cineplex, which Onex Corp. bought together with Oaktree Capital Management by acquiring a controlling interest in the company’s senior debt and taking it through bankruptcy; and Magellan Health Services Inc., which it bought just out of bankruptcy. “Our suspicion is that as we head into the next few years the default rates are going to pick up and there will be more of those types of opportunities,” Sheiner said. The firm will continue to invest in aerospace and health care companies.

Onex Partners LP is “largely realized,” with a 5x multiple and an IRR of 106 percent, Sheiner said. Its $3.75 billion sophomore fund has had no exits to date. In the 13 large buyout deals Onex Partners has done out of its two funds, the average EBITDA purchase multiple has been 6.4x and the average EBITDA leverage multiple has been 4.2x, he said.

On the smaller deal side, ONCAP I LP is fully invested. The firm bought six companies with the fund, earning positive returns on each one and generating a 4x multiple of capital and a 42 percent gross IRR, according to Sheiner. ONCAP II LP, a $580 million fund, began investing in mid-2006 and has made four investments to date.

Prior investors in Onex Corp. funds include California State Teachers’ Retirement System, Caisse de dépôt et placement du Québec and Teacher Retirement System of Texas.—J.P.