CFA Challenge Final Version

8/2/2019 CFA Challenge Final Version

1/36

Know When to HoldEm

Summary

Despite Onex excellent track record, concerns regarding the overconcentration of votingcontrol among management and the recent performance of current holdings leads to

SSBs HOLD rating. Moreover, SSB expects poor private equity industry performance

going forward due to sustained volatility in equity markets and global economic uncer-

tainty.

Highlights

Big shoes to fill. Over Onex 27 years of existence it has generated an average IRR

of 29%. The firms superlative investment record owes largely to its investment dis-

cipline and managements deep experience. However, limited partner and shareholder

expectations may now be set too high, which could have adverse effects on Onex

ability to maintain AUM going forward.

Concentrated voting control. Gerry Schwartz, Onex CEO, President and Chair,

holds nearly 70% of Onex voting control. Such concentration of voting rights pro-vides little oversight with regards to managements actions and decisions. Investors

must effectively put their faith in one individual, a fact that may not be palatable to

many investors.

Weak investment and exit opportunities. Onex ability to reproduce its past suc-

cess is highly dependent on its ability to locate profitable investments and exit exist-

ing holdings at attractive multiples. This, in turn, is dependent on the state of the

global economy and the performance of public equities. Several factors, including a

weak global economic recovery and uncertainty surrounding the state of the Euro-

zone may contribute to extreme economic uncertainty and volatility in public markets

over the coming quarters. This will lead to weak investment and exit opportunities,

constraining managements ability to repeat its past success.

Extreme information asymmetry. Onex financial statements are of limited use to

shareholders, and inadequate information is available on many of its holdings. Conse-quently, financial analysis and valuation of Onex is problematic, and relies heavily on

the limited information disclosed by management.

Dependent on changes in Canadian pension fund management. Pension funds

historically contribute between 60% and 70% of third-party capital to each of Onex

funds. Certain trends in the Canadian pension fund industry may limit the extent to

which Onex achieves growth in assets under management. Such trends include, but

are not limited to: the tendency of Canadas largest pension funds to manage private

equity investments in-house; the shift to defined contribution plans amongst private

pension plans; and changes in pension fund regulation.

Onex CorporationCanadian Private Equity | TSX: OCX

January 6 , 2012

SSB Investments

Rating HOLD

Price Target (C$) 36.41

Price Dec. 31 (C$) 33.28

Upside (%) 9.41

Market Data

52 Week High ($) $38.22

52 Week Low ($) $28.01

Avg Daily Volume 119 K

Beta 1.05

Dividend Yield (%) 0.33%Share Outstanding (Mil): 115.63 M

Market Cap. (M$) $3.85 B

Insider Holdings: 23%

B/V per share: $17.86

ROE LTM (%) 3.53%

EPS (LTM): $12.86

Trailing P/E Ratio (%): 2.62x

Onex is a private equity investment firmwith holdings in electronics manufacturingservices, aerostructures, healthcare, and avariety of other industries. Onex had reve-nue of C$24.4B in 2010; making it one ofthe largest PE and alternative asset manag-ers in Canada.

Company Overview

$60

$80

$100

$120

$15

$20

$25

$30

$35

$40

O CX S&P Pr ivate Equi ty Inde x

Share Price Movements

Source: S&P, Bloomberg

Source: Bloomberg

Current Valuation

Current Price (Dec.30 2011) $33.28

NAV $29.26

PV of Carried Interest $1.09

PV of Mgmt Fee $3.73

Current Value $34.08

Current Implied Discount -2.3%

12-month Target Valuation


Target NAV $31.59



12-month Target Price $36.41

Implied Growth 9.4%

Source: Onex Financials, SSB estimates


2/36SSB Investments Page 2

Toronto CFA Society Investment Research Challenge |Student Research |

Business DescriptionOnex is a publicly listed private equity (PE) firm which manages C$4.4 B of proprietary

capital and C$8.9B of third-party capital (Figs.1 & 2). As a corporate entity, Onex is com-

prised of five closed-end equity investment funds, a real estate fund, a credit fund, and direct

ownership in two businesses. Appendixes A and B provide an overview of Onex holdings

and the distribution of capital and historical performance across its existing funds.

President, Chair, and CEO Gerald Schwartz founded Onex in 1984. The company was pub-

licly listed in 1987, and Gerald Schwartz remains its controlling shareholder with nearly 70%of voting control. Over the last 27 years Onex has grown to a workforce of seventy invest-

ment professionals with an average manager tenure of sixteen years.

With offices in Toronto and New York City, the majority of Onex businesses are located in

North America (NA) specifically, the US. However, on a consolidated basis, the company

derives roughly a third of its revenues from business activities outside of NA ( Fig. 3).

Onex revenue is derived from three key industries: Electronic Manufacturing Services,

Aerostructures, and Healthcare, which make-up 30%, 19%, and 21% of Onex consolidated

revenue respectively. Over the last 5 years, Onex appears to have made an effort to diversify

its portfolio across a variety of industries (Fig. 4). For example, in 2010 72% of revenue

came from just 3 industries versus 88% in 2005. Details per each company can be found in

Appendix C.

On a holdings basis, as of Q3 2011, the largest contributor to Onex consolidated revenue is

Celestica at 30%. Three companies make up roughly 62% of Onex revenue (Fig. 5).

Creating Shareholder Value

Onex creates shareholder value in three ways:

1. Fees from Third-Party Assets Under Management (AUM): Onex currently manages

about C$8.9B of third-party AUM on behalf of a number of institutional investors.

Management fees range from 1-2% per year depending on whether or not committed

capital is invested. In 2010, revenue from this business segment totalled approxi-

mately USD$90M.

2. Carried Interest: Carried interest is a reward to Onex shareholders and management

based on performance. Onex earns 20% of all capital gains within a fund provided it

reaches a target annualized return of 8%. Carried interest within a fund is calculated

independently of other funds. Shareholders are entitled to 40% of earned carriedinterest, with management taking the remaining 60%. Since 2003, Onex has recog-

nized USD$237M in carried interest through its income statement.

3. Capital Appreciation: Appreciation of the C$4.4B of Onex proprietary capital repre-

sents the largest way through which Onex creates shareholder value. Onexs goal is

to grow Net Asset Value (NAV) per share by 15% per year. Since inception, Onex

boasts an average IRR of 29%. This has contributed to a 17% annual compounded

share price return over the last twenty years.

Investment Strategy

Onex is a self-described value investor as it aims to acquire companies that are undervalued.

The key driver behind Onex past performance is its ability to find, manage, and exit profit-

able investments. The management team looks for investments in three key areas:

1. Carve-outs of subsidiaries and mission-critical supply divisions from multinational

corporations

2. Operational restructurings

3. Build-ups in a wide variety of industries

Onex investigates nearly 300 investment ideas per year prior to moving forward with only

two or three of them. It tends to take on public or private equity investments that grant it a

controlling stake. As of Q3 2011, the smallest percentage of voting shares Onex holds in a

company is 50%a. Onex likes to maintain an active presence within its investments; manage-

ment often takes on key managerial roles inside its investments.

Onex Clients

The majority of Onex third-party AUM comes from pension funds. The value contributions

from this source have increased from C$916M to Onex Partners I (2003) to C$2.4B to Onex

74%

16%

4%3%

3%

Large-cap Private Equity Cash & Near-cash Items

Mid-cap Private Equity Onex Credit Partners

Onex Real Estate

Fig. 2: Investment of ONEXsProprietary Capital

Fig. 1: Distribution of 3rd Party AUM

19%

28%38%

10%

3% 2%

Onex Partners I Onex Partners II

Onex Partners III Onex Cr edit Partners

ONCAP Other

64%

13%

20%

3%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2006 2007 2008 2009 2010

Nor th America Eur ope Asia & Oceania Other

Fig. 3: Revenue by GeographicSegment (C$ M)

Fig. 4: Revenue by Industry (C$ M)

27%

18%

27%

5%

6%8%

9%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2006 2007 2008 2009 2010

Electronics Manufacturing Service

Aero-structures

Healthcare

Financial Service

Customer Support Services

Metal Service

Other

(a) Allison Transmission: Onex has contractual rights and protections, including right to appoint members to the Board of Directors

Source: Onex financials







Partners III (2009), a 2.6x increase. However, the percentage of pension fund ownership

within each fund has declined over the same time period (Fig. 6).

Industry Overview & Competitive PositioningFundraising Down 10.9% as of Q3 2011

In the first nine months of 2011, PE firms raised USD$192.5B globally compared to

USD$216B in the same period of 2010. In aggregate, fundraising has slowed considerably

from pre-recession highs (Fig. 7). Since 2009 a quarterly average of roughly USD$70B was

raised by PE firms globally, versus an average of over USD$160B between 2007 and 2008.

Institutional investors have recently shied away from PE due to high volatility in equity and

bond markets, as well as the uncertainty surrounding the future of the global economy. The

liquidity risks associated with PE investments may have contributed to this trend. Alterna-

tively, it may be that fundraising levels are artificially constrained by the so-called denomina-

tor effect write-downs in the valuation of PE holdings have lagged more liquid holdings,

artificially inflating the PE allocation beyond its target. Clearly this story needs to be moni-

tored over the next few years.

Against this backdrop ONCAP III completed fundraising in September 2011 with third-party

capital commitments of nearly C$550M. ONCAP III was oversubscribed, a rarity in the cur-

rent PE environment. Onex closed Onex Partners III in December 2009 with C$3.5B in third-

party capital commitments. This represented a 70% increase in commitments from Onex

Partners II. Given the poor fundraising performance in the PE industry, it is clear that Onexhas a special advantage over its peers. Onex ability to attract capital owes largely to its repu-

tation for earning consistent, outsized returns.

Buyout Slow-down

Buyout activity is historically correlated with equity market conditions, and the recent past is

no exception. While there is a definite post-recession upward trend in global aggregate buy-

out deals, Q3 of this year has seen a significant slowdown; buyout deal activity decreased

23% QoQ to USD$60.6B(Fig. 8).

Currently, weak deal flow is not due to a lack of funds globally, PE firms have nearly

USD$1T in dry powder (un-invested capital) (Fig. 9). Instead, solid investment opportunities

are relatively uncommon. Typically, investment opportunities come from two sources: public

markets and carve-outs. While there exist attractive opportunities in public markets, there are

fewer carve-out opportunities which represented the majority of PE investments in the past.The lack of quality carve-out opportunities is attributable to the unwillingness of cash-

hoarding parent companies to shed assets leading to weak corporate M&A activity (Fig. 10).

In 2011, Onex completed three buyouts totalling C$976M. Over the past ten years Onex has,

on average, completed roughly three deals per year valued at C$833M. As such, 2011 has

been an average year for Onex in terms of buyouts. Overall, Onex is constrained by the same

forces as the entire PE industry, and its buyout activity is generally correlated with global PE

buyout activity. Going forward, Onex has C$1.3B in cash and roughly C$2.8B in uncalled

committed capital to support its investing strategy. This glut of dry powder falls in line with

the industry trend, implying that Onex and its peers have a considerable war chest of capital

that must be put to use in the coming quarters.

I.P.Nos

Turbulent public markets in the second half of this year and cash-hoarding firms have con-strained exit opportunities available to PE firms. While investors were optimistic with respect

to public equity markets at the start of 2011, environmental disasters and global political

gridlock have left investors unwilling to assume additional risk. Still, owing to robust capital

markets in Q1 and Q2, aggregate exit values for 2011 may test prior records (Fig. 11 & 12).

In Q2 alone, over 300 exits were announced globally, valued at over US$120B, which is a

single-quarter record. Conversely, only 254 exits were announced globally in Q3 with a dis-

mal value of less than US$60B. The steep QoQ drop is partially attributable to PE firms un-

willingness to exit their largest holdings in volatile public markets. Indeed, only 12 exits

valued over USD$1B were made in Q3 versus 21 in Q2, and no exits valued over USD$5B

were made compared to three in the previous quarter.

Source: Preqin

Fig. 7: Aggregate Value & Number ofPE Funds Raised (2007-11,USD$B)

0

100

200

300

400

500

$-

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NumerofFunds

AggregateValue

Capital Raised (Billions USD) Number of Funds

Source: Preqin

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$90

0

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AggregateDealValue

#ofDeals

Global Value (Billions USD) Number of Deals

Fig. 8: Global PE-Backed BuyoutActivity

0%

20%

40%

60%

80%

100%

Onex Partners I

('03)

Onex P artners

II ('06)

Onex Partners

III ('09)

Pensions Asset Managers

Banks & Insurance Endowment

Soverign Wealth High Net Worth

Fig. 6: 3rd Party Committed CapitalDemographics at Funds Inception

Source: RBC Capital Markets

Fig. 5: 2011 Revenue (1st 9 mths)

33%

21%12%

10%

7%

6%

5% 4%1%

Spirit AeroSystems

TMS International Corp.

The Warranty Group

Skilled Healthcare Group

Centre for Diagnostic Imaging

Other

Celestica

Carestream Health

Sitel Worldwide Corp.

ONCAP II Co's

ResCare

Tropicana Las Vegas





In 2011 Onex fully divested two investments: Emergency Medical Services and Husky Inter-

national. Both companies were sold to other PE firms for a total of roughly C$3.5B, repre-

senting a weighted average IRR of 41%. Additionally, Onex brought TMS International pub-

lic in April 2011, realizing a nominal portion of the total investment in the process. Notably,

all three liquidity events occurred in the first half of 2011 when markets were more stable.

Onex Allison Transmission announced its IPO in March of this year. However, the IPO has

not yet occurred due to poor equity market performance. Continued weakness in public mar-

kets may force Onex to hold onto its already mature holdings for longer than originally in-

tended.Pension Plan Changes Will Impact Onex

Both globally and within Canada pension funds represent an important source of funds for

PE firms. In the last decade or so, the share of pension fund assets allocated to PE has in-

creased. The increase is part of a broader trend among pension funds towards greater diversi-

fication from traditional assets, like bonds, and public equities, to alternative assets like PE,

hedge funds, and infrastructure.

At Onex, pension fund commitments to the Onex Partners family of funds represent nearly

67% of third-party committed capital. Moreover, third-party capital commitments have suc-

cessively increased by 60% to 70% for each fund in the Onex Partners fund family. Thus,

changes in the Canadian pension fund industry have undoubtedly affected Onex growth.

Going forward, three important developments in the pension fund industry will likely have a

material impact on Onex:1. Many pension funds are opting to manage PE internally, which both reduces the avail-

ability of third-party AUM to Onex and creates a more competitive PE environment. For

example, Ontario Teachers Pension Plan is a direct investor in PE deals; its C$12B PE

portfolio poses a real competitive threat.

2. Among private pension plans, there has been a shift from defined benefit (DB) plans to

defined contribution (DC) plans that will continue for the foreseeable future. Unlike DB

plans, regulatory constraints limit DC plan members ability to participate in PE. Thus

the shift to DC plans may translate into a net decrease in funds available to Canadian PE

firms, including Onex.

3. In December 2011, the Canadian government passed legislation to enact a new pension

scheme: Pooled Registered Pension Plan (PRPP). PRPPs allow Canadians without ac-

cess to work based pension plans to form collectively pooled pensions. These new

pensions are being designed to emulate many of the features of DC plans. As employersopt for PRPPs, Onex may lose out on AUM growth.

Competitive Environment

The near- to mid-term prospects for PE do not look any more promising than in the recent

past. With extreme uncertainty surrounding the Euro-zone sovereign debt crisis and a slug-

gish global economic recovery, public equity markets will likely continue their lacklustre

performance. This means sustained competition for investment opportunities and less-than-

optimal IPO exit opportunities. In contrast, corporate M&A activity may pick up slightly

given recent signs of economic stability in the US. If this happens, both carve-out and exit

opportunities will improve, which may be a bright spot for the industry. Still, given the prob-

lems in the EU, debt financing for leveraged deals may still be scarce going forward. This

will put continued pressure on the mid-market segment as the largest PE firms compete with

the smallest for quality investments.The hypercompetitive environment that has developed within the PE industry will constrain

Onex ability to effectively deploy capital over the coming quarters. In addition, Onex may

start to feel pressure from LPs to utilize their C$2.8B in uncalled capital so as to begin gen-

erating yield as quickly as possible. Together, a competitive environment and LP pressures

could force Onex to re-evaluate its historically successful investment strategy by venturing

into new asset classes. This transition may already be underway, as Onex is one of the two

final bidders for the private equity arm of AXA, the European insurance giant. Such an in-

vestment would be highly uncharacteristic for Onex, raising concerns that it may not be able

to reproduce its industry-leading returns.

$-

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$1,000

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(US$B)

Fig. 9: Global PE Dry Powder(2003 2011)

Source: Preqin

Source: Ernst & Young, Allen Avery

Fig. 10: Global M&A Activity

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Q12008

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Q32009

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Q12010

Q22010

Q32010

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Q12011

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Q32011

USD$B

Source: Ernst & Young, Allen Avery

Fig. 12: Quarterly Global IPO Activity

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Q12008

Q22008

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IPOValue(USD$B)

Fig. 13: Comparison of Alternative AssetManagers

AUM

(Bil. USD)

Buyouts in

2011

(Mil. USD)

Activities

BuyoutLeveraged

Finance

Real

EstateOther

Onex $8.2 $962

KKR $43.7 $15,900

Blackstone

Group$157.7 $16,700

Carlyle

Group$148 $8,000

Apax

Partners$33.3 $9,800

Bain

Capital$66 $9,200

Source: Private Equity Manager, Proprietary Research

Fig. 11: Global PE Exits

Source: Ernst & Young, Preqin

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#ofDeals

DealValue

(USD$B)

Ag gregate Deal Value # of Deals




Investment SummaryLeverage in Disguise

Onex has no debt at the parent level and does not use debt to buy companies. Rather, debt

lies within each portfolio company. These subsidiaries are responsible for their own debt

financing, which is without recourse to Onex or its other portfolio companies. This policy

helps to maintain the financial strength of the parent company, but also increases the credit

costs for each subsidiary. Thus, while Onex investors are not directly exposed to financing

risk, they indirectly face this risk through Onex holdings. Onex outsized gains, past or fu-ture, may be earned at the cost of increased financing risk through Onex its subsidiaries.

Luxury Aircrafts Hit Turbulence

In 2007 Onex partnered with Goldman Sachs in a deal to buy Hawker Beechcraft for

USD$3.3B, of which Onex committed USD$537M. Hawker operates in the luxury avionics

industry, which is highly vulnerable to economic cycles. Needless to say, this investment is

not going very well for Onex. From 2008 to 2010 sales declined 21%, a trend that has contin-

ued through 2011 (Fig. 14). Both S&P and Moodys have recently downgraded their credit

ratings on Hawker to Caa3 and CCC respectively. Both agencies are concerned that

Hawker may be forced to restructure its USD$2B in debt. Moodys goes so far as to say that

they do not believe Hawker will be able to pass certain financial covenant tests through 2012,

which will not bode well for debt and shareholders. In mid-December their USD $182.9M

notes, due in April 2015, were trading around 18.5 cents on the dollar. Therefore, there is a

very real possibility that Onex may see its equity position in Hawker severely damaged if not

completely wiped out. Hawkers poor performance calls into question Onex recent invest-

ment decisions, as it was purchased in 2007 when Onex placed nearly C$2.7B in capital.

Management Handsomely Rewarded

Onex compensation structure aligns the interests of management and shareholders. Specifi-

cally, Onex management is required to reinvest 25% of all gross carried interest and Man-

agement Investment Plan distributions into Onex until each manager owns at least one mil-

lion shares. As a result, Onex management team is its single largest shareholder. While

Onex compensation structure does much to mitigate moral hazard, overconcentration of

ownership exposes outside investors to governance risks. This is elaborated on in the Risks

section.

The Value Investor NOT Value Investing

Despite being a self-described value investor, Onexs acquisition activity seems to run con-trary to the economic cycle-agnostic approach typical of value investors. Over the last fifteen

years Onex has made significantly more acquisitions in bull markets than in bear markets

(Fig. 15) (Appendix D). Specifically, Onex made nearly C$2.7B in acquisitions in 2007,

during the run-up to the 2008-09 economic collapse. Conversely, Onex made only three ac-

quisition valued at C$668M in 2008 and 2009 combined. This trend calls into question Onex

investment discipline and its self-described value investing style. Moreover, Onex tendency

to invest when equity markets perform well is a cause for concern, given extreme uncertainty

surrounding near-term equity market performance.

Bigger Company = Bigger Deals

As a result of nearly three decades of strong results, Onex has been rewarded with increasing

amounts of third-party capital. Increased AUM creates greater fees for Onex, but also neces-

sitates larger deals, or a higher frequency of deals. Evidence of this is the growth of Onexaverage deal size (Fig. 16) as well as the frequency of deals (Fig. 17). The average deal in

Onex history is roughly C$164M; C$219M in the last ten years, and C$314M in the last five

years. It may become more of a challenge for Onex to replicate its past performance because

price inefficiencies are less common in larger companies.

Clock is Ticking on an Aging Portfolio

Onex is sitting on a mature basket of businesses (Fig. 18). Since its inception, Onex has ex-

ited an equity investment in about 4 years on average. Since OnCap Is launch in 2003, this

number has dipped to around 3.5 years. This metric does not adjust for partial exits, such as

Celistica, though still provides some insight into the health and future of Onexs holdings. On

an equally weighted basis the average age of fully realized investments is just over 4 years.

However, Onex older funds, Onex Partners I and ONCAP II, have an average investment

$0

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1991 1995 1999 2003 2007

Avera

geDealSize(C$M)

Fig. 16: Inflation Adjusted AverageDeal Size of Onex (1991-2010)

Source: Onex financials, StatCan

0

2

4

6

8

10

12

Freque

ncy

Fig. 17: Frequency of Onex Deals(1984-2011)


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AcquisitionSize

S&P500PriceLevel

A cq ui si ti on s S& P 5 00

Fig. 15: Acquisition history vs. S&PPerformance (2005-12)

Source: Onex financials, SSB

Fig. 14: Hawker Beechcraft Sales &Net Income (USD)

Source: Hawker Beechcraft

-$500

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2005 2006 2007 2008 2009 2010 9 Mon

Ended

'10

9 Mon

Ended

'11

Sal es Net I nc ome




age of 6.5 and 4.5 years, respectively. Specifically, Onex has held Rescare for over seven

years and Casino ABS for over 10 years. Keep in mind, Allison Transmission, which Onex

filed papers to IPO, but failed to pull the trigger, is about 4.5 years old. As such, Onex could

find itself having to divest a large number of investments in short order, resulting in a further

flood of cash-on-hand to be re-invested. Given its already flush coffers of cash and poor in-

dustry outlook, Onex will likely be rich in cash and poor in investment opportunities for the

near term. The implication is that the company will struggle to meet its stated 15% NAV

growth target.

Financial AnalysisFinancial Statements of Limited Use to Investors

Onex financial statements are fully consolidated, making any meaningful interpretation

nearly impossible. The extent to which Onex financial statements can be analyzed is limited

by three factors:

1. The extent to which a portfolio company contributes to Onex consolidated revenue or

net income is rarely proportional to its relative contribution to Onex portfolio value. For

example, in 2010 Celestica represented roughly 27% of Onex consolidated revenues yet

comprises less than 5% of Onex holdings.

2. Following on the above point, if financial information on all of Onex portfolio compa-

nies were available, proper financial analysis would be possible. However, given that themajority of Onex holdings are private the requisite information is unavailable.

3. Finally, Onex constantly acquires and divests holdings, making comparison of financial

results between periods problematic. For example, according to Figure 19, it appears that

over the last five years Onex revenues plateaued, its operating margins improved and

profit margins deteriorated. Yet, throughout this time Onex exited and partially realized

investments in 6 different companies, which collectively have had a significant impacted

on all three variables.

These three factors call into question the relevance of Onex financial statements, both for

assessing financial performance and for valuation purposes.

Industry Segmented Financial Analysis

To mitigate the effect of asset turnover and operational differences between Onex portfolio

companies on ratio analysis industry segmented analysis can be used. On these terms, it is

clear that the industries Onex companies operate within have highly variable margins ( Fig.

20). Moreover, performance across industries varies significantly over time (see Appendix E:

Segmented Financial Analysis). Key takeaways include:

1. YoY Net Profit Margins (NPM) Up: NPM was up for Onex three largest holdings by

revenue. Although Electronic Manufacturing Services (i.e. Celestica) increased its net

profit by nearly 17% YoY, the net profit margin increased from 0.09% to an equally

abysmal 0.1%. To further exasperate the situation, their largest customer, Research-in-

Motion is under hardship. Continued financial distress may adversely affect Celestica.

2. Net Income (NI) Down: Overall, NI was -USD$51M, a 145% YoY decrease. This can

primarily be attributed to Customer Support Services (i.e. Sitel World Wide) and Other

Industries, which lost USD$53M and USD$94M respectively. Onex shareholders have a

68% stake in Sitel, a C$340M investment. Though Sitel is up from a loss of USD$126M

Fig. 19: Revenues ($C M) & ProfitMargins (2006 2010)

-2%0%2%4%6%8%10%12%

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Fig. 20: 2010 Operating Margin,EBITDA, Revenue by Industry

(USD$M)


Fig 18: Age of Active Investments (Years) Compared to Average Age at Exit (1984-2011) & (2003-2011)


0

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Average Age at Exit

(since ONCAP I

(2003))

Average Age at Exit

(since inception

(1984))




in 2009, as of Q3 2011 Sitel still lost USD$37M. Nine months into 2011, Other Industry

income was up USD$908M. However, after subtracting earnings from discontinued op-

erations of USD $1,109 M, Other actually lost USD -$201 M year to date.

Buybacks and Dividends

Maintaining a competitive dividend policy is not a top priority for Onex management as

evidenced by the $0.11 per share dividend. This payment level has remained constant since

1995. The very low yield of these dividends (0.33%) and the priority of capital appreciation

within Onex strategy begs the question as to why Onex pays dividends at all. Given the

concentration of ownership within management and with the CEO, it is possible that this

dividend policy is catered towards managements interests.

Since 1997 Onex has conducted normal course issuer bid (NCIB) share buybacks amounting

to 75,841,399 shares (C$1,154M at average share price of $15.22). From 2009 to 2011 Onex

has bought back C$43.4M, C$49.5M, and C$91.9M respectively. Over the last decade, these

share buybacks seem to increase in bull markets, and act as a return of wealth to sharehold-

ers. Analysis shows periods of buybacks are generally followed by periods of acquisitions

(Fig. 21). There is a strong correlation between the pattern of buybacks and acquisitions,

with a correlation of 40% when adjusted for a one year lag. Moving forward, given Onex

mounting cash and its purse full of ripe businesses, it is possible that it will use some of its

cash to conduct larger than normal share buybacks in the coming years.

ValuationPE Discount Factor

Traditionally, as is the case with Onex, PE firms trade at a discount to NAV for a number of

reasons. Such reasons include: limited disclosure requirements; investment illiquidity (i.e.

long lock-up periods); transaction costs incurred in the acquisition and divestiture of busi-

nesses; management and employee compensation costs; and general overhead costs. A com-

pany will also trade at a greater discount to NAV if shareholders have reservations about

management or, as is the case with Onex, are concerned about management succession plan-

ning (See Risks section). Aside from these factors, a PE firm will trade at a discount to NAV

if the growth in new capital commitments is greater than that of new acquisitions. Therefore,

just because Onex market price is trading below its NAV does not imply that Onex is trad-

ing at a bargain. The importance of the PE discount will become clear shortly.

Discounted Cash Flow (DCF) and Comparable Analysis

Both DCF and comparable analysis require reliable financial data, which is not available for

Onex. A DCF model hinges on the reliability of predicted future cash flows, however at both

the consolidated and company-specific level such data is not available. Similarly, with com-

parable analysis the denominator of any multiple (i.e. price-to-earnings, price-to-book value,

etc.) does not truly reflect Onex economic value and as such is of limited use. Figure 22 &

Appendix F demonstrates the inappropriateness of comparable analysis.

Net Asset Value (NAV) With a Sum-of-the-Parts Analysis

Given the inappropriateness of traditional valuation methodologies, an alternative approach

is required. The best approach is to separately value each of three means by which Onex

creates shareholder value (net AUM fees, carried interest, and capital appreciation), and add

them together to create a sum-of-the-parts (SOTP) valuation. Each component of the SOTP

valuation is discussed below.

Capital Appreciation (Appendix G)

For Onex publicly traded companies, present and one year forecasted NAV valuations are

computed by using present market prices and one year analysis consensus price targets. To

find Onex present and forecasted NAV of Onex private holdings, historical costs for each

investment are adjusted according to historical industry growth ratesb, or EV/EBITDA indus-

try multiples as deemed fit. In some instances, current information on a company indicates

that it no longer follows its industry growth path. In these situations, judgement was used to

arrive at a NAV which reflects present circumstances. For example:

1. Hawker Beechcraft:For reasons previously discussed, we believe that recording the value

of Onex position in Hawker at a fifth of its initial cost appropriately discounts for the

risks encompassed with this holding until further notice.

2. Tropicana Casino: Tropicana is undergoing a comprehensive redevelopment and is not

0

1

2

3

4

56

7

8

9

0

20

40

60

80

100120

140

160

180

C$M

Buybacks Number of Acquisitions

Fig. 21: Trend of Acquisitions andShare Buybacks (1997-2011)


Fig. 22: Demonstration ofUnreliability of Comparable Analysis

BV FCF EBITDA AUM ($B)

Per Share $48.00 $0.39 $23.05 $8.90

Multiple 1.7x 14.5x 12.2x 7.2x

Price $81.6 $5.66 $281.21 $5.51

Source: Bloomberg, Onex financials

(b) Source: Damodaran Online




fully operational. As such, it is not reasonable to assume Tropicana is currently growing

at the same rate as its industry. Until the completion of the redevelopment, the current

value of Tropicana is assumed to be the price that Onex paid.

After the formulation of a projected value for each public and private company, all holdings

are weighted to reflect the level of Onex economic ownership and subsequently aggregated.

The resultant number reflects the intrinsic value of Onex holdings. Finally, the aforemen-

tioned PE discount factor is applied, resulting in the NAV of Onex operating companies.

Standard industry practice is to use a PE discount factor of 20%. However, due to opaque-

ness and abnormality of Onex operations and the pessimistic opinions of Onex future pros-pects expressed above, this report uses a 25% discount factor for private companies. Public

companies are discounted by 10%, reflecting the reduced liquidity premium required for such

holdings.

Onex Real Estate Partners and Credit Partners was valued using their fair value, reported in

Onex financial statements.

For cash and near-cash assets a 0.12% annual growth rate is used. This represents 1-year

interest rate implied by the current U.S. treasury yield curve.

Finally, the result from the NAV of Onex holdings and the present value of its cash are

added together. This results in a total NAV per share of C$29.26, and constitutes the majority

of Onex share price (Fig.23).

Carried InterestCarried interest was valued using a forecasted present value approach. Carried interest esti-

mates are problematic because of the uncertainty surrounding future returns and Onex future

AUM. To overcome this hurdle whilst erring on the side of caution, carried interest calcula-

tions were based only on Onex current third-party AUM. Instead of using the companys

historical IRR of 29%, the future value estimate of carried interest is formulated assuming a

constant IRR of 15%. This better reflects this reports cautiously pessimistic view of Onex

future prospects.

To discount projected carried interest back to present, a cost of equity of 12% is computed

using CAPM estimation (Fig. 24) . In addition, Carried Interest is discounted a further 10%

to account for uncertainty regarding the timing of investments and exits.

The PV of carried interest is C$1.09 per share, constituting a small contribution to Onex

share value. A sensitivity analysis with variable IRR and discount rates was employed tofurther examine the impact this reports assumptions had on the valuation (Fig. 25). As

shown in Figure 25 varying the assumptions within the specified extremes suggests that had

the historical IRR of 29% been used, an additional $1.48 could be added to the valuation.

Net AUM Fees (Appendixes H)

From 2003 to 2010 annual fee-based revenue has increased from C$17M to C$97M. After

subtracting necessary overhead costs for the parent company, 2010 net AUM fees came in at

approximately C$33M. Using this information, future net fees are forecasted via two meth-

ods:

1. Price-to-Earnings Multiple Approach: This straight forward method multiplies the total

net AUM fees (C$33M) by the average P/E multiple for Canadian asset managers (14x).

Using this method we calculate a PV of third-party fees of C$4 per share.

2. DCF Approach: All of our assumptions in implementing this valuation model can be

found in Appendix H. The two most noteworthy assumptions are: the use of a 10%

growth rate over the next 5 years as opposed to Onex targeted AUM growth rate of 15%;

and that overhead costs will remain a constant 30% fraction of fees over time. Manage-

ment guidance implies that the current number is closer to 25%, but a 30% fraction better

represents the future economies of scale that will benefit Onex as AUM grows. Once

again, management fees are discounted by a further 10% to account for uncertainty re-

garding the timing of investments and exits. This method yields an estimated PV of third-

party fees of C$3.73 per share (Fig. 26).

Valuation (SOTP)

$36.41 Twelve-month Target Price (Fig. 27)

The SOTP valuation finds Onex current value to be C$34.08. When compared to its current

Fig. 24: CAPM - Cost of Equity

Source: Bloomberg

Variables Percents

Risk Free 1.97%

Market Return 11.03%

Equity Premium 9.06%

Beta 1.06

Cost of Equity 12%

Fig. 25: Sensitivity Analysis of thePresent Value (C$) of Carried Interest

Source: SSB Research

Dis-

count

Rate

5% 10% 15% 20% 25% 29%

13% 0.31 0.65 1.05 1.50 2.03 2.48

12% 0.32 0.68 1.09 1.57 2.10 2.57

11% 0.32 0.70 1.13 1.62 2.17 2.66

IRR

Base

DCF Approach $4.28

P/E Multiple Approach $4.00

Average $4.14

Net AUM Fees Discount 10%

PV of Net AUM Fees

after discount$3.73

Fig. 26: PV of Net AUM Fees (C$)

-Base Scenario

Source: Proprietary research

Current Valuation

Current Price (Dec.30 2011) $33.28NAV $29.26


PV of Net AUM Fees $3.73





Target NAV $31.59


PV of Net AUM Fees $3.73


Implied Growth 9.4%

Fig. 27: SOTP Valuation (C$)

Source: Proprietary research

Fig 23: NAV-Base Scenario per Share


NAV Components Current Forecast

Public $2.69 $3.99

Private $10.74 $11.38

Oncap II $1.91 $2.10

Real Estate Partners $1.15 $1.27

Credit Partners $0.74 $0.82

Cash and Other $12.02 $12.03Total $29.26 $31.59




price of C$33.28, the result is an implied discount of 2.3%. The 12 month target price is

C$36.41 which represents a 9.4% gain over the next year.

Price Range (Fig. 28)

Scenario analysis was conducted to obtain a range of estimates of the target price. Besides

the base case, a bull and bear case share price was calculated. The underlying assumption for

the bull scenario is that the economy will experience a V-shaped recovery over the next

twelve months. The underlying assumption for the bear scenario is that there will be a double

-dip recession and the economy will continue to slide. To value Onex in a bull (bear) sce-

nario, many of the assumptions were changed from the base scenario:

1. For public companies, rather than the average analyst price estimate, the

highest (lowest) analyst price estimate is used

2. Private companies NAV growth are 10% higher (lower) than under the base

scenario.

3. A growth rate of 15% (5%) is used instead of 10% for the discounted cash

flow model for management fees. A multiple of 15x (13x) is used instead of

14x for the relative valuation.

4. An IRR of 20% (10%)is used to calculate the PV of carried interest in the

bull (bear) scenario.

Given these assumptions the target bull price is $41.58 which represents an implied growth

of 24.9%. The target bear price is $34.10 which represents implied growth of 2.5% (Figs. 28

& 29).

RisksInvestment Risks

Governance Concerns

Onex shares are structured into two classes: Multiple Voting Shares (MVS) and Subordi-

nated Voting Shares (SVS). SVSs are traded on the TSX and entitle their holders to elect

40% of Onex board members. MVSs entitle their holders to elect 60% of Onex board mem-

bers. Mr. Schwartz holds all of the 100,000 outstanding MVS indirectly, and 19.5% of the

SVSs directly. As such, he has the right to elect nearly 70% of Onex board giving him con-

trol of both the companys operations and governance. Therefore, Onex share structure re-

sults in a governance risk because management and oversight are controlled by one individ-

ual.

Stock Illiquidity

In 2011 and 2010 the average daily volume for Onex publicly traded shares were 175,967

and 266,721, respectively. On a public float of roughly 120 M shares, these volumes are

extremely low. This raises concerns for institutional investors and high net worth individuals

looking to enter and exit positions valued in the tens of millions of dollars. Moreover, large

trades may cause share price movement, adding an extra layer of risk and complexity to the

investment decision (Fig. 30).

Fund Risks

Exit Opportunities

On an industry-wide basis, turbulence in equity markets has undermined the ability of PE

firms to exit investments through IPOs. Similarly, weak corporate M&A activity has ad-

versely impacted exits via strategic acquisitions by competitors and suppliers. This represents

a significant risk to Onex. The inability to divest its holdings may severely impact the com-panys ability to maintain a consistent return on investment over the next few years.

Investment Opportunities

Global economic uncertainty, very high levels of dry powder, and a general inability to raise

debt funds for large leveraged buyouts has intensified the competition for mid-market invest-

ments amongst PE firms. Onex inability to place uncalled committed capital due to these

factors may significantly impact its share price performance over the near- to mid-term.

Forex Risks

A large portion of Onex capital is allocated to investments in companies operating in the

US: 76% of consolidated revenues come from American operations. Fluctuations in foreign

exchange rates between the US and Canadian dollar, may cause significant changes in the

value of Onex holdings. While over the long-term foreign exchange rate gains and losses

Fig. 28: Scenario Analysis


Bear Base Bull

Target NAV $30.17 $31.59 $35.75

PV of carried interests $0.68 $1.09 $1.56

PV of net mgmt fees $3.25 $3.73 $4.27

Target price $34.10 $36.41 $41.58Implied Growth 2.5% 9.4% 24.9%

Fig. 29: Scenario Analysis onPredicted Share Price (C$)


AverageDaily

Volume

AverageFloat

% of FloatTradedDaily

YTD 183,724 116,904,994 0.157%

2010 175,967 119,298,614 0.148%

2009 266,721 121,208,215 0.220%

2008 275,852 123,836,536 0.223%

2007 371,499 127,250,611 0.292%

2006 244,880 133,503,083 0.183%

Fig. 30: Trade Volume (2006-Present)

Source: Annual Reports, Yahoo! Finance

Bull: $41.58

Target: $36.41

Bear: $34.10




ONEX

may cancel out, volatility in exchange rates can lead to volatility in the value of realizations

from Onex investments.

Reputational Risk

Onex ability to raise funds is largely dependent on its reputation among institutional inves-

tors. Poor performance, owing either to managements decisions or forces outside the firms

control would have a material and adverse effect on Onex reputation. This would directly

affect the companys ability to raise future funds, representing a medium- to long-term risk.

Dependence on Trends in Pension Fund Industry

Pension funds contribute 60% to 70% to each of Onex current funds, making the firm vul-

nerable to trends in pension fund management. Such trends include, but are not limited to:

the growing tendency for large Canadian pension funds to manage PE in-house; the shift of

private pension funds from DB to DC plans; and the newly created PRPP. In addition, un-

foreseen changes in pension fund management would affect Onex future AUM growth.

Loss of Key Employees

PE is a human capital intensive industry. Onex ability to locate profitable investments and

exit them in a fruitful and timely manner is wholly dependent on the knowledge and talent of

its management. With a team of only seventy investment professionals whose average tenure

is sixteen years, Onex investment team is small and experienced. The loss of even a few key

employees may severely impact Onex ability to generate the outsized returns typical of the

firm. Specifically, Gerry Schwartz is arguably Onex greatest asset. If his tenure as CEO

were to end abruptly, the implications for Onex share price would likely be catastrophic.Operational Risks

Significant Customers Risk

Six of Onex operating companies have significant customers from whom 10% or more of

their revenues are derived (Appendix I). The value at cost, or market value, of those invest-

ments is C$466 M, which represents 18% of Onex total PE investments. Two companies are

heavily exposed to this risk. Spirit AeroSystems, (valued at C$95 M as of September 30,

2011) derives 94% of its revenues from two customers. Celestica (valued at C$129 M) de-

rives 20% of its revenues from Research in Motion (RIM). RIMs future is questionable,

because of its recent industry-lagging performance, governance concerns, and current specu-

lation of it being an acquisition target. The failure of Onex subsidiaries to diversify their

customer base may adversely affect their performance, which would negatively affect Onex

share price in the near future.

Operating Liquidity

Volatility in credit markets represents a risk to Onex operating companies whose loans areup for renewal in the short term. As Figure 31 shows, loans at Onex companies are not upfor renewal until 2013, and the majority of renewal dates are past 2014. Moreover, 56% ofdebt at Onex operating companies is fixed rate, or fixed through interest rate swaps. Assuch, near-term volatility in credit markets does not represent a significant risk to Onexcurrent operating companies.

Increasing Commodity Prices

Three of Onex operating companies are vulnerable to swings in commodity prices. Spirit

AeroSystems uses significant amounts of aluminum, titanium and carbon fibre in its manu-

facturing operations. It has entered into long-term supply contracts to mitigate the effects of

volatile commodity prices on its earnings. TMS International is highly dependent on diesel

fuel prices, and consumes approximately 11 million gallons of oil per year. Finally, silver

represents a significant commodity used in Carestream Healths manufacturing of imagingequipment, particularly x-ray film. Carestream uses forward contracts to manage the effect of

volatile silver prices on its earnings.

Decreasing Government Funding

Approximately 5.5%, or $151 million, of Onex proprietary capital is invested in its health-

care segment. Performance companies in this segment is dependent on US government fund-

ing at the federal, state and municipal levels. Due to increased budgetary pressures in the US,

a variety of factors may lead to diminished levels of government funding. A decrease in ap-

propriations for services offered by Onex operating companies may materially and adversely

impact the performance of those companies.

Additional company-specific risks are provided in Appendix C.

Fig. 31: Consolidated Minimum DebtRepayment Requirements

Source: Annual Reports

Year USD$M

2011 242

2012 395

2013 2,356

2014 1,096

2015 468

Therafter 2,132

Total 6,689




ONEX

Disclosures:Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publica-tion of this report.Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as a officer or director:The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company.Market making:

The author(s) does not act as a market maker in the subject companys securities.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, butthe author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be usedas the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation ofan offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Schulich School of Busi-nes, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.




ONEX

Investment

PeriodInvested Capital

Total Realized and

Unrealized Value

Multiple of

Cost

Annual Rate

of Return

Direct Investments 1984-2003 $1,899 $4,948 2.9 27%

Onex Partners I 2003-2006 $1,561 $5,674 4.2 80%

Onex Partners II 2006-2008 $2,939 $4,804 2.3 25%

Onex Partners III 2008-present $1,303 $1,428 - -

ONCAP I 1999-2005 $208 $850 4.1 43%

ONCAP II 2005-2011 $493 $813 5.8 57%

ONCAP III 2011-present $44 - - -

Total 27 years $8,447 $18,517 3.3 29%

Appendix B: Return on Invested Capital

Source: Onex

Appendix A: ONEXs Structure and Funds Holdings

Source: Onex




ONEX

Name Industry Description Location RisksEconomic, Vot-ing Ownership

Celestica Inc.Electronics

manufacturingservices

Originally a division of IBM, now

designs & manufactures tech com-

ponents; provides supply chain

supportOntario

20% of revenues come from

RIMGeopolitical

Commodity pricing

8%, 71%

Spirit Aerosys-

tems Aero-structuresOriginally a division of Boeing, now

manufactures airplane assemblies

& components to Boeing, Airbus, &military Kansas

54% revenues from Boeings

737Unknown future for Boeings787

Heavily regulated industry

4%, 64%

TMS Interna-

tional Metal ServicesOutsourced provider of industrial

services to steel mills in 10 coun-

tries globally, but with a North

American focusPennsylvania Commodity pricing; particu-larly diesel fuel. 25%, 85%

Centre for

Diagnostic

Imaging Inc. HealthcareAn outpatient imaging provider

operating 60 locations across 9

States MinneapolisRegulation

Malpractice threatsTalent recruitment/retention 19%, 100%

Skilled Health

Care Group

Inc. HealthcareA holding Co. with subsidiaries in

skilled nursing, assisted living,

hospice facilities and the like CaliforniaRegulation

Changes to Medicare/

MedicaidMacroeconomics of Texas &

CaliforniaTalent recruitment/retention

9%, 89%

Carestream

Health Inc. Healthcare Designs & manufactures healthimaging IT systems New York IP protectionregulation 37%, 100%

Rescare Inc. HealthcareOffers residential & support ser-

vices to people with intellectual &

developmental disabilities, voca-

tional training, and in-home assis-

tanceKentucky Regulation & compliance 20%, 100%

The Warranty

Group Financial Ser-vicesThe worlds largest provider of

extended warranty contracts sold

to manufacturers, retailers, & dis-

tributersIllinois Regulatory concerns

Geopolitical events & stresses29%, 100%

Sitel World-

wide Corp. Customer CareServicesProvides customer contact centre

outsourcing, primarily via tele-

phone TennesseeLong accounts relievable peri-

ods 68%, 88%

Alison Trans-mission OtherMarket leader in the niche market

of providing of commercial dutyautomatic transmissions Indiana Dependency on a few numberof customers 25%,-

Hawker Beech-

craft Corp. OtherDesigner & manufacturer of corpo-

rate and military turboprop and jet

aeroplanes KansasSupply chain risks

High industry rivalryMacro-economic forces 19%, -

Tomkins Ltd. Other Diversified global engineering &manufacturing firm; focus on en-ergy efficient products London, UK

Volatility of input pricesGeopolitical uncertaintyMacroeconomic forces 14%, 50%

Tropicana Las

Vegas Inc. Other A casino, hotel, & entertainmentfacility on the Las Vegas strip NevadaIlliquidity

Debt obligationsRegulation

Macroeconomic trends

17%, 76%

RSI Home

Products Inc. OtherManufacturer of kitchen & bath

cabinets and home organization

products CaliforniaTied to strength of US housing

market 20%, 50%

Appendix C: Description of ONEXs Major Holdings

Source: Onex




ONEX

VariableElectronics Manufacturing

ServiceAero-structures Healthcare Financial Service

2010 2009 YoY(%) 2010 2009 YoY(%) 2010 2009 YoY(%) 2010 2009 YoY(%)

Revenue $6,717 $6,909 -2.78% $4,293 $4,641 -7.50% $6,548 $6,590 -0.64% $1,199 $1,359 -11.77%

Cost of Sales $6,173 $6,319 -2.31% $3,578 $3,946 -9.33% $4,866 $4,766 2.10% $563 $656 -14.18%

SG&A $224 $224 0.00% $178 $199 -10.55% $716 $771 -7.13% $450 $509 -11.59%

EBITDA $320 $366 -12.57% $537 $496 8.27% $966 $1,053 -8.26% $186 $194 -4.12%

Operating Margin 4.76% 5.30% -10.07% 12.51% 10.69% 17.04% 14.75% 15.98% -7.67% 15.51% 14.28% 8.67%

Operating Margin ex SG&A 8.10% 8.54% -5.16% 16.66% 14.98% 11.22% 25.69% 27.68% -7.19% 53.04% 51.73% 2.54%

% of Total Revenue 27.57% 27.82% -0.92% 17.62% 18.69% -5.73% 26.87% 26.54% 1.26% 4.92% 5.47% -10.09%

Net Income $7 $6 16.67% $15 $14 7.14% $39 $36 8.33% $32 $32 0.00%

Net Profit Margin 0.10% 0.09% 20.00% 0.35% 0.30% 15.83% 0.60% 0.55% 9.03% 2.67% 2.35% 13.34%

Variable Customer Support Services Metal Service Other Total

2010 2009 YoY(%) 2010 2009 YoY(%) 2010 2009 YoY(%) 2010 2009 YoY(%)

Revenue $1,381 $1,780 -22.42% $2,091 $1,472 42.05% $2,137 $2,080 2.74% $24,366 $24,831 -1.87%

Cost of Sales $882 $1,140 -22.63% $1,914 $1,329 44.02% $1,282 $1,312 -2.29% $19,58 $19,468 -1.08%

SG&A $376 $487 -22.79% $55 $48 14.58% $600 $581 3.27% $2,599 $2,819 -7.80%

EBITDA $123 $153 -19.61% $122 $95 28.42% $255 $187 36.36% $2,509 $2,544 -1.38%

Operating Margin 8.91% 8.60% 3.62% 5.83% 6.45% -9.60% 11.93% 8.99% 32.73% 10.30% 10.25% 0.51%

Operating Margin ex SG&A 36.13% 35.96% 0.50% 8.46% 9.71% -12.87% 40.01% 36.92% 8.36% 20.96% 21.60% -2.94%

% of Total Revenue 5.67% 7.17% -20.94% 8.58% 5.93% 44.76% 8.77% 8.38% 4.70% 100.00% 100.00% 0.00%

Net Income -$52.00 126.00 -58.73% $2.00 -$31.00 -106.45% -$94.00 $181.00 -151.93% -$51.00 $112.00 -145.54%

Net Profit Margin -3.77% -7.08% 46.81% 0.10% -2.11% 104.54% -4.40% 8.70% -150.55% -0.21% 0.45% -146.40%

Source: Onex Financials

Appendix E: Segmented Financial Analysis

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

0

200

400

600

800

1000

1200

1400

1600

1800

AcquisitionSiz

e(USD$M)

S&P500Pr

iceLevel

Acquisitions S&P 500

Appendix D: Comparison of Onex Acquisition Size and Volume With S&P 500

Source: Onex


15/36

SSBI nvest ment sPage15

Market Lastest

Cap AUM P/E P/B P/FCF EV / EB

Name Ticker billion billion 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 2011 2010 2

ONEX CORPORATION OCX 3.7$ 8.9$ 1.5x 1.8x 1.7x 1.4x 2.6x 2.2x 14.2x 4.0x 4.7x 8.1x 51.7x 5.2x 4.8x 5

AMERICAN CAPITAL LTD ACAS 2.5$ 53.0$ 8. 7x 4.4x 1. 3x 9. 8x 14. 9x 0.6x 0.2x 0. 2x 1. 0x 1. 6x 14. 0x 3. 6x 1. 8x 12. 5x 16. 4x 4 .3x

AGF MANAGEMENT LTD AGF 1.5$ 48.4$ 11. 1x 16. 6x 5. 1x 16. 5x 26. 7x 1 .2 x 1. 3x 0 . 7x 2. 6x 2. 3x 7. 9x 7. 9x 2. 1x 7. 3x 11. 0x 3. 6x 3 .5x 0

BROOKFIELD ASSET MANAGENT BAM 17.3$ n/a 7.0x 31.2x 14.9x 28.8x 17.0x 1.1x 2.0x 1.8x 3.1x 3 .5x 128.3x 15.4x 13.6x 1

BERKSHIRE HATHAWAY INC BRK 192.8$ n/a 17.0x 20.3x 15.5x 22.7x 18.2x 1.2x 1.2x 1.4x 1.8x 1.6x 14.9x 14.1x 29.3x 30.5x 30.2x 4.0x 2.5x 5

BLACKSTONE GROUP LP BX 16.0$ 164.0$ 11.0x 20.8x 3.8x 4.4x 2.1x 5.7x 229.9x 38.0x 4.0x

FORTRESS INVESTMENT GRP FIG 1.8$ 45.4$ 3.8x 7.7x 4.9x 33.3x 3.2x 5.0x 0.3x

GMP CAPITAL INC GMP 0.5$ 0.9$ 8.3x 23.4x 10.1x 11.5x 11.2x 1.9x 2.8x 1.5x 5.5x 5.1x 3.2x 7.4x 8.1x 3.9x 7.8x 3

KKR & CO LP KKR 9.0$ 61.1$ 18.5x 2.3x 12.2x

OCH-ZIFF CAPITAL MANAGEMENT OZM 3.5$ 29.9$ 1.1x 1.4x 0.6x 1.5x 4.2x 0.5x 9.0x 16.1x 2

PARTNERS GROUP HOLDING AG PGPHF 16.2x 15.8x 10.9x 15.0x 23.2x 9.2x 7.1x 5.2x 10.4x 13.7x 14.2x 26.2x 6.2x 16.6x 26.0x 15.2x 13.2x 9

mean 27.2$ 57.5$ 11.0x 16.7x 8.4x 15.1x 18.5x 2.8x 3.3x 2.2x 7.9x 4.6x 47.3x 14.2x 19.5x 14.9x 18.3x 8.5x 9.4x 8

median 29.9$ 58.2$ 11.0x 18.4x 10.1x 15.0x 17.6x 1.9x 2.4x 1.7x 4.3x 2.9x 14.1x 7.9x 3.2x 12.5x 16.4x 6.7x 10.5x 7Source:Bloomberg




ONEX

Appendix G: NAV Valuation - Base Scenario

Source: SSB, Onex




ONEX

YoY growth rate - Bear 5%

YoY growth rate - Base 10%

YoY growth rate - Bull 15%

Discount rate (CAPM) 12%

Growth rate terminal 3%

Net AUM fees/AUM fees 30%

Variable Assumption

Assumptions Inherent in DCF Approach

Appendix H: Calculation of PV of Net AUM Fees

Source: SSB and Onex

2003 2004 2005 2006 2007 2008 2009

AUM fees $17 $26 $28 $42 $52 $65 $88

YoY growth rate - 53% 8% 50% 24% 25% 35%

Source: Onex

Historical Fees

Bear 2011E 2012E 2013E 2014E 2015E Thereafter Total

AUM fees $101.85 $106.94 $112.29 $117.90 $123.80 $1,416.81

Net AUM fees per share $0.26 $0.28 $0.29 $0.31 $0.32 $3.68

Discount net AUM

fees per share$0.26 $0.25 $0.23 $0.22 $0.20 $2.34 $3.50

Base 2011E 2012E 2013E 2014E 2015E Thereafter Total

AUM fees $106.70 $117.37 $129.11 $142.02 $156.22 $1,787.85


Discount net AUM

fees per share$0.28 $0.27 $0.27 $0.26 $0.26 $2.95 $4.28

Bull 2011E 2012E 2013E 2014E 2015E Thereafter Total

AUM fees $111.55 $128.28 $147.52 $169.65 $195.10 $2,232.83


Discount net AUM

fees per share$0.29 $0.30 $0.31 $0.31 $0.32 $3.68 $5.21

PV of Net AUM Fees: DCF Approach with Scenario Analysis


Bear Base Bull

Net AUM fees (million) $33 $33 $33

Net AUM fees per share $0.29 $0.29 $0.29

Industry multiple 13x 14x 15x

PV of net AUM fees $$$$3.71 $$$$4.00 $$$$4.28

PV of Net AUM Fees: P/E Multiple Approach with Scenario Analysis





ONEX

Cost/FMV

(C$B)

2010 2009

Number of

Significant

Customers

% of Reve-

nues

Number of

Significant

Customers

% of Reve-

nues

Spirit Aerosystems $95.00 2 94% 2 96%

Skilled Healthcare $12.00 2 69% 2 67%

TMS International $68.00 1 32% 1 25%

Celestica $129.00 1 20% 1 17%

CDI $8.00 1 12% 1 12%

Warranty Group $154.00 1 12% 1 10%

Total $466.00

Total Private Equity Investments $2,650.00

Share with significant customers 18%

Appendix I: Significant Customers at Onex Operating Compa-

Source: Onex


19/36

Know When to HoldEm

Summary

Despite Onex excellent track record, concerns regarding the overconcentration of votingcontrol among management and the recent performance of current holdings leads to

SSBs HOLD rating. Moreover, SSB expects poor private equity industry performance

going forward due to sustained volatility in equity markets and global economic uncer-

tainty.

Highlights

Big shoes to fill. Over Onex 27 years of existence it has generated an average IRR

of 29%. The firms superlative investment record owes largely to its investment dis-

cipline and managements deep experience. However, limited partner and shareholder

expectations may now be set too high, which could have adverse effects on Onex

ability to maintain AUM going forward.

Concentrated voting control. Gerry Schwartz, Onex CEO, President and Chair,

holds nearly 70% of Onex voting control. Such concentration of voting rights pro-vides little oversight with regards to managements actions and decisions. Investors

must effectively put their faith in one individual, a fact that may not be palatable to

many investors.

Weak investment and exit opportunities. Onex ability to reproduce its past suc-

cess is highly dependent on its ability to locate profitable investments and exit exist-

ing holdings at attractive multiples. This, in turn, is dependent on the state of the

global economy and the performance of public equities. Several factors, including a

weak global economic recovery and uncertainty surrounding the state of the Euro-

zone may contribute to extreme economic uncertainty and volatility in public markets

over the coming quarters. This will lead to weak investment and exit opportunities,

constraining managements ability to repeat its past success.

Extreme information asymmetry. Onex financial statements are of limited use to

shareholders, and inadequate information is available on many of its holdings. Conse-quently, financial analysis and valuation of Onex is problematic, and relies heavily on

the limited information disclosed by management.

Dependent on changes in Canadian pension fund management. Pension funds

historically contribute between 60% and 70% of third-party capital to each of Onex

funds. Certain trends in the Canadian pension fund industry may limit the extent to

which Onex achieves growth in assets under management. Such trends include, but

are not limited to: the tendency of Canadas largest pension funds to manage private

equity investments in-house; the shift to defined contribution plans amongst private

pension plans; and changes in pension fund regulation.

Onex CorporationCanadian Private Equity | TSX: OCX

January 6 , 2012

SSB Investments

Rating HOLD

Price Target (C$) 36.41

Price Dec. 31 (C$) 33.28

Upside (%) 9.41

Market Data

52 Week High ($) $38.22

52 Week Low ($) $28.01

Avg Daily Volume 119 K

Beta 1.05

Dividend Yield (%) 0.33%Share Outstanding (Mil): 115.63 M

Market Cap. (M$) $3.85 B

Insider Holdings: 23%

B/V per share: $17.86

ROE LTM (%) 3.53%

EPS (LTM): $12.86

Trailing P/E Ratio (%): 2.62x

Onex is a private equity investment firmwith holdings in electronics manufacturingservices, aerostructures, healthcare, and avariety of other industries. Onex had reve-nue of C$24.4B in 2010; making it one ofthe largest PE and alternative asset manag-ers in Canada.

Company Overview

$60

$80

$100

$120

$15

$20

$25

$30

$35

$40

O CX S&P Pr ivate Equi ty Inde x

Share Price Movements

Source: S&P, Bloomberg

Source: Bloomberg

Current Valuation


NAV $29.26







Target NAV $31.59




Implied Growth 9.4%

Source: Onex Financials, SSB estimates




Business DescriptionOnex is a publicly listed private equity (PE) firm which manages C$4.4 B of proprietary

capital and C$8.9B of third-party capital (Figs.1 & 2). As a corporate entity, Onex is com-

prised of five closed-end equity investment funds, a real estate fund, a credit fund, and direct

ownership in two businesses. Appendixes A and B provide an overview of Onex holdings

and the distribution of capital and historical performance across its existing funds.

President, Chair, and CEO Gerald Schwartz founded Onex in 1984. The company was pub-

licly listed in 1987, and Gerald Schwartz remains its controlling shareholder with nearly 70%of voting control. Over the last 27 years Onex has grown to a workforce of seventy invest-

ment professionals with an average manager tenure of sixteen years.

With offices in Toronto and New York City, the majority of Onex businesses are located in

North America (NA) specifically, the US. However, on a consolidated basis, the company

derives roughly a third of its revenues from business activities outside of NA ( Fig. 3).

Onex revenue is derived from three key industries: Electronic Manufacturing Services,

Aerostructures, and Healthcare, which make-up 30%, 19%, and 21% of Onex consolidated

revenue respectively. Over the last 5 years, Onex appears to have made an effort to diversify

its portfolio across a variety of industries (Fig. 4). For example, in 2010 72% of revenue

came from just 3 industries versus 88% in 2005. Details per each company can be found in

Appendix C.

On a holdings basis, as of Q3 2011, the largest contributor to Onex consolidated revenue is

Celestica at 30%. Three companies make up roughly 62% of Onex revenue (Fig. 5).

Creating Shareholder Value

Onex creates shareholder value in three ways:

1. Fees from Third-Party Assets Under Management (AUM): Onex currently manages

about C$8.9B of third-party AUM on behalf of a number of institutional investors.

Management fees range from 1-2% per year depending on whether or not committed

capital is invested. In 2010, revenue from this business segment totalled approxi-

mately USD$90M.

2. Carried Interest: Carried interest is a reward to Onex shareholders and management

based on performance. Onex earns 20% of all capital gains within a fund provided it

reaches a target annualized return of 8%. Carried interest within a fund is calculated

independently of other funds. Shareholders are entitled to 40% of earned carriedinterest, with management taking the remaining 60%. Since 2003, Onex has recog-

nized USD$237M in carried interest through its income statement.

3. Capital Appreciation: Appreciation of the C$4.4B of Onex proprietary capital repre-

sents the largest way through which Onex creates shareholder value. Onexs goal is

to grow Net Asset Value (NAV) per share by 15% per year. Since inception, Onex

boasts an average IRR of 29%. This has contributed to a 17% annual compounded

share price return over the last twenty years.

Investment Strategy

Onex is a self-described value investor as it aims to acquire companies that are undervalued.

The key driver behind Onex past performance is its ability to find, manage, and exit profit-

able investments. The management team looks for investments in three key areas:

1. Carve-outs of subsidiaries and mission-critical supply divisions from multinational

corporations

2. Operational restructurings

3. Build-ups in a wide variety of industries

Onex investigates nearly 300 investment ideas per year prior to moving forward with only

two or three of them. It tends to take on public or private equity investments that grant it a

controlling stake. As of Q3 2011, the smallest percentage of voting shares Onex holds in a

company is 50%a. Onex likes to maintain an active presence within its investments; manage-

ment often takes on key managerial roles inside its investments.

Onex Clients

The majority of Onex third-party AUM comes from pension funds. The value contributions

from this source have increased from C$916M to Onex Partners I (2003) to C$2.4B to Onex

74%

16%

4%3%

3%

Large-cap Private Equity Cash & Near-cash Items

Mid-cap Private Equity Onex Credit Partners

Onex Real Estate

Fig. 2: Investment of ONEXsProprietary Capital

Fig. 1: Distribution of 3rd Party AUM

19%

28%38%

10%

3% 2%

Onex Partners I Onex Partners II

Onex Partners III Onex Cr edit Partners

ONCAP Other

64%

13%

20%

3%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2006 2007 2008 2009 2010

Nor th America Eur ope Asia & Oceania Other

Fig. 3: Revenue by GeographicSegment (C$ M)

Fig. 4: Revenue by Industry (C$ M)

27%

18%

27%

5%

6%8%

9%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2006 2007 2008 2009 2010

Electronics Manufacturing Service

Aero-structures

Healthcare

Financial Service

Customer Support Services

Metal Service

Other

(a) Allison Transmission: Onex has contractual rights and protections, including right to appoint members to the Board of Directors








Partners III (2009), a 2.6x increase. However, the percentage of pension fund ownership

within each fund has declined over the same time period (Fig. 6).

Industry Overview & Competitive PositioningFundraising Down 10.9% as of Q3 2011

In the first nine months of 2011, PE firms raised USD$192.5B globally compared to

USD$216B in the same period of 2010. In aggregate, fundraising has slowed considerably

from pre-recession highs (Fig. 7). Since 2009 a quarterly average of roughly USD$70B was

raised by PE firms globally, versus an average of over USD$160B between 2007 and 2008.

Institutional investors have recently shied away from PE due to high volatility in equity and

bond markets, as well as the uncertainty surrounding the future of the global economy. The

liquidity risks associated with PE investments may have contributed to this trend. Alterna-

tively, it may be that fundraising levels are artificially constrained by the so-called denomina-

tor effect write-downs in the valuation of PE holdings have lagged more liquid holdings,

artificially inflating the PE allocation beyond its target. Clearly this story needs to be moni-

tored over the next few years.

Against this backdrop ONCAP III completed fundraising in September 2011 with third-party

capital commitments of nearly C$550M. ONCAP III was oversubscribed, a rarity in the cur-

rent PE environment. Onex closed Onex Partners III in December 2009 with C$3.5B in third-

party capital commitments. This represented a 70% increase in commitments from Onex

Partners II. Given the poor fundraising performance in the PE industry, it is clear that Onexhas a special advantage over its peers. Onex ability to attract capital owes largely to its repu-

tation for earning consistent, outsized returns.

Buyout Slow-down

Buyout activity is historically correlated with equity market conditions, and the recent past is

no exception. While there is a definite post-recession upward trend in global aggregate buy-

out deals, Q3 of this year has seen a significant slowdown; buyout deal activity decreased

23% QoQ to USD$60.6B(Fig. 8).

Currently, weak deal flow is not due to a lack of funds globally, PE firms have nearly

USD$1T in dry powder (un-invested capital) (Fig. 9). Instead, solid investment opportunities

are relatively uncommon. Typically, investment opportunities come from two sources: public

markets and carve-outs. While there exist attractive opportunities in public markets, there are

fewer carve-out opportunities which represented the majority of PE investments in the past.The lack of quality carve-out opportunities is attributable to the unwillingness of cash-

hoarding parent companies to shed assets leading to weak corporate M&A activity (Fig. 10).

In 2011, Onex completed three buyouts totalling C$976M. Over the past ten years Onex has,

on average, completed roughly three deals per year valued at C$833M. As such, 2011 has

been an average year for Onex in terms of buyouts. Overall, Onex is constrained by the same

forces as the entire PE industry, and its buyout activity is generally correlated with global PE

buyout activity. Going forward, Onex has C$1.3B in cash and roughly C$2.8B in uncalled

committed capital to support its investing strategy. This glut of dry powder falls in line with

the industry trend, implying that Onex and its peers have a considerable war chest of capital

that must be put to use in the coming quarters.

I.P.Nos

Turbulent public markets in the second half of this year and cash-hoarding firms have con-strained exit opportunities available to PE firms. While investors were optimistic with respect

to public equity markets at the start of 2011, environmental disasters and global political

gridlock have left investors unwilling to assume additional risk. Still, owing to robust capital

markets in Q1 and Q2, aggregate exit values for 2011 may test prior records (Fig. 11 & 12).

In Q2 alone, over 300 exits were announced globally, valued at over US$120B, which is a

single-quarter record. Conversely, only 254 exits were announced globally in Q3 with a dis-

mal value of less than US$60B. The steep QoQ drop is partially attributable to PE firms un-

willingness to exit their largest holdings in volatile public markets. Indeed, only 12 exits

valued over USD$1B were made in Q3 versus 21 in Q2, and no exits valued over USD$5B

were made compared to three in the previous quarter.

Source: Preqin

Fig. 7: Aggregate Value & Number ofPE Funds Raised (2007-11,USD$B)

0

100

200

300

400

500

$-

$50

$100

$150

$200

$250

NumerofFunds

AggregateValue

Capital Raised (Billions USD) Number of Funds

Source: Preqin

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

0

100

200

300

400

500

600

700

800

900

AggregateDealValue

#ofDeals

Global Value (Billions USD) Number of Deals

Fig. 8: Global PE-Backed BuyoutActivity

0%

20%

40%

60%

80%

100%

Onex Partners I

('03)

Onex P artners

II ('06)

Onex Partners

III ('09)

Pensions Asset Managers

Banks & Insurance Endowment

Soverign Wealth High Net Worth

Fig. 6: 3rd Party Committed CapitalDemographics at Funds Inception

Source: RBC Capital Markets

Fig. 5: 2011 Revenue (1st 9 mths)

33%

21%12%

10%

7%

6%

5% 4%1%

Spirit AeroSystems

TMS International Corp.

The Warranty Group

Skilled Healthcare Group

Centre for Diagnostic Imaging

Other

Celestica

Carestream Health

Sitel Worldwide Corp.

ONCAP II Co's

ResCare

Tropicana Las Vegas





In 2011 Onex fully divested two investments: Emergency Medical Services and Husky Inter-

national. Both companies were sold to other PE firms for a total of roughly C$3.5B, repre-

senting a weighted average IRR of 41%. Additionally, Onex brought TMS International pub-

lic in April 2011, realizing a nominal portion of the total investment in the process. Notably,

all three liquidity events occurred in the first half of 2011 when markets were more stable.

Onex Allison Transmission announced its IPO in March of this year. However, the IPO has

not yet occurred due to poor equity market performance. Continued weakness in public mar-

kets may force Onex to hold onto its already mature holdings for longer than originally in-

tended.Pension Plan Changes Will Impact Onex

Both globally and within Canada pension funds represent an important source of funds for

PE firms. In the last decade or so, the share of pension fund assets allocated to PE has in-

creased. The increase is part of a broader trend among pension funds towards greater diversi-

fication from traditional assets, like bonds, and public equities, to alternative assets like PE,

hedge funds, and infrastructure.

At Onex, pension fund commitments to the Onex Partners family of funds represent nearly

67% of third-party committed capital. Moreover, third-party capital commitments have suc-

cessively increased by 60% to 70% for each fund in the Onex Partners fund family. Thus,

changes in the Canadian pension fund industry have undoubtedly affected Onex growth.

Going forward, three important developments in the pension fund industry will likely have a

material impact on Onex:1. Many pension funds are opting to manage PE internally, which both reduces the avail-

ability of third-party AUM to Onex and creates a more competitive PE environment. For

example, Ontario Teachers Pension Plan is a direct investor in PE deals; its C$12B PE

portfolio poses a real competitive threat.

2. Among private pension plans, there has been a shift from defined benefit (DB) plans to

defined contribution (DC) plans that will continue for the foreseeable future. Unlike DB

plans, regulatory constraints limit DC plan members ability to participate in PE. Thus

the shift to DC plans may translate into a net decrease in funds available to Canadian PE

firms, including Onex.

3. In December 2011, the Canadian government passed legislation to enact a new pension

scheme: Pooled Registered Pension Plan (PRPP). PRPPs allow Canadians without ac-

cess to work based pension plans to form collectively pooled pensions. These new

pensions are being designed to emulate many of the features of DC plans. As employersopt for PRPPs, Onex may lose out on AUM growth.

Competitive Environment

The near- to mid-term prospects for PE do not look any more promising than in the recent

past. With extreme uncertainty surrounding the Euro-zone sovereign debt crisis and a slug-

gish global economic recovery, public equity markets will likely continue their lacklustre

performance. This means sustained competition for investment opportunities and less-than-

optimal IPO exit opportunities

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