October 3, 2016 QUIC RESEARCH REPORT Financial Institutions Group David Chan Neil Shah Adam Carnicelli Ioulia Malamoud

Private Equity Overview & Onex Stock Pitch An Intro to the Private Equity Sector | Attractive Upside in Onex

Introduction

Onex Corporation (“Onex”) is a Canadian private equity investment company that acquires and builds businesses. Founded in 1984, Onex has approximately $23 billion of assets under management, of which $4.5 billion is Onex capital. The firm has built more than 85 operating businesses, completing roughly 490 acquisitions.

The purchase of Onex provides QUIC’s portfolio with exposure to the only large cap private equity player within Canada, a robust industry in the current low interest rate environment.

Investment Thesis

Argument I: Consistent Shareholder Value Creation

Argument II: Strong Market Position

Argument III: Favourable Portfolio Fit Given Bank-Heavy Focus

Valuation

Using a balance sheet-centric sum-of-the-parts valuation of Onex, we arrive at a price target of $92.25, implying a one-year return of 9.3%. QUIC Research Reports focus on emerging investment themes that affect current portfolio companies and companies under coverage.

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© Queen’s University 2016 QUIC Research Report October 3, 2016 An Introduction to the Private Equity Sector | Attractive Diversification and Upside in Onex

Table of Contents

Introduction to Private Equity 3

Leveraged Buyouts 4

Compensation of Private Equity General Partners 5

How Do Interest Rates Affect Private Equity? 6

A Changing Private Equity Industry: Pre-Crisis vs Post-Crisis 8

Onex Company Overview 10

Investment Thesis I: Consistent Shareholder Value Creation 11

Investment Thesis II: Strong Market Position 12

Investment Thesis III: Favourable Portfolio Fit Given Bank-Heavy Focus 13

Catalysts & Risks 14

Valuation 15

References 17

October 3, 2016 QUIC Research Report October 3, 2016 An Introduction to the Private Equity Sector | Attractive Diversification and Upside in Onex

Introduction to Private Equity

What is a Private Equity Firm? How are Private Equity Investments Structured?

A private equity (PE) firm is a type of alternative PE investments have two main players: the general asset manager that pools capital to invest in equity partner (GP) and the limited partner (LP). The PE ownership stakes in companies. These holdings, firm itself is referred to as the GP, while investors often referred to as portfolio companies, are who commit capital to the fund are the LPs. consolidated into a fund with an average time Typically, LPs provide the majority of capital for the horizon of 4-8 years, and the fund attracts capital equity portion of the investment. However, the GP from institutional and high net worth investors. PE often invests alongside its LPs, so they also receive firms use substantial amounts of debt to amplify a portion of the equity upside. However, regardless the returns of their investments. This financing of their vested capital, GPs collect both strategy is known as a leveraged buyout (LBO), and management fees and performance fees, with the LBOs are the reason that PE firms have the ability to latter being dependent on return hurdles. While invest limited amounts of equity and still see many of the biggest PE firms in the world have a attractive returns. LBOs will be described in more variety of different investments, many have a detail on the following page. PE professionals distinct strategy under which they operate. The perform two main functions: deal origination and strategies of PE firms could differ based on the portfolio oversight. Both of these functions are stage of investment (eg. venture capital, growth critical, as PE firms make money by finding equity, buyouts or distressed), the fund’s target attractively-priced acquisition targets, and then geography, the fund’s target sector, the value adding value to these holdings by widening added by the firm (eg. operating expertise, operating margins and driving multiple expansion. industry-specific network, etc.) or the fund’s preferred exit strategy. EXHIBIT 1 EXHIBIT 2 Basic Private Equity Structure Examples of Large Private Equity Firms Typically, a general partner (PE firm) manages a The majority of large private equity firms are based fund on behalf of a limited partner (investor) in the United States

General Partner Limited (Private Equity Partners Firm) (Investors)

Manages the Fund Owns the Fund

Private Equity Fund (Limited Partnership)

Holding Holding Holding Holding

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Leveraged Buyouts

What is an LBO? Mortgage Analogy

An LBO refers to the acquisition of a business that is The philosophy behind an LBO is that the primarily funded by debt. As mentioned, the investment can generate cash flows sufficient immense amount of leverage assumed via LBOs are enough to meet its debt repayment obligations, the what allow PE firms to realize returns on their remaining equity portion of the asset will be much investments that are disproportionate to their initial greater than the initial purchase price. Say, for equity investment. Typically, more than half of LBO example, that you are investing in a house, as a transactions are financed by debt. To increase the rental property. Suppose that the value of the debt levels of the company, PE firms generally house is $500,000, and you are responsible for borrow against the firm’s hard assets, assuming making a down payment of $50,000. This amount is debt that uses these assets as collateral. likened to the equity portion of a PE transaction. Additionally, the company can issue bonds, which Suppose also that the remaining $450,000 is debt, are usually classified as junk, to further drive up in the form of a mortgage. Over the years, the rent debt/equity ratios. The guiding principle behind an collected minus building maintenance is levered LBO is that if a firm can invest minimal equity into free cash flow. Assume that five years from now, the an operating company and generate operating cash mortgage will be reduced to $300,000, because the flows in excess of its debt obligations, the firm will generation of rental income has allowed you to pay be able to pay off its debts and eventually sell the down principal and interest on your mortgage, and company, claiming its entire equity value for an assume also that you are able to sell the house at a attractive multiple on invested capital (MOIC). The price of $550,000. These assumptions imply that the concept can be better illustrated by using the equity value of the house would increase from analogy of investing in a mortgage. $80,000 to $250,000 ($550,000 - $300,000),

EXHIBIT 3 Simplified LBO Return Illustration Assumptions As shown below, the use of leverage can help turn a company growing at 5% into a 20% + IRR investment LTM Entry and 12.0 10.0x Exit Multiple 2017 Cash $10.0M 60.0 Flow

10.0 10.5 11.0 11.5 Cash Flow $0.5M per (4.5) (4.5) (4.5) (4.5) (4.5) Growth Year (40.0) 60% Debt Debt / Equity / 40% Split Equity

2016 2017 2018 2019 2020 2021 Cost of Debt 7.5%

Equity Cash Flow Interest Resulting Gross IRR: 22%

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Compensation of Private Equity General Partners

How PE Firms Exit Their Investments fee of roughly 2%, and a certain percentage of outperformance, commonly referred to as carried PE funds have an average lifespan of 4-8 years. The interest. Distributions are tiered, with the goal of first stage of the fund is committed to deploying delineating the order of distributions to ensure capital, while the next several years are spent trying different types of investors are prioritized at to drive operational improvements in the company different levels of IRR. and widen margins. However, in order to return capital to investors and partners, GPs must find a Waterfall Distributions way to exit the investment and ultimately realize their profits. The three most common exit methods The distribution waterfall refers to the sequence of for private equity investments are initial public capital allocation to LPs and the GP in a PE fund. offerings (IPOs), selling to a strategic buyer and a Waterfalls consist of several phases, each of which secondary sale to another PE firm. can be thought of as a bucket. Each bucket has its own allocation method, and when the bucket fills IPOs tend to be the most desirable exit opportunity, up, the excess capital flows into the next bucket. but are not overly common, as it is sometimes Earlier buckets tend to favour the LPs, while later difficult to grow the company enough to go public buckets tend to favour the GP, incentivizing the within the constrained time horizon of the fund. fund managers to drive returns as high as possible. Strategic buyers seek to make acquisitions that Waterfalls usually consist of four stages: return of offer cost and revenue synergies to their current capital, preferred return, catchup and carried. Each business, a popular exit route for PE firms that bucket has a different “hurdle rate”, which is typically results in a premium being paid for the designed to allow LPs to receive a fair portion of holding. Sometimes, PE firms will have their returns before GPs take their portion. holdings acquired by another PE firm, which is referred to as a secondary sale. This essentially Carried Interest lengthens the time horizon of the portfolio company’s development, and allows the new firm Carried interest refers to the share of excess profits to continue upon the progress the initial investors that GPs receive upon closure of a PE fund. The have made. In special circumstances, fund majority of the GPs compensation comes from carry managers can repurchase the equity of private – however, it is not guaranteed, and is only investors, liquidate the assets of the company, or distributed once the fund has generated profits that refinance the company’s existing debt obligations exceed the required return level of LPs. Typically, to be able to make cash distributions. the distribution structure of a PE fund will return a specified percentage of profits (~10%) to the LPs, The ability of PE fund managers to successfully exit as well as return their initially invested capital. their investment is critical, as the majority of Beyond this initial hurdle, GPs claim ~20% of excess compensation for both themselves and other profits, while the other ~80% falls to the LPs. In investors occurs once all holdings have been many circumstances, there will be several different divested. Thus, there is often considerable thought hurdle rates, making the GPs return proportional to put into the exit before the fund is fully assembled. their effectiveness as a fund manager. However, the ability of PE firms to only put up ~2-3% of equity in The fee structure of a PE fund is more complex than the fund and still receive ~20% of upside beyond a that of most other asset managers. Typically, PE certain hurdle is what allows companies such as firms are compensated via a general management Onex to drive such handsome returns.

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How Do Interest Rates Affect Private Equity?

Interest rates have an effect almost on any leveraged buyouts by lowering yearly interest business—not only due to borrowing involved, but payments and by reducing the discount rates on also because on a broader level interest rates investments. Since the Fed enacted its policy determine the general activity in the economy and of quantitative easing and the subsequent result of asset prices. Private equity firms are more reactive prolonged near-zero short term interest rates, PE to interest rate changes because of the main firms have had the luxury of increasing the levering investment strategies involved in the PE on their buyout deals, engaging in deals that have business: venture capital and leveraged buyout. The smaller profit cushions, and having larger margins impact of interest rates on PE firms is a double- of error in terms of solvency. Low or declining edged sword; it affects buyouts and exits interest rates mean more funds are available for PE differently. firms, as investors tend to look elsewhere, away from fixed income and credit securities. This creates In leveraged buyout-styled transactions, PE firms an opportunity for PE firms looking to buy. They fund the takeover of companies using little capital, have access to easy funds and fundraising activity relying on debt to meet the cost of acquisition. sees a boom. Second, they can enter into a However, it entails steady cash outflow in terms of transaction, locking in lower interest rates, reducing interest payments; hence, the sensitivity to interest their periodic outflow, and thus, increasing the IRR rates. The internal rate of return (IRR) that the PE and eventually the return on their investment. firm achieves when it exits the company depends highly on the interest rates at which it takes on However, with the current world economic scenario, debt. many countries have historic low interest rates, has led to capital superabundance. This does not serve Low or Declining Interest Rates PE firms on the lookout to buy. Easy capital and competition over buying assets send prices soaring. The largest impact interest rates have on PE firms is High asset prices deter PE firms from entering into through creating an environment conducive to a deal.

EXHIBIT 4 Private Equity Conditions and the 10 Year Note Private equity conditions are inversely correlated to interest rates

1400 6.0%

1200 5.0% 1000 4.0% 800 3.0% 600 2.0% 400

200 1.0%

0 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Capital IQ Private Equity Total Return Index 10 Year US Treasury Bill

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EXHIBIT 5 Global Private Equity Buyout Fund Dry Powder ($B) Historically low interest rates in recent years results in continuous increase in fundraising activity 500

400

300

200

100

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bain and Company Private Equity Report

On the other hand, capital superabundance is During interest rate hikes investors and the public advantageous for sellers. IPO activity surges in a show decreased appetite for IPOs and asset low interest rate environment. Thus, PE firms valuations come down, which proves a headache looking to exit have an opportunity when interest for PE firms that would have planned their exits rates are low or declining, as this will help them around the same time. As interest rates increase, achieve higher valuation and much higher returns there could be a rush to exit certain deals and than anticipated. fundraising could be an issue. However, it is also a good time for PE firms looking for undervalued Interest Rate Hike firms and assets to invest in; they can deploy the capital they have accumulated from the low interest An interest rate hike would have the opposite effect period to good use. Also, PE firms have access to – investors flock to fixed income and credit capital from large institutional investors that have a securities and thus fundraising becomes a long-term outlook and diversification needs; and challenge. This will detract from the amount of this keeps up their interest and appetite for PE. money raised by private equity by only a small amount because most retail investors do not have The effect can be felt in PE acquisitions as well. As access to this market. the cost of debt rises, PE companies are going to have to pay less for assets than they may have In addition, when interest rates rise, companies otherwise. Until confidence is assured or conditions within private equity portfolios are exposed to their change, PE acquisition activity is bound to slow own risk. If a company has loans with variable down. interest rates and those rates increase, it is going to cut into its bottom-line. This could affect its A looming interest rate hike in the US has many PE profitability. In turn, the company may be firms looking cautiously as they have to re- prevented from making timely payments or could strategize. From a debt perspective, it is important become less attractive for the PE firm’s exit strategy. to lock in at lower interest rates to mitigate the effect of an interest rate hike on financing cost.

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A Changing Private Equity Industry: Pre-Crisis vs Post-Crisis

The history of private equity can be analyzed in two EXHIBIT 6 distinct eras: before and after the financial crisis. Post-Recession AUM of Buyout Funds Pre-Crisis 6% of assets under management affected after 2008 30% 26% In the early 2000s and especially from 2005 to 2007, 25% private equity firms were able to complete blockbuster buyouts due to liberal US monetary 20% policy and strong credit markets, which resulted in 15% historically low interest rates, lax lending policies, 10% 6% and large amounts of debt financing available. 5% Large-scale buyouts were becoming ever more 0% prevalent, as seen by LBOs of Toys “R” Us ($7 Perentage of buyout firms Percentage of buyout capital billion), Hertz Corporation ($15 billion), Energy that rasied a fund during these firms represented Future Holdings ($44 billion), Harrah’s 2002-08 but not during Entertainment ($27 billion), and Hilton Hotels ($26 2009-15 billion). Source: Bain and Company Private Equity Report

The Global Financial Crisis By sharp contrast, firms that failed to raise a new 2008 created a new investing environment for PE fund after 2009 represented just 6% of total buyout firms due to the beginning of the global financial fund AUM raised between 2002 and 2008. One big crisis. The financial meltdown was a disaster for reason is that most of the 2008 firm casualties were banks, brokerages, insurers and investors, as credit small firms; more than half of them had raised just seized up and equity markets collapsed. one fund before their demise. The financial crisis and downturn barely put a dent in the health of the However, the PE industry withstood the maelstrom PE industry overall. far better than commonly expected. It is true that the downturn claimed PE firms by the hundreds: Post-Crisis 26% of the 4,019 buyout firms that had raised a new fund between 2002 and 2008 went dark after As the recession lifted, however, private equity the crisis hit, not raising another fund since 2009 buyouts gradually began to return, and in 2012, the and appearing unlikely to do so ever again. deals were again in the billions, though still nowhere near the levels of the 2005 to 2007 boom Furthermore, PE firms had difficulty finding years. The private-equity structure permitted attractive investments and an even harder time companies to work their way through a cycle of obtaining debt financing, as investors remained on recession. the sidelines and investment banks were struggling with their own balance sheet problems. This Overall, it is estimated that PE firms manage over $2 resulted in fewer buyouts and smaller deals. To trillion in assets worldwide today, with close to $1 compare: the PE industry in the U.S. alone made trillion in committed capital, “dry powder”, available 7,590 deals in the period 2005 to 2007, accounting to make new PE investments. As has been widely for nearly $1.1 trillion in value, but during 2008 to reported, private equity dry power has reached an 2010, there were 5,056 deals worth only $408 all time high, topping $1.2 trillion in March 2015. billion, showing a 62% drop in capital employed.

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This is compared to less than $600 billion in  Private equity firms are making a conscious December 2005 and roughly $800 billion in effort to invest in more socially responsible December 2006. companies

Even so private equity firms invested almost the  Many prominent private equity deals in decades same amount of capital in 2006 and in 2014. In past while today, practically all PE deals are 2014, however, the total number of deals this executed with the sole intention of creating capital was deployed across was almost a quarter economic value for shareholders and the higher than the number of deals done in 2006. The economy at large number of exits in 2014 finally brought the industry  The general public has begun to see how over it’s previous record. Total exit value recorded buyouts can play a beneficial role in improving in 2014 far outshone the last boom cycle in 2007. companies and sustaining economic growth. Several emerging trends have come to define Instead of being seen as an industry that focuses private equity in a post-recession, multi-year boom on making operations leaner through layoffs and period. Most prominently, while megadeals seemed restructuring, PE firms are starting to be seen as to be the flavor of choice in the years leading up to being able to help sustain and build companies, the recession, the past year has seen a rise in as well as increase employment levels. transactions involving small and mid-sized firms. While corporate merger activity is still Nevertheless, fundraising for private equity strong, sponsors focused on firms with EBITDA investments in general has been much more between $5 and $30 million are having an easier difficult since 2008, because of both investors time obtaining money from institutions, and as such having less capital to invest in private equity, and private equity firms across the board have been private equity funds having difficulty generating steadily moving down market. consistent returns for its investors. In addition, a lot of the money that was raised in the boom year still Over the past decade, the public perception of has yet to be used for buyouts. This overhang of private equity firms has changed for the better. This committed capital prevents many investors from can be seen through a few key reasons: committing to invest in new PE funds.

EXHIBIT 7 Global Number and Aggregate Value of Private Equity-Backed Buyout Exits Since the financial crisis, aggregate exit value has been on the climb 2000 500

400 ($B) ExitValue Aggregate 1500 300 1000 200 No.of Exits 500 100

0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Perqin Ltd. No. of Exits Aggregate Exit Value ($bn)

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Onex Company Overview

Onex operates through four main investment raised $5.2 billion. Key investments include Husky platforms, with each generating base management International and Tropicana Las Vegas. and performance fees that make up the firm’s total revenues. ONCAP (Middle-Market)

EXHIBIT 8 The ONCAP funds focus on value-oriented, private equity opportunities in medium-sized businesses Onex Capital Breakdown located in North America. Investments typically Onex has $6 billion in capital across its balance sheet have an enterprise value of up to $500 million. ONCAP III, established in 2011, has capital Credit, 7% Real Estate & Other, 4% commitments of $800 million. Middle Market Private Equity, Onex Credit Partners 7% Onex Credit Partners is the exclusive credit Large-Cap investing arm of Onex and focuses on credit- Private oriented investment strategies, such as event- Equity, 46% driven, long/short, and market dislocation strategies. Over $5 billion has been allocated to Cash and Near- these strategies. Cash Items, 36%

Source: Company Reports (As of Q2 2016) Onex Real Estate Partners

Onex Partners (Large Cap) Founded in 2005, Onex Real Estate Partners is dedicated to acquiring and adding value to real Onex Partners focuses on large-scale, value estate assets in North America. Led by a team in oriented acquisitions of leading businesses based New York, the majority of holdings have been primarily in North America, The most recent fund, divested, with Sky View Parc representing the sole Onex Partners IV, started in May 2014 and has remaining investment.

EXHIBIT 9 EXHIBIT 10 Share Price Relative Performance 2015 Geographic Revenue Breakdown Onex grows much faster than the TSX Financial Index Onex is globally diversified with a focus on the US

380 Other, 6% 365.8 Canada, 330 5%

280

230 Asia, 16%

180 190.0 United 130 States, 80 Europe, 56% 2010 2011 2012 2013 2014 2015 2016 17% OCX S&P/TSX Capped Financials Index Source: Capital IQ (As of October 3, 2016) Source: Thomson One

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Investment Thesis I: Consistent Shareholder Value Creation

Investment Thesis I: Consistent EXHIBIT 11 Shareholder Value Creation Onex Return on Invested Capital by Fund Onex boasts high returns across its private equity funds Over the past 20 years, Onex has grown by a factor Fund Investment Period Gross Multiple of Capital Gross IRR of over 20x, significantly outpacing its competitors Direct Investments 1984-2003 2.5x 27% in all major indices. Onex’s stock price has risen Onex Partners I 2003-2006 3.9x 55% over 60% in the past three years alone, Onex Partners II 2006-2008 2.4x 18% outperforming the S&P/TSX by nearly 50% over Onex Partners III 2008-2014 1.9x 20% that span. Due to the firm’s strong performance Onex Partners IV 2014-Present 1.1x 12% ONCAP I 1999-2005 4.1x 43% and buildup of cash waiting to be deployed, such ONCAP II 2005-2011 3.7x 30% returns can be expected to continue, growing NAV ONCAP III 2011-Present 2.0x 28% and thus placing upward pressure on its stock price. Source: Company Reports (As of Q2 2016)

Onex is the largest LP in each of its private equity EXHIBIT 12 funds, as well as a major investor in its credit Onex 32-Year Gross IRR Relative Returns investment division. This means that not only is Significant outperformance above all asset classes Onex strategically aligned to maximizing returns, 28% but that it also receives the greatest portion of the gross returns, while also collecting fees from other LPs. Therefore, Onex’s co-invested capital passes Onex private equity returns onto common 17% shareholders of Onex.

10% 9% With a focus on absolute returns in the world of 9% private equity, Onex is well-positioned to outperform in the macro landscape of a slowing Canadian economy, particularly given a heavily uncertain outlook in the Canadian housing market. Onex Private Equity Real Estate S&P 500 High Yield Source: Company Reports (As of Q1 2016)

EXHIBIT 13 Long-Term Share Outperformance In the long-term, Onex common shareholders are rewarded with very lucrative returns

5-Year Share Growth 10-Year Share Growth 20-Year Share Growth 114% 268% 2415%

77%

105%

23% 62% 355% 342%

Onex S&P 500 S&P Onex S&P 500 S&P Onex S&P 500 S&P TSX/Composite TSX/Composite TSX/Composite Source: Company Reports (As of Q2 2016)

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Investment Thesis II: Strong Market Position

Investment Thesis II: Strong Market Widely Recognized as a Leader in Private Equity Position As the only large cap private equity investor in Financial Position Canada, Onex has an extensive network and can use this to capitalize on any potential transactions Onex continues to maintain a strong financial within the country. This particularly appeals to position amidst a challenging economic companies who are looking to partner with an environment in the Canadian Private Equity space. established and experienced investor within The firm has substantial financial resources Canada, which gives Onex a competitive advantage including a high liquidity and debt-free balance over other private equity firms, establishing an sheet that enables the company for new economic moat. acquisitions and to support the growth of its operating companies that is rare amongst On a global scale, Onex is widely-known as one of competitors in the market. the world’s most sophisticated private equity funds. Onex has operated for 32 years and has performed Diverse Investment Portfolio more than 85 platform acquisitions which have generated 2.8x MOIC and 28% IRR. Onex’s diverse investment portfolio enables the company to mitigate various market risks that Onex’s ability to demonstrate a consistent track competitors are facing, as there investment record in creating value in their portfolio philosophy and size allows them to be independent strengthens its positon to attract fresh capital. of any particular sector or geography. Strong Capital Support

EXHIBIT 14 Onex has approximately $6 billion of proprietary capital to support its overall operations. Onex is Investment Portfolio entrusted with third-party capital from institutional Onex boasts diverse holdings across several unique investors from around the world. The company sectors Other , currently has approximately $14.7 billion of invested 15% Electronics and committed capital that it manages on behalf of Manufacturing these limited partners. Insurance Services, 29% Services, 9% Ultimately, with availability of sufficient capital, Onex is in a position to make significant Health and investments, look forward for expansion and Human capture greater market share, which puts them at Services, 9% the forefront of private equity in Canada.

Packaging Building Products and Products, Healthcare Services, 11% 17% Imaging , 11%

Source: Company Reports (As of Q1 2016)

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Investment Thesis III: Favourable Portfolio Fit Given Bank-Heavy Focus

Investment Thesis III: Favourable Low Correlation With Existing Portfolio Portfolio Fit Given Bank-Heavy Focus Onex offers a unique portfolio positioning Significant Growth Advantage vs. QUIC Portfolio opportunity due to its inverse correlation with interest rates. Banks and insurers benefit from higher Onex is one of the fastest-growing Canadian interest rates while private equity firms prefer lower financial institutions, with balance sheet growth rates. Due to Onex’s underlying business model and significantly outpacing the rest of the Canadian geographic diversification, it has a low correlation financials space. In Canada there are no close peers, with the rest of the Canadian financials sector. The making Onex a unique investment opportunity. rest of the sector, particularly the Big 5 Canadian banks, are highly correlated given very similar Given the absolute size of large Canadian banks business models and geographic exposure. and insurers, one can infer reasonable bounds around acceptable growth expectations. For Canadian banks have a large inherent reliance on example, RBC has over one trillion dollars in assets the Canadian housing market given that mortgages on its balance sheet, with over half of a trillion make up the bulk of their loan portfolio. Given dollars in loans. While RBC is able to generate increasing market skepticism in the Canadian attractive net interest margins from its assets, it is housing market, Onex helps us diversify our macro exponentially more difficult for a bank to grow its exposure. Regarding other non-bank sectors, we trillion dollar balance sheet at 10% annually than it feel confident in our current insurance exposure, is for a smaller private equity firm based on size. and have a negative outlook on traditional asset managers and specialty mortgage companies. Inherently, capital markets price an above-average growth profile into the stock. However, we see an Beyond this, we believe that buying TSX:OCX has asymmetric risk-reward opportunity in Onex, where immense marginal benefit based on the the upside looks quite attractive at current diversification offered to a bank and insurance- valuation levels. heavy portfolio and inverse interest rate exposure.

EXHIBIT 15 EXHIBIT 16 Regression vs. S&P TSX Capped Financials Index Target Portfolio Weighting Whether in upside or downside, banks and insurers Adding Onex helps to diversify QUIC’s FIG portfolio, have a tendency to be closely correlated particularly in respect to interest rates and housing

1.39 Financial Sponsors, Life Insurance, 1.15 12.5% 1.00 0.98 12.5% 0.87 0.82 0.80 0.70

0.35

0.10 Banks, RBC TD Scotiabank Manulife Onex 75.0% 2-Year Beta R^2 Source: Bloomberg Source: Capital IQ

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Catalysts and Risks

Catalysts Risks

1. Middle-Market Growth 1. Interest Rate Hike

Although large private equity investments often Since private equity investments are dependent on generate the most awareness, the buildup of high amounts of leverage, an increase in the uninvested capital, combined with a decreased interest rate would increase financing costs on availability of large cap investments, has led to a floating debt hampering IRR returns, ultimately shift of focus to middle-market investments. lowering the profitability of private equity firms. It Despite the smaller investment mandate, such also has an unfavourable effect on discounting investments often represent the largest returns. future investments, where a greater discount rate decreases the net present value of future cash 2. Strong US and Global GDP Growth flows.

When GDP growth is consistent and significant, 2. Buildup of Uninvested Capital existing owners of firms often look to sell off their ownership in order to capitalize on significant Although private equity investments have been returns. In addition, a strong economy represents robust over the past few years, there has also been opportunity for entrepreneurs to borrow capital a large buildup of uninvested capital. At over $2bn and create new ventures, ultimately boosting on Onex’s balance sheet, this dry powder leaves private equity activity. Onex with less opportunity to collect on fees and to generate attractive returns on capital. 3. High Market Multiples Affecting Divestitures of Private Equity Holdings 3. Challenging Investment Environment

As a result of a number of factors including an The global private equity environment has been ultra-low rate environment, asset prices have been challenging due the recent volatility in the equity inflated. As Onex plans to divest and exit its assets and credit markets. Globally, the number of the firm should see exit multiple expansion, which leveraged buyouts completed in Q2 was down 30% will boost gains on sale. year over year. Furthermore, though debt levels for buyouts have been relatively consistent, as asset prices are inflated funds are required to inject more equity to fund recent LBO transactions.

4. Strengthening CAD or Weakening USD

Onex reports its financials in US dollars, as roughly half of its operations in the US. Given that the stock is listed on the TSX, a strengthening CAD or weakening USD would negatively affect share price.

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Valuation

Onex Capital: Public Companies and Direct Investments Shares Owned Market Value (USD) Value / Share Celestica (Direct Investment) 17.9 $194 $1.88 Genesis Healthcare (Onex Partners) 3.5 9 0.09 Total Public Companies $203 $1.97

Onex Capital: Onex Partners LTM EBITDA (USD) Book Value (USD) Value / Share SIG $427.0 $405 $3.93 JELD-WEN 351 217 2.10 Carestream Health 346 186 1.80 York Risk Services Group 105 173 1.68 USI 344 170 1.65 Emerald Expositions 97 119 1.15 Schumacher 135 93 0.90 Survitec 46 76 0.74 Jack's 52 67 0.65 SGS International 113 66 0.64 BBAM 120 49 0.48 AIT - 45 0.44 ResCare Inc. 136 41 0.40 Meridian Aviation - 19 0.18 Markup for Private Investments 643 6.24 Unrealized Carried Interest 170 1.65 Total Private Companies $2,539 $24.62

Onex Capital: Other Divisions Book Value (USD) Value / Share Onex Real Estate Partners $191 $1.85 Onex Credit Partners 409 3.97 ONCAP 397 3.85 Other Investments 64 0.62 Cash and Near-Cash $2,184 $21.18

Total Onex Capital and Target Price Book Value (USD) Value / Share Total Onex Capital in USD $5,987 $58.06 Total Onex Capital in CAD $7,862 $76.24 Current Price $84.49 Current Premium / (Discount) 10.8% 1-Year Projected Onex Capital Growth 10.0% 1-Year Projected Premium / (Discount) to Onex Capital 10.0% Price Target $92.25 Dividend Yield 0.1% Implied All-In Return 9.3%

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Valuation

EXHIBIT 17 EXHIBIT 18 Valuation Sensitivity Analyst Price Targets

Onex Capital Growth QUIC 0.0% 5.0% 10.0% 15.0% 20.0% $92.25

5.0% $80.05 $84.05 $88.06 $92.06 $96.06 RBC Capital Markets $92.00 7.5% $81.96 $86.05 $90.15 $94.25 $98.35

10.0% $83.86 $88.06 $92.25 $96.44 $100.63 Canaccord Genuity $87.00

Onex Capital Onex 12.5% $85.77 $90.06 $94.35 $98.63 $102.92

Premium / (Discount) to (Discount) / Premium 15.0% $87.67 $92.06 $96.44 $100.83 $105.21 BMO Capital Markets $84.00

Source: Bloomberg

Commentary At the surface level, one may shy away from investing in Onex due to its negative earnings. However, for companies such as Onex, it is more logical to value it from a balance sheet perspective. As such, investors price the stock based on Onex’s capital per share, using judgement to justify a premium to capital attributable to Onex’s ability to generate attractive returns on capital, and to continuously raise additional capital.

Unfortunately, there are few close competitors to Onex globally in terms of financial metrics. This is because most large private equity firms (typically located in the U.S.) have a tendency to focus more on short-term quarterly returns, while Onex employs a longer-term growth strategy. As a result, it is unjust to value Onex on figures such as P / E versus other financial sponsors.

Onex has a unique and defensible stance in the Canadian private equity environment and has consistent, yet significant performance. This allows Onex to provide common shareholders with steady and strong stock price appreciation. By using a balance sheet-based valuation methodology, a target price of $92.25 is reached. After including the firm’s dividend yield, this represents a total return of 9.3%.

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References

1. Bain and Company 2. Bloomberg 3. Capital IQ 4. CIBC World Markets 5. Company Reports 6. NASDAQ 7. Perqin Ltd. 8. Reuters 9. Thomson One 10. World Finance

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