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The slow evolution of Onex continues

Today's launch of a $3.45-billion fund shows a focus on asset management, KEITH DAMSELL writes

Onex Corp. will today launch a $3.45-billion (U.S.) private investment fund, continuing the transformation of the Toronto conglomerate into a global investment manager.

"It's a really different business than it was five years ago," said Andrew Sheiner, managing director of the Toronto firm. "We've been in the process of transitioning Onex from an investment holding company to a diversified, private equity asset management company."

A group of global institutional investors has committed $2-billion to Onex Partners II; Onex itself will invest $1.45-billion in the fund. The new fund will make equity investments of $70-million or more in North American companies. It's expected that most investments will be made in Canadian companies.

The new fund continues the slow evolution of Onex, a leveraged buyout specialist with a vast range of holdings, from health care and high technology to film exhibition and aerospace. The company now manages more than $3-billion on behalf of third parties.

There are several factors behind the subtle shift in strategy. First, it makes Onex a more profitable firm. Investment management services spin off about $65-million in annual fees, the company estimates.

Second, it makes Onex much more nimble. Cash is the company's inventory and its needs are growing as the price of potential investments escalates. Onex's institutional partners, a mix of pension funds, endowments and a handful of individuals, sign long-term investment commitments for a percentage of the action. Cash changes hands only when the need arises, keeping dollars off the corporate balance sheet.

Then, when the right opportunity is found, Onex has billions at its disposal and can act quickly. In the past, it could take the Onex team valuable days and weeks to cobble together deep-pocketed partners to conclude a deal.

Competition to win the favour of institutional investors is intense, as is due diligence. Major institutions typically earmark 5 to 10 per cent of their portfolios for alternative investments, a catch-all that includes private equity shops, venture capital firms and hedge funds. Onex estimates there are more than 1,000 global firms competing for business and of these, only two dozen -- including Onex -- are able to secure multibillion-dollar funding commitments.

Each year, Onex kicks the tires of about 100 potential investments. A few dozen make the first cut and, eventually, the Onex team will invest in an average of two to four annually.

"A lot of businesses are for sale but there's not necessarily a lot of opportunity," managing director Nigel Wright said.

Onex is characteristically tight-lipped when it comes to future prospects. The firm has a value-driven investment style and has a very long-term exit strategy, typically holding major positions for 10 years or longer.

Historically, many investments have been captive businesses or outsourcing companies that cater to a specific industry or partner. For example, Onex and partners bought Celestica Inc. from IBM Canada Ltd. in 1996; IBM remains a key customer of the high-tech manufacturer.

Onex takes a very proprietary role, working closely with management to rebuild, refocus and renew a company. The Onex executive team regularly commits millions of their own to funds, too; the executive team has sunk about $100-million into Onex Partners II.

The first investment to meet the criteria of Onex Partners II is Aon Corp., one of the world's largest providers of warranties for automobiles, home appliances and other consumer products. In June, Onex agreed to pay $575-million (Canadian) and assume about $225-million in debt. A chunk of the investment will come from the new fund.

The formula is working. Over the past 22 years, Onex has posted a compound annual return of 27 per cent on invested capital.

"We tend to get very involved in our businesses and tend to be more focused on the long term," managing director Anthony Munk said.

"There's a sense of sharing in our successes and it really makes a big difference."

AIM exiting group RSPs

Small investors that are members of AIM Funds Management Inc.'s administered group retirement savings plan need to do some homework.

The Toronto fund company has served notice to unitholders that it will exit the group RSP business by the end of this year. Servicing company plans is a low-margin business and AIM wants to devote all its resources to investment management. Insurance giant Great-West Lifeco Inc. has had talks with AIM about servicing the fund company's $240-million in corporate and group plans.

So what does it mean for unitholders?

AIM plan members are under no obligation to move their cash to Great-West or sell their AIM or Trimark funds, the company said.

"We are not forcing them to make a decision one way or another," said Dwayne Dreger, AIM spokesman.

Winnipeg-based Great-West plans to set up eight new segregated funds that will accommodate the AIM move. About 80 per cent of existing assets can be shifted to equivalent Great-West funds that are largely invested in AIM and Trimark funds.

But if AIM group plan members opt to sell their current holdings, they may have to pay potentially costly deferred sales charges.

It's a potentially confusing situation for small investors. The best advice is to talk to your company's plan administrator, your financial adviser or AIM Funds directly.

Keith Damsell is editor of GlobeinvestorGOLD

© 2007 The Globe and Mail. All rights reserved.

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