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Onex to float IPO on distressed-debt fund

Vehicle to be based on strategies with a 41-per-cent return this year; holdings to be in senior corporate debt, including bank loans

Onex Corp. is offering retail investors a chance to put their cash beside its executives' money in a distressed-debt fund that has recently delivered eye-popping returns.

The country's largest private equity firm said yesterday that it plans an initial public offering of the OCP Credit Strategy Fund, which will offer individuals access to strategies that have returned 41 per cent so far this year.

The new fund is run by a team known as Onex Credit Partners, an 11-person group based in New Jersey that has managed an internal portfolio for Onex since 2001 that now holds $65-million. Backers of this fund include Onex founder and chief executive officer Gerry Schwartz and other senior Onex executives.

The new Onex fund will be listed on the Toronto Stock Exchange and target the income-seeking investors who used to buy income trusts. Units will be sold for $10 each and the prospectus says the fund will target a 7-per-cent annual distribution. That shouldn't be a difficult threshold to hit.

Since inception, Onex's internal debt fund has averaged an 8.4-per-cent return, twice the benchmark return on leveraged loans portfolios and well above the 0.3-per-cent decline in the S&P 500 over that same period. Year to date, the Onex fund is up 41 per cent against a 35-per-cent jump in the U.S. leveraged loan index, and a 15-per-cent rise in the S&P 500.

RBC Dominion Securities and CIBC World Markets are leading the initial public offering.

The IPO comes at a time when debt markets are dealing with the aftermath of last year's market meltdown and a recession. Onex said in a press release that its credit team "believes that the dislocation in credit markets over the last two years has created an attractive environment for senior credit investors."

The OCP fund will target holdings in senior corporate debt, which would include bank loans. While this sounds like a niche market, the company estimates there is $2.6-trillion of this paper in circulation. The goal is to buy debt that is backed by solid assets and cash flow, but trading at a deep discount, in part because many lenders are retreating from corporate debt markets. The OCP fund would profit as companies simply make payment on their debts until the loans mature, or when the debt is restructured on favourable terms.

U.S. distressed-debt funds are among the best-performing hedge funds, year to date, up an average of 14.9 per cent, according to a U.S. service called Absolute Return. Only convertible debenture funds have better numbers. Unlike most hedge funds, Onex will not use leverage in its new fund, which lowers the risk associated with this strategy.

The leaders of the OCP fund team are Michael Gelblat and Stuart Kovensky, each of whom has more than two decades of experience in U.S. credit markets at Wall Street investment banks and fund managers.

© 2007 The Globe and Mail. All rights reserved.

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