TORONTO — Gerry Schwartz is itching to do a deal, but he's not sure when he and his team at buyout firm Onex Corp. will have a chance to unveil another takeover.
After a busy 2007, when Onex snapped up five companies in deals worth almost $13-billion, Onex has yet to buy a company in 2008, when the credit crunch has limited access to loans. Concern about the outlook for the private-equity business has Onex stock down 2.4 per cent so far this year.
However, Mr. Schwartz says he's not concerned, and in fact he is looking forward to a time when deal flow resumes because the bidding wars fuelled by the easy credit of recent years were anathema to his firm, which likes to buy on the cheap.
“This is going to be a much better market for us, no question,” Mr. Schwartz said in an interview prior to Thursday's Onex annual meeting. “I wouldn't try to put my finger on exactly when. But this market is moving more and more to the kind of a market that we do well in.”
Onex Corporation
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Mr. Schwartz said he's watching for sellers to drop their prices, which should start the buyout business rolling again. For the moment, companies are reluctant to sell because they are hoping for a return to the heydey of early 2007 when easy credit drove up prices.
“People aren't stuck yet needing to sell,” Mr. Schwartz said. “They aren't willing to accept that it's a permanent change from a year ago. I don't think that has yet really sunk in.”
The past nine months have been tough for the private-equity industry. While part of the problem is banks cutting access to credit and sellers demanding high prices left over from the heydey, some of the pain has been self-inflicted. With firms such as Kohlberg Kravis Roberts and Blackstone Group walking away from buyout agreements, the reputation of private-equity buyers has been tarnished.
“The broken deals are a black eye for the industry,” said Mr. Schwartz, whose firm has never backed out on an agreed deal. “There's no question the lenders put lots of pressure on the transactions, but it's very clear also that there are lots of sponsors trying to escape and using the banks as an excuse.”
Onex is banking on its reputation to convince boards to agree to deals, and to convince investors to sign on for the $4.5-billion fund the firm is putting the finishing touches on raising. Mr. Schwartz said he's confident the company will have no trouble making that target, but not all firms will be able to say that.
“Smaller funds, first-time funds are having a really tough time,” said Anthony Munk, an Onex managing partner.
Given the paucity of traditional deals to put that new capital to work, Onex is trolling for forced sellers – companies that can't afford to wait in hopes of better days.
“Distressed is going to be a big part of the theme of the next year,” said Mr. Schwartz.
Since they can't borrow to buy, Onex and the companies it owns have also been taking advantage of falling values for loans in another way. Allison Transmission, which Onex bought last year, purchased $100-million of its own debt at 85 cents on the dollar.
Onex is also banking on its fee income from running assets for other companies to help smooth out any bumps from a lack of deals. The firm is expecting close to $100-million in revenue this year from management fees. So far, the slowing U.S. economy hasn't hurt the companies Onex owns, Mr. Schwartz said, because of the offsetting effect of growth abroad.
The U.S. economy “is clearly a big issue, but so far we have not seen any meaningful impact on any of our businesses.”
