(Bloomberg) -- Supply chain snags are holding down the valuations of industrial companies, creating potential buying opportunities in an otherwise “frothy” market, according to Onex Corp. President Bobby Le Blanc.
“We know where we want to play in the industrial space, and we are seeing some better valuations there versus other verticals that we’re following,” Le Blanc, the no. 2 executive at the Toronto-based investment firm, said in an interview. “There’s still there.”
The coronavirus pandemic is still reverberating across the global supply chain, slowing the flow of raw materials and inflating prices amid a surge in demand for goods. That’s hurting the shares of some manufacturing, aerospace and transportation companies. Industrial stocks in the S&P 500 have underperformed the broader index over the past six months.
Onex, which has $46 billion under management including $7.5 billion of its own capital, has more than a dozen equity investments in the industrials sector, ranging from auto accessories maker Hopkins Manufacturing to aircraft leasing firm BBAM LLC. On Tuesday, the company said it will add another, as its $7.2 billion Onex Partners V fund struck a deal to acquire Fidelity Building Services Group, a closely-held building maintenance and engineering firm.
Industrials are one of several areas of focus for Onex, such as financial services, health care and business services, including software. The latter groups have seen “a really healthy sort of multiple expansion” coming out of the pandemic, Le Blanc said. That’s led the firm to reduce its stakes in a number of companies, including software and analytics firm Clarivate Plc.
Overall, “we’re probably leaning more towards being a net seller than a net buyer, because the market is just pretty frothy in terms of valuations,” he said.
In Canada, Onex’s highest-profile investment is WestJet Airlines Ltd., the country’s second-largest carrier, which it took private for $2.6 billion.
The deal closed in December 2019, just a few months before the pandemic crushed demand for air travel. But the airline was able to resist taking emergency funding from the Canadian government because it had relatively low leverage, Le Blanc said. WestJet primarily serves North American destinations and isn’t as reliant on business travelers as larger rival Air Canada.
“When the rules around Covid and travel relax, I think there’s going to be a V-shaped recovery in leisure travel,” Le Blanc said. “I don’t know if that incredible demand happens a month from now or four months from now, but what I like about our position at WestJet, it’s our balance sheet is so strong that we can afford to wait.”
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While Onex made its name with leveraged buyouts, the firm has focused more attention and resources on private lending and its credit division, now under the leadership of former Blackstone executive Jason New.
That expansion will continue, Le Blanc said, despite a rising number of players in corporate lending.
“I think the pricing in the private lending markets has gotten better this year,” Le Blanc said. “Competition’s coming in. So there’s more and more firms that are trying to set up direct lending arms, particularly on a larger scale for LBOs, and that part of the market’s become quite competitive.”
Onex shares are up 29% this year in Toronto, outpacing the 24% gain of the S&P/TSX Composite Index.
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