A sold-out crowd of more than 850 members and guests attended CFA Society Toronto’s Annual Investment Dinner at the Metro Convention Centre on Nov. 7. The Dinner, an annual highlight, was first hosted in 1957, and is eagerly anticipated each year.

This year’s program featured a fireside chat with Marg Franklin, CEO and president of CFA Institute, and Gerry Schwartz, founder, chairman, and CEO of ONEX Corp. Members were delighted to have Franklin in town for the event, following her appointment in September as the first Canadian and first woman in the CFA Institute global leadership role in its 73-year history.

“It’s apparent why Gerry is legendary,” Franklin said, reflecting on Schwartz’s expertise. “His candour and wisdom in sharing the enduring principles that have made ONEX extraordinary in terms of capital creation over 30 years was great. His reflection that every five years he determined it had never been harder than that moment looking forward and this time is no different, was priceless!”

Born in Winnipeg, Schwartz worked for Bear Stearns on Wall Street in the 1970s where he was mentored by Jerome Kohlberg Jr., a founding partner of investment firm Kohlberg Kravis Roberts. Returning to Canada in 1977, Schwartz founded ONEX in 1983, taking it public four years later. Today, ONEX manages US$39 billion in North American and European private equity, non-investment grade debt, and public equity and debt strategies for shareholders, institutional, and high-net-worth investors.

Schwartz doesn’t often make public appearances, but he honoured the Investment Dinner audience with his insight into ONEX’s involvement in the private equity and credit spaces, the company’s culture of success, the impact of ESG factors in today’s investment decision-making process, and his views on philanthropy.

Early Years
Reflecting on his formative years with Bear Stearns, Schwartz remarked, “In those days, we didn’t call it private equity—it was LBOs [leveraged buyouts], and the total amount of money available for LBOs at that time was probably about $200 million to $300 million. Today, it’s about $2 trillion to $2.5 trillion. In a way, success was just standing there with the wind at our back for 40 years. We’ve been unbelievably fortunate to be in that position, to just be in the heart of the growth of the entire industry. Honestly, I put a lot of our success on that fact.…It’s like living in a bull market for 40 years. It’s unimaginable.”

Schwartz then shared stories from the early years after returning to Canada. He co-founded CanWest Global Communications in 1977, with Izzy Asper, and then founded ONEX in 1983. Serving as its CEO and majority shareholder, Schwartz grew the company into one of the largest in the country.

“To get started, we raised a total of $50 million, which, I can tell you, was by far and away the hardest $50 million I’ve ever been involved with for fundraising,” he said. “We proved something early and decided to go public in April 1987 in the bull market, long before the crash in the same year. Again, it was like a phenomenon happening.” Investor response to this and subsequent capital-raising efforts far surpassed modest expectations, resulting in handsome returns for investors and the launch of a 35-year Canadian success story. ONEX has delivered an annualized 27 percent return to its fund investors over that time.

Investment Philosophy and Outlook
“We built a really, really nice organization with really good people. We have real longevity. We’ve built a team of people who have stayed with it. We care a lot about values, and we care a lot about value,” Schwartz said. He continued by explaining the challenges of being a value investor, sometimes being “stuck in it,” and that it hasn’t been a straight road to success. Mistakes were made along the way, he said. “Our business is a long-term business; we don’t produce short-term results and don’t measure short-term results. That’s tough sometimes for analysts to evaluate and try to put numbers on…. Quite frankly, in today’s private equity market, everyone should be a value investor, and if you’re not a value investor, learn to be—because it’s going to count.”

Schwartz then shared his thoughts on private equity in today’s challenging environment of decreasing GDP and low interest rates, and in view of the large amount of money that has flowed into the sector in recent years. Schwartz said this is admittedly the worst time of any in the last 35 years for the business, referring to the large amounts of capital desperate to be invested and the vast amounts of debt issued at enticing rates leading to increased leverage and risk. “This is a tough market,” he said. “We can find great companies, but can we actually buy them? Not so easy these days.”

Despite these headwinds, Schwartz said this “has always been, and remains, I believe, the best risk-adjusted business that I’m aware of…. So we’ll do fewer transactions, probably larger transactions,” he said, paraphrasing French philosopher Blaise Pascal, who wrote, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”

Franklin then quipped, “And we all know how hard it is for portfolio managers to sit and do nothing.”

When asked about the public equity and debt market, Schwartz claimed not to be an expert, but said, “We are, and want to be, a part of the shrinking of capital markets. It’s cheaper in the public markets today than it is in the private markets. There are great businesses we see, and we think there’s an opportunity for everybody, all shareholders, to have a win—and for us to have a win as well. We’ve announced that we’re hoping to buy WestJet, a great public company. It’s going to be a private company in our hands, [so that will] shrink the market again.”

Franklin then asked about the investment thesis behind the 2019 acquisition of wealth manager Gluskin Sheff, given the “interesting headwinds” in the asset management business currently. “We view it as a platform rather than a stand-alone business,” Schwartz said. “It’s going to be integrated into ONEX, and it fits beautifully with our credit business in the U.S. The thesis is, we want to be really close to clients, to talk to them about their interest in philanthropy and introduce them to charitable opportunities, building a relationship that moves beyond their asset returns. We want to build long-term relationships, and, in doing that, we can significantly expand the high-net-worth manager market.”

Company Culture
The discussion then turned to company culture, both within ONEX and in the companies it looks to invest in. “We’ve been better at enforcing and living the culture within ONEX,” Schwartz said, “than we’ve been in demanding the same culture from our portfolio of operating businesses. Culture is critical, and every mistake we’ve made is when we didn’t have the right group of people and didn’t act fast enough when we knew we’d made a mistake.”

He explained that a successful culture needs to be defined with metrics for those things the organization cares most about: integrity, transparency, friendship, and philanthropy.

“We try to enforce and build on our culture,” Schwartz said, “and we want people to live it and have it extend beyond us. Our people who’ve done very well for themselves, for example, are they charitable? ESG is a perfect example. We really believe in the principles of ESG. We always have, and typewritten into our early 1980s document was the statement that we don’t own share certificates, we own live businesses. We have a responsibility to customers, employees, and communities.”

Franklin asked if there are companies that specifically want to work with ONEX because they subscribe to the same set of values. “Yes,” Schwartz said, “we find in many of the auction processes we go through that when the management team spends time with us, and understands our values, they want to work with us. The problem is,” he explained, “it’s the shareholder that controls this, and price often ends up prevailing.” Schwartz continued to describe their commitment to finding “proprietary transactions” where they approach a firm to sell and the result is based fully on the relationship.

AI and Machine Learning
As the discussion turned to the use of AI and machine learning, Schwartz noted that, at the ONEX level, they need to do much more, but that in the companies they own, “we’re in the forefront, pretty good at encouraging those companies to spend real money and become big-time users of big data. It wasn’t mentioned, but is known by many Torontonians that in March, the University of Toronto announced that the Schwartz Reisman Foundation would be making a $100-million donation to build a 750,000-square-foot innovation centre to improve technology, particularly AI, and explore the intersection of technology and society.

Philanthropy
Schwartz continued to share his thoughts on philanthropy, where the extraordinary efforts and contributions he and his spouse, Heather Reisman, have made are well known, and have made a meaningful difference in education, healthcare, and other areas. “I think philanthropy is, if you’re lucky enough to be rich—and my definition of rich is…you have $1 more than you need to support your family and immediate needs—then sharing it through philanthropic giving or investment….I don’t know why anyone wouldn’t want to do that.”

Franklin asked if the same thinking applied toward the portfolio of companies ONEX invests in, which Schwartz replied to using ONEX itself as an example. “Young people are encouraged to spend time on philanthropy; as they go through that system they become richer, some become wealthy. We really encourage people to get deeply involved in fundraising events, and ONEX will contribute to anything our employees contribute to. We urge people to think philanthropically. We strive for 100 percent participation in the United Way, and we encourage everyone at ONEX constantly to increase their donation. It’s the kind of people we want to be with. Being nice is a criterion and philanthropy is a criterion. You can’t be nice if you can’t share.”

Living in Toronto
Franklin asked Schwartz why he has chosen to live in Toronto, when he could live and operate anywhere in the world. “You have to understand that I’m an immigrant to Toronto, so I have all the passion and enthusiasm of a new immigrant. I love this country. Toronto’s a great city. I can’t think of a better place to live. We love this city, we enjoy it, and Toronto’s so much more livable than it used to be. It’s a great place for kids to grow up. [There are] many things to do, and the constant immigration in Toronto is driving the economy. What a wonderful place to live. You look at what’s going on in America today and contrast to what we have here—we really respect the rule of the law, we really care if politicians tell the truth or don’t tell the truth.

“We do most of our business in the United States. Our goal is North American–headquartered companies about 50 percent of global operations, but this is a great country, this is a great city, and I couldn’t think of a better place to be.”

Advice to CFA Charterholders
Schwartz said, “I’m hard-pressed to give advice to people who are in a field that’s so based on integrity already. Capital markets are critical to all Canadians, critical to the wealth and worth of the country, and without analysts who have standards to meet, to prove, to live up to, we aren’t going to have healthy markets. My advice is to do more of the same. You have a vibrant, working, respected organization. I know you’re proud of it. I can’t tell you to do more than that.”