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Check Out This Onex Corporation Clone

Successful investing requires looking under a lot of rocks to find a few gems that will increase your wealth over the long haul.

One company that’s done that in spades is Toronto-based Onex Corporation (TSX:ONEX), which has beaten the TSX Composite Index by 600 basis points annually over the past 10 years.

Onex was started by Gerry Schwartz, its CEO, in 1984. One of the earliest employees at Onex was Anthony Melman, who worked at the company for 22 years until he returned from a business trip overseas in 2006 and walked away from the private equity business.

But he’s back.

In 2015, a group of founders second to none in Canadian business raised $403 million through a special purpose acquisition corporation (SPAC) called Acasta Enterprises Inc. (TSX:AEF). Like all SPACs, Melman and company were required to make a qualifying acquisition (acquire an operating business) within 24 months or the funds would be returned to investors.

The clock started ticking on July 30, 2015, when Acasta closed its IPO at $10 per share. It made its qualifying acquisition on January 3 of this year when it closed not one, but three acquisitions: Apollo Health and Beauty Care Partnership, JemPak Corporation, which are private label consumer staples businesses, and Stellwagen Group, a commercial aviation finance advisory and asset management business.

Once the deals were completed, Acasta had an enterprise value of $1.1 billion.

Today, that enterprise value is around $1.24 billion. We’ll know more when it announces Q3 2017 earnings on November 17, when it also holds its first annual Investor Day for analysts and investors. There, Melman and the rest of management will elaborate on how they intend to build a Onex-like private-equity machine.

If you don’t know much about private equity, the goal is to buy businesses using a combination of debt and equity and then use those businesses as platforms for future growth. When done correctly, the returns over three to five years can be substantial. In the case of Onex, it’s achieved a gross internal rate of return of 28% over its +30-year history and almost three times its capital invested.

Why Acasta?

There are very few publicly traded private equity firms in Canada, especially one as big as Onex. Acasta gives you the opportunity to get in on the ground floor of something that could turn out to be the next Onex. If that’s the case, its current share price will seem cheap in five years’ time.

The key to success in SPACs, which Acasta was until it made the qualifying acquisition, is the talent backing it. In this case, you’ve got Melman, formerly a big rainmaker at Onex and several other key management with significant M&A experience along with early investors and board members like Geoff Beattie who ran Woodbridge Company Limited, the Thomson family’s private holding company, from 1998 to 2012. Beattie is Acasta’s non-executive chairman.

It’s the private equity version of the U.S. dream team in Olympic basketball.

But don’t accept what I’m saying as gospel, because there are still risks attached to investing in this type of business — the biggest being that Melman is approaching 70 years of age; proper succession planning is necessary for Acasta to remain viable for years to come.

Bottom line on Acasta

In May, Acasta agreed to pay US$22.5 million to acquire ECN Commercial Aviation, adding to its aviation finance platform. Expect further bolt-on acquisitions for its consumer products platform and possibly the addition of a third platform sometime in 2018 once it’s been able to close an initial private equity fund.

There’s a lot of ifs, but I like where it’s heading.

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Fool contributor Will Ashworth has no position in any stocks mentioned. 

 

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