Lessons from Gerry Schwartz, founder and CEO of Onex Corporation

Gerry Schwartz is the founder, chairman and CEO of Onex Corporation, a private equity and credit investor and manager founded in 1984. Schwartz worked alongside Jerome Kohlberg, Jr., who later became a founding partner in Kohlberg Kravis Roberts, one of the first LBO fund.

As of March 31, 2019, Onex had approximately US$31 billion of assets under management. Since its founding, the firm has generated a gross multiple of invested capital of 2.6x and a gross internal rate of return of 27% on its realized private equity investments.

1. On how instincts and passion influence business decision-making: "Enormously. Instinct is the accumulation of knowledge over time, often from having made mistakes and learning from them, and I trust my instincts and the instincts of my colleagues at Onex. It's like the history that goes into a computer. Passion is important because you have to want to dedicate your life to building a particular business, and if you're not passionate about it, it's not a lot of fun. The combination of passion and instinct together work well-instinct stops you from making a bad, passionate decision."

2. On the most important factors when acquiring a company: "Quality of management, from the senior executives all the way down to the loading dock. The quality of people, the culture, the integrity, the history. We really believe that business is all about people-when we have great people, we have great businesses. And while we're obviously interested in good, solid cashflow businesses, we've probably done best where we could acquire a company and grow it significantly. We've grown six businesses with $1 million to $200 million in revenue each to between $3 billion and $8 billion in revenue each."

3. On his key business principles: "Integrity. It's real simple: do the right thing, always."

4. On how to go about defining your career: "A successful career doesn't have to follow a straight line. You can afford to make choices that turn out to be serious mistakes and time will let you correct the trajectory that you want to be on."

5. On why paying the right price is important when making an acquisition: "We just can't overpay, because you have to live with that price for a long time."

6. On the importance of having a great reputation: "We were able to buy a company almost entirely based on our reputation. Our reputation got us more than money could. Our money's no better than anybody else's. Our reputation is better than some."

7. On developing your own style and relationship building as a key comparative advantage: "Lacking the same size or brand recognition as its larger U.S. rivals has forced Onex to develop its own particular style. It tends to stick close to industries it knows well, particularly manufacturing, and is more inclined, Mr. Schwartz said, to roll up its sleeves and get into the operation of its businesses. TorreyCove's Mr. Fann describes it as "a very nose-to-the-grindstone type of approach." At a recent investor day, Bobby Le Blanc, Onex's New York-based senior managing director, said the firm tends to prefer targets with a "little more hair on them," meaning they can be bought at a lower price but require more fixing up. "When we get those right, they really lead to good outcomes," he said. Onex also views relationship building as a key comparative advantage over more transaction-oriented competitors. In the current crowded playing field, Mr. Schwartz places increasing emphasis on what he calls Onex's "proprietary value" - its ability to leverage past successes for future advantage."

8. On keeping small fund size to stay disciplined: "We think it's smart to keep the fund size reasonable. And if we need more money we will raise another fund, rather than having a much larger fund which would put some of the pressure on us to just get money invested. It's very important for us to maintain our record because it makes it so easy to raise money, and if we blow it, it's 24 years down the drain. So there's no inclination here to shovel money out in order to get another fund raised."

9. On his worst investing decision: "A lot of what I do is running businesses, rather than buying stocks. My worst decision is probably when I know I have the wrong chief executive running the business and I keep on waiting to make the difficult decision of replacing him. First of all, I'm probably friends with the person, so I don't want to fire him. I made the decision to have him as chief executive, so I don't want to admit that I was wrong. And above all, there's the human dimension. It's tough on the person. It's tough on his family. It's tough on the organization that he's leaving. So I have too many times delayed, delayed, delayed. And lots of damage has been done by waiting too long."

10. On his management style: "The whole firm meets by phone or in person on Mondays at noon to debate the "thesis" behind potential investments. They look seriously at over 100 possible deals a year, but only consummate a handful. Sitting at the head of the table, of course, is Schwartz: "I'm helping to guide what they're looking at. I'm coaching, I'm the in-house cynic, so I get to question the things they're doing. I'm also the cheerleader: 'Have courage, don't be afraid to look at that.'" He says the team votes on any investment. "We have enough respect for each other that if it's seven to five, we won't do it. If we have five smart people against [a proposed deal], that's worth listening to."

Source:
[1, 2, 3] Profit: the Magazine for Canadian entrepreneurs; Toronto Vol. 27, Iss. 2, (May 2008): 80,79.
[5] Olive, David. National Post; Don Mills, Ont. 01 Feb 1999: C12.
[6, 7] Deveau, Scott.National Post; Don Mills, Ont. 27 June 2014: n/a.
[8] Erman, Boyd.The Globe and Mail; Toronto, Ont. 23 June 2007: B.4.
[10] Lorinc, John.The Globe and Mail; Toronto, Ont. 24 June 2005: 22.