Soul Patts is cashed up and ready for the next strategic investment

Often cited as Australia’s closest approximation of Warren Buffett’s Berkshire Hathaway, Soul Patts (ASX: SOL) has either beaten, or matched, its investor dividend payout in each of the last 23 years.

The firm’s CIO, Brendan O’Dea, spoke with Livewire’s James Marlay in the latest episode of The Rules of Investing. 

O’Dea came to the WHSP business through the high-profile merger with another investment house, Milton Corporation, that was completed in 2021. This gave the combined entity a market cap above $10 billion – a figure that has now grown to north of $12 billion.

Describing himself as a dyed-in-the-wool value investor, O’Dea’s investment career includes a 20-year journey with Citi, before joining Milton in 2018. As he describes it, the WHSP-Milton merger was a simple process, given the two firms’ similar cultures – and their shared chairman in Robert Millner, who sits on both the Soul Patts and Milton boards.

“Because the DNA was so similar, we didn’t need to make a lot of investment changes,” says O’Dea.
“The core of what we do is still long-term investing, focus on the shareholder, generation of dividends, sensible risk management and sensible investment decisions, and that hasn’t changed.”

He notes that increasing the activity of its investment book was a key outcome of the merger, including in its small-cap, emerging portfolio. Many of the assets held in its portfolio grew out of its private assets, with coal miner New Hope and telecommunications company TPG a couple of prominent examples.

“We’re not a classic private equity investor and we’re not a fund manager, so we don’t have a time window we’re operating with and are very happy to partner with businesses and take time and sustained investment and working with management teams.”

While the merger has seen the firm increase its diversification, O’Dea is quick to emphasise this has occurred as part of a clearly defined process. “Each business has to stand on its own feet, we’re not operating to maximise the number of investments.”

What happened in 2023?

The firm amassed a war chest of some $900 million last year, which reflected a couple of important things about how management was feeling about markets and the broader economic outlook.

“We were cautious on public markets and that it was quite logical to get a little more defensive, raise some cash and wait for better opportunities. As it transpired, the market was very strong last year but we still managed to outperform,” O’Dea says.

But the elevated cash holdings also reflected WHSP’s desire to push more of its capital into the private space, including private equity and private credit.

“We’re of an opinion we can build credit investments that are going to get equity-like returns and from much higher in the capital stack in terms of protection. We saw opportunities to move out of listed equities into other asset classes that are going to generate very compelling returns,” O’Dea says.

Soul Patt’s equity investments sit in three buckets:

• Strategic portfolio
• Large-cap portfolio
• Small-cap (emerging) portfolio.

“We do skew large cap – it’s in this portfolio we hold New Hope, TPG and Brickworks and some others...that’s performed very well and has been the core of SOL’s cash generation and performance for a long time,” O’Dea says.

The large-cap portfolio, which is composed mostly of the old Milton book, currently sits at around $2.5 billion and is more concentrated currently than it has been, with around 35 names, including some in the mid-cap space.

“It’s also a lot higher in terms of turnover velocity [then when it was at Milton] when it was around 10%, it’s now many multiples of that.

WHSP’s small-cap portfolio, which O’Dea says is more accurately described as “emerging” because it also includes mid-cap names, is currently skewed heavily toward the resources sector.

Soul Patts superpowers

It’s the divergence of the Soul Patts approach with that of traditional fund managers that O’Dea emphasises throughout the interview.

“We’re a team of generalists, and the ability to work across all asset classes and market cap spectrums to find the best ideas…is unique. I think it’s a big driver of our returns,” he says.

“We invest shareholders capital, we’re not a fund manager, so we don’t tend to get pressure to put money to work. We’re very happy to wait for what Warren Buffett would describe as ‘fat pitches,’” says O’Dea.

Where are the big upcoming opportunities?

Private credit and private equity were mentioned several times during the interview as areas of focus.

Within public markets, its investments can be loosely grouped across four key areas:

• Energy transition
• Wealth management
• Agriculture
• Education

In the first of these, O’Dea discusses coal miner New Hope, of which Soul Patts owns some 39%. Noting that investment in coal-fired power generation has been declining, he says much of the customer base for New Hope lies in Asia, which will be slower to transition away. “As we look at the energy transition, coal still has a role to play for the foreseeable future,” O’Dea says.

Another company he singles out is Newcastle-based electrical engineering firm Ampcontrol.

The nuclear renaissance

Nuclear power is an area that has become an increasing focus for Soul Patts, particularly via investments in uranium miners through its emerging companies portfolio.

“It will be a volatile commodity over time, supply will come, and supply will go. But we think structurally there’s a story there,” O’Dea says.

One company it holds in this space is Canadian uranium developer NexGen, having invested through convertible bonds and a couple of tranches of equity holdings worth “a couple of hundred million dollars”.

Soul Patts holds a similar view on the battery metals theme and electrification more broadly, holding exposure to BHP and some lithium names.

What’s on the horizon?

Looking forward, O’Dea says the valuation of equity markets is something he’s watching most closely from here.

“Valuations seem quite elevated in the context of a high-rate environment, and one that is very sensitive,” he says.

“If we have a situation where rates in the US don’t get cut in the way the market expects, there could be more opportunities.”

Asset Allocation

Where Soul Patts is investing for long term growth and dividends

View