28 September 2023
Investment house Washington H Soul Pattinson is holding significantly more cash as it waits for opportunities that will emerge in the coming 12 months, as a higher rate and inflationary environment leads to an increasingly ‘dislocated’ market.
Having been a little bearish on asset prices, managing director and chief executive Todd Barlow says the group has been a beneficiary of interest rates, with its portfolio being positioned around the expectation that rates will be higher for longer.
Soul Pattinson transacted $3.1bn in value of the 2023 fiscal year and the group was a seller of $1.4bn in equities, mostly large caps, with the majority of proceeds allocated to private equity and structured yield portfolio investments to generate risk-adjusted returns.
The group, which started out operating Soul Pattinson chemists before investing elsewhere and now holds sizeable stakes in TPG, Brickworks and New Hope, reported an 87.3 per cent increase in its cash balance to $911m in 2023 fiscal year with an average current yield of 5 per cent per annum.
Net cash flow from investments increased 22 per cent to $424.3m. This enabled Soul Pattinson to its final dividend to 51c, taking the total dividends for the past fiscal year up 20.8 per cent to 87c per share.
Investors were however not excited, with shares in Soul Pattinson down 6.6 per cent to $31.75 in afternoon trade. It came as regular profit decreased by 9 per cent to $759.3m and its statutory annual net profit totalled $690.7m, compared to a net loss of $12.9m in the previous year that was impacted by a one-off impairment.
Mr Barlow said that the investment house was holding more cash in volatile environment to allow it to be “nimble” as it looks to deploy the war chest in the coming 12 months.
“The pipeline for opportunities is growing. The pricing for risk and liquidity is increasing and if you have cash and flexibility to deploy that in the next 12 months then we see some really good potential,” he said.
“The credit space offers an array of possibilities for us with bond yield and the risk spread both coming up.
“As a lender we are a beneficiary of borrowing costs rising and we can be more flexible than mainstream lenders by developing creative loan structures that work for the borrower, but maximise the opportunities for us.”
Soul Pattinson enters the new financial year with more than $500m in commitments across private market investments along with a solid pipeline of opportunities. Chief investment officer Brendan O’Dea added that it had adjusted its portfolio around the shift to higher bond yields and the expectations that rates will be higher for longer.
“We are taking a somewhat defensive position and are cautious about economic sensitive parts of the markets by being underweight on materials and retail banks, but overweight in industrials and health care,” he said.
“We think there is opportunity to grow earnings in this period by being selective and this is seen with our portfolio being the most concentrated it has ever been. With rates higher for longer you need to be careful about stock selection and that is what we have been done.”
Forty-eight per cent of all investments are held in its strategic portfolio, which is made up of companies including TPG Telecom, New Hope and Brickworks. That portfolio delivered the investment house a 75.4 per cent increase in net cash flow to $295.9m.
“New Hope has been a standout, and while coal prices have come off they remain at very high levels historically and we are getting higher margins and growth from expansion plans,” Mr Barlow said.
“Brickworks has been sold off after reporting, but people are missing that while building materials is showing a little bit of weakness it makes up just 10 per cent of the portfolio.
“Most of the business is made up of investments, including 40 per cent held in industrial property which is doing very well.”
It made seven acquisitions during the year as part of its growth strategy, and following $547.1m in additional investment and revaluations during the past fiscal year, the private equity portfolio is now valued at $1.2bn.
Mr Barlow said that the company saw more potential to invest in small to mid-size businesses where “there is not as much capital floating around”. He added that the new fiscal year has seen net asset value of the total portfolio outperform the All Ordinaries by 3.9 per cent in the month of August.
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