Washington H. Soul Pattinson has up to $2bn in firepower to throw at investments amid economic turmoil

The group will use booming profits from its 39 per cent stake in New Hope Coal and its $10bn investment portfolio to reward shareholders with a special dividend.

Todd Barlow, Washington H. Soul Pattinson managing director, is looking for quality companies with strong balance sheets and leading market positions to invest as much as $2bn. Picture: John Feder

Diversified investor Washington H. Soul Pattinson is sitting on $2bn in firepower it can deploy into equities and other investments as it looks to “buy the dips” from the current economic turmoil and shake-out across global sharemarkets.

However, when that new capital burning a hole in Soul Patts’ pockets does find a home, it is unlikely to go into the big banks such as Commonwealth Bank or NAB, with the 119-year-old venerable investment house concerned about forward profitability of retail lenders and their growing exposure to bad debts.

Soul Patts has already begun to sketch out the sectors in which it is keen to invest further, and they are based around healthcare, food, agriculture, energy transition and education. Reflecting these sector biases, its recent investments in Australia have included Carsales, Ramsay Health­care, Domino’s Pizza, IDP and Computershare.

Harvesting growing returns from its bulging $9.95bn investment portfolio, which stretches across Australian large-cap shares, emerging small-caps, private equity, structured lending and property, Soul Patts is now setting its sights on further investment through the current bout of volatility.

“We’ve got about $600m of cash, we have a billion dollars of liquidity through undrawn facilities and other assets that we could dispose off to take advantage of opportunities. So between $1bn and $2bn of firepower,” Soul Patts managing director Todd Barlow said.

And the confidence to invest was despite the many challenges facing the global economy, from interest rates and inflation to war and possible recession.

“We don’t really have to form a view around whether Australia goes into a technical recession or whether Europe or the US does. If we just look at the macro landscape, there are some headwinds coming,” Mr Barlow said.

“Inflation is here and you’ve got central banks deliberately saying that they want to slow the economy.

“Those sorts of things are going to be relevant to the macro environment, but we think that in any environment we can pick the eyes out and make some good investments.”

Chairman Robert Milner, left, and Todd Barlow, CEO of Washington H Soul Pattinson. Picture: Hollie Adams

But the hunt for beaten-down shares, new private equity investments and structured credit deals has not stopped Soul Patts rewarding its own shareholders, with the investment house using newly struck riches from its stake in New Hope Coal to help fund a 16.1 per cent dividend increase, as well as a surprise special dividend of 15c a share.

On Wednesday, Soul Patts ­paraded its growing investment strength that was evident in its portfolio easily outperforming the broader market, with its net asset value leaping 71.6 per cent to $9.96bn. Its net asset value outperformed the All Ordinaries Index by 20.2 per cent over 2022.

The company reported a full-year net loss of $12.9m for the year to July 31, against a profit of $273.2m in 2021. However, that loss was driven by almost $1bn in goodwill impairments flowing from its acquisition of listed investment company Milton in ­October last year. The Milton ­acquisition created $984.6m of goodwill, with the takeover scrip-based and the impairment that has now hit the 2022 accounts reflecting a falling Soul Patts share price.

Soul Patts’ underlying profit for 2022 rose 154.4 per cent to $834.6m as net cashflows from its investments – such as Brickworks, New Hope, TPG Telecom and Pengana Capital – rocketed 93 per cent to $347.9m.

Soul Patts declared a final dividend of 43c a share, bringing total dividends for the year to 72c, up 16.1 per cent, and a special fully franked dividend of 15c a share, all payable on December 12.

New Hope, of which Soul Patts is the biggest shareholder with a 39.85 per cent stake, announced on Tuesday that it would shower shareholders with almost $470m in dividends, and that dividend pipeline will be used to pay about half of Soul Patts’ own special dividend.

Mr Barlow said the company had been selling investments into the rising market last year, taking money off the table.

“Towards the back end of last year we started selling quite aggressively, moved into a net cash position by Christmas time. It was perfect ahead of the sell-off. We’ve done $7bn of transaction activity in the portfolio in the last 12 months,” he said.

“We are very active in buying the dips and getting out ahead of any sort of correction when we see things are getting a bit out of control.”

Now Soul Patts was poised to invest further. And despite the large lift in its dividends, it still has plenty of cash on hand, borrowings and assets it could sell to take advantage of the current sharemarket turmoil.

“Everyone is trying to find the same thing. Good, strong cashflow generating businesses that have resilient business models with defensive qualities and a strong market position that enables them to pass on inflationary prices,” Mr Barlow said.

“The good thing about that is they are the kinds of assets that we have had in our portfolio for a very long time. So we are benefiting from that move towards those kinds of assets.

“And we are just keeping our eyes open for really any kind of opportunistic acquisition.”