Inside the Soul Patts compounding machine

For more than a century, Washington H. Soul Pattinson (ASX: SOL) has quietly built a reputation as one of Australia’s great compounders. Listed in 1903, the firm has grown into a diversified investment house with a market cap north of $14 billion and a track record that rivals some of the world’s best.

Through market cycles, Soul Patts has delivered annualised shareholder returns of around 13% over 20 years, comfortably outpacing the broader market. The company’s approach is built on a foundation of patient capital, long-term partnerships, and always having an eye for value.

Following its recent merger with Brickworks (ASX: BKW), Soul Patts enters a new chapter. The deal ends a 56-year cross-shareholding in one of Australia’s most-established building-products and property businesses. The merger has thrust Soul Patts inside the ASX50 with index funds BlackRock and Vanguard recently lodging substantial shareholder notices.  

In this episode of The Rules of Investing, CEO Todd Barlow discusses the timing and rationale behind the Brickworks merger, his views on the Australian housing cycle, the defensive role of real assets in a portfolio, and the strategic investments the firm is backing for the long term.

Buying at cyclical lows

Soul Patts has a knack for turning market pessimism into opportunity. Barlow says the Brickworks merger comes at a time when the housing cycle is bouncing along the bottom. 

“We looked at the building products part of Brickworks and thought that we’re bottom of the cycle. We could help them realise some of the uplift from a change in the cycle,” he says.

Housing construction in Australia remains anaemic. Despite population growth and record migration, the number of housing starts is hovering around 170,000 a year, near historic lows. Government targets call for 240,000 new homes annually - a goal that underscores the scale of the shortfall.

Barlow believes the ingredients for a recovery are in place. “There’s a massive underbuild of homes,” he says. “There’s a concerted effort now across all levels of government that we need to build more houses. There’s no reason to think that the cycle won’t turn.”

For Soul Patts, that turning point could unlock significant value. Brickworks’ exposure to both residential and commercial construction, along with its industrial property portfolio, positions the group to benefit from any uplift. “We can provide capital for new ideas,” Barlow adds, noting that Brickworks was previously “a bit capital constrained.”

On paper the rationale for Brickworks merger was straightforward - a simplified capital structure, no major changes to the operating business and increased scale for Soul Patts - it also has the hallmarks of Soul Patts long-term and counter-cyclical approach to investing.

Defensive assets with upside optionality

While listed markets grab the headlines, a large and often overlooked part of the Soul Patts portfolio lies in real assets including property, agriculture, and infrastructure that generate stable, contracted income.

Barlow describes real assets as “defensive and uncorrelated,” offering both inflation protection and downside support. “If you talk about our big property exposure, if we saw a recessionary environment, interest rates come down, well cap rates will fall in real estate and that should be positive for our real estate investments,” he explains.

The group has around $2.9 billion invested across real assets, with roughly $2 billion tied up in real estate. That includes major industrial holdings leased to tenants like Amazon and Coles, which deliver steady rental income regardless of market sentiment.

But this isn’t a passive play. Soul Patts continues to develop new projects, from data centres linked to the digital economy to retirement communities in partnership with Moran Health Care. 

“We are working hard to generate alpha,” Barlow says. “Notwithstanding the fact that it’s a defensive asset class, we’re trying to create operating leverage.”

Underweight gold but long coal, copper and uranium

At a time when investors are chasing gold and AI stocks, Soul Patts believes there is long term value in less fashionable corners of the market - energy and materials.

The firm’s approach is pragmatic and grounded in fundamentals rather than sentiment. “We’re certainly underweight gold,” Barlow says. “That’s not a deliberate decision because of a view on gold. It’s really just a stylistic thing. We like to invest in things because we think their business is going to get better in time, rather than speculating that something’s going to be worth more in time.”

Instead, Soul Patts has built meaningful exposure to coal, copper and uranium through a mix of strategic investments:

• New Hope (ASX: NHC) – Soul Patts holds ~39.36% of the company, worth roughly A$3.37 billion. New Hope is an Australian thermal coal producer serving Asian markets.

• Aeris Resources (ASX: AIS) - Soul Patts owns ~31.28%, with a market cap of about A$500 million. Aeris is a copper-focused producer anchored by the Tritton Copper Operations in Cobar (NSW), with additional zinc and copper projects in WA and Qld.

• NexGen Energy (ASX:NXG) – Soul Patts has a exposure to the dual-listed A$8.5 billion uranium developer. NexGen's Rook I Project is one of the largest undeveloped uranium resources globally.

Barlow breaks down their energy view by geography. 

“In the US, we think there’s going to be a lot more nuclear. In Asia, coal will continue to be needed, and in Australia, we’re going renewable.”

The strategy recognises the uneven global transition to cleaner energy. In Asia, tight supply and low-cost production underpin Soul Patts’ coal investment case. “We’re at the bottom end of where we could be,” Barlow says. “Every now and again you get these price spikes, and when that happens, we make a lot of money.”

By contrast, copper and uranium play into long-term structural demand - electrification, decarbonisation, and the rise of AI infrastructure. 

“We’ve had a very early view that the world was going to be short energy, and that’s now the flavour of the month.”

A time for humility

With equity markets surging and valuations stretched, Barlow isn’t afraid to sound a note of caution. “It’s clear that we’re late cycle now,” he says. “No one knows what it is that will hit you, and we’ll all look back and say that was obvious, but no one saw it coming.”

“This is the market where you just need a healthy dose of liquidity and humility. You just need to be alert and not get ahead of yourself.”

Soul Patts is currently running net cash at the portfolio level, a rare position for a company of its size. It reflects Barlow’s view that this isn’t the time to take on extreme risk. “We typically go into more leverage at the bottom of the cycle when we can go shopping and get some great assets,” he says.

Despite this conservative stance, the company continues to deliver. Portfolio cash flows have grown at over 10% a year for nearly three decades, and 16.5% annually over the past four years. That steady compounding gives Soul Patts the flexibility to invest without being forced to sell.

Looking ahead, Barlow expects more modest returns from global markets but remains optimistic about the firm’s positioning. 

“If we can generate double-digit returns across multi-assets, protecting our capital, protecting our downside, getting some contracted returns and staying liquid, that’s the right portfolio setting.”