Private Lending opportunity in Childcare

Private Lending opportunity in Childcare

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Posted on: 14 May 2024

ASX stock Finexia Financial Group says Australia needs 300 new childcare centres a year to keep up with exploding demand - and that means big opportunities.

Finexia Financial Group (ASX:FNX), a non-bank lender operating in the private credit sector, is carving out a niche in a childcare sector it sees as a “huge opportunity”.

The Queensland-based firm, which focuses on markets and opportunities that major banks have traditionally dominated but have recently abandoned, has set itself the aim of becoming the leading private lender to the childcare sector in Australia.

It was listed on the ASX in 2015 as a securities dealer/licensee, but CEO and director Patrick Bell said FNX had over the years pivoted and evolved its strategy towards the lending sector.

“We’ve really over the past couple of years carved out a niche in the childcare sector and love the space,” Bell said.

“We do a lot of work mainly around lending to childcare operators to open up childcare centres.”

Childcare generation ‘a huge opportunity’

Bell said childcare was a growing sector, with accelerated growth of the Finexia Childcare Income Fund supported by multiple favourable independent ratings.

“The Finexia Childcare Income Fund is growing rapidly, and our first target is to reach $100 million ... and we are well on the way to that now,” Bell said.

“We really see childcare as a huge opportunity.

“It’s a concept we talk about called the ‘childcare generation’ where basically in the past 20 years the childcare centre sector has just boomed in Australia.”

Bell said government support had grown substantially for childcare in the past decade and looked like continuing to do so with cross-party support for “universal” childcare and a “system stewardship” model.

He said childcare service quality had improved, with 88 per cent meeting or exceeding National Quality Standard (NQS) in 2023, up from 56 per cent in 2013, driving consumer confidence and supporting government spending.

He said women workforce participation was almost at an historical peak and this was meant childcare industry revenue was forecast to substantially increase.

“From 2005 to now there’s been almost a 50 per cent increase in the amount of both parents who work, so it’s an industry that is really growing,” he says.

“Thirty five per cent of most of the population live in what we call a childcare desert, so there’s a growing need for capital in this space.

“There’s 300 new childcare centres required in Australia every year to keep up with demand.”

Bell says childcare is an investment theme that people understand and tend to like.

“Most people have had interactions with childcare centres, and we have a national distribution team now who are mostly all ex-bank people whose full-time job is to go out and help operators open up more centres,” he says.

The rise of private credit

Bell said that before the Global Financial Crisis (GFC), which ran from around 2007-2009, the majority of commercial lending was done by the four major banks in Australia.

“After the GFC, the capital additive requirements for the banks went through the roof,” he said.

“The term private credit is a quite recent one but there is a whole market out there now of funds, private and listed businesses who have really jumped into what banks used to do.”

Bell said that essentially FNX’s offerings reflected what bank policies might look like, without the stringent constraints faced by Authorised Deposit-taking Institutions (ADIs).

He said childcare specialist loans required banks to fund 15 per cent with the highest quality measure, known as Common Equity Tier 1 (CET1) capital, which is nearly four times more than the 3.8 per cent for prime mortgages and A-rated corporate loans.

Bell said banks also would not fund a centre to any significant gearing level until occupancy was 50 per cent, with FNX providing capital for formative centres and make a more nuanced assessment.

“They do not support greenfield centres, which is one our specialities,” he said.

Bell says private credit also had the advantage of quick turnarounds with decisions.

“We decide within a number of days or same day if we like it and then go and do a lot of due diligence, “ he says.

“When we assess a loan, we do the same as other lenders like servicing tests and check out their character and capability so it’s really a private market now for what used to be done by the major banks.”

Bell said that while FNX’s interest rate for lending was usually much higher than a traditional bank this did not normally deter childcare operators.

“It’s interesting though as we very rarely have conversations about price and our product is unique, essentially lending on the future value of the business once we done traditional valuations that are then formally assigned to Finexia for first mortgage purposes” he says.

“They don’t have any issues with the price because they want the capital, and they need it and most private childcare centres are returning somewhere between 25-30 per cent.

“They key aim for them is to build out a network of childcare centres.”

Childcare resilient to economic cycles

Bell said childcare was also a solid niche for the company to focus on as it was resilient to economic cycles.

“It has a low sensitivity to recessions and spending drops,” he said.

Bell said the childcare sector was certainly sensitive to employment levels but with more parents needing to work and a growing participation rate of women there were many more children aged 0 to five put into childcare.

“The government funds more than 70 per cent of all revenue to the industry and the businesses themselves are highly profitable which presents a great lending opportunity for us,” he says.

“Its strong tailwind from a demographic point of view and it’s got great returns for operators.

“Childcare is not all the business we do but it’s our key focus now.”

Other offerings

In addition to its childcare-focused lending, Bell says FNX also worked in traditional private credit.

“We do traditional first mortgage lending against commercial and residential property for wholesale clients,” he says.

“We also have a reasonable size book that we lend against ASX-listed equities so an insider of a company may come to us with X amount of shares and we lend them money against their shares.”

Bell said that at the end of H1 FY24, Finexia’s loan book was around $163 million, with its funding coming from a variety of sources.

“Essentially, we are a lending business with our funding source coming from several places including ASX-listed companies, a lot of wholesale and retail clients, family offices and high net worth individuals,” he said.

Bell was appointed CEO in November 2023, as part of a planned leadership transition and was formerly head of the company’s credit division.

He joined FNX in 2020 through its acquisition of Creative Capital Group and replaced Neil Sheather, who took on the role of chairman.

“Since the acquisition the business has pivoted pretty much into the lending space,” Bell says.

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