Exploring Opportunities in Childcare

Our next presenter is Patrick Bell, CEO at Finnexia Financial Group Limited.

Patrick has over 20 years of experience in financial services, specializing in income generating assets.

His presentation topic today is exploring opportunities in childcare.

Welcome to the presentation, Patrick.

Thanks a lot, Angelina.

Folks, today I'd like to show you why the childcare industry is a great source of investment and how you can participate in this multi-billion dollar industry right now.

without owning any property, changing nappies, or any other headaches, and generate a 10% passive income return via the Phoenixia Income Fund.

It's a great investment opportunity in childcare.

It's a public-private synergy.

It's government-backed and funded, and it's delivered privately for profit.

It has regulatory and political protection which provides great certainty for investors.

The demand dynamics are great and it's multilayered from different sources and it's driven from the social and economic factors that are supported by the changes in how we actually live now and well into the future.

Demand has been increasing and sustained over many years and it will endure over the generations to come and I'll talk about why that's important in a moment.

I think Alan Coller said it best when he said, childcare is within a social sector, predominantly financed by the federal government, but delivered through the private sector.

About $14 billion of revenue exists in the industry, of which 10 billion of it comes from the federal government.

Why is this important?

So as I say, about 72% of the industry is funded by the government.

It's been growing steadily over a number of years, as you can see here, as well as it's forecast to do in the future.

So actually, it's also one of the very few policies on which both sides of government actually agree on.

In the last 10 years, funding has gone from $900,000 per annum to $14.7 billion per annum.

Believe it or not, 99% of all kids who attend childcare now have some form of funding from the government.

It's been an amazing success.

So I said before that demand was multilayered.

Why is that?

Well, demand comes from three places.

First of all, the parents obviously.

Parents are now working more and cost of living has gone up.

More couples are dual working and more children need childcare.

One of the key drivers of demand is female workplace participation.

It's currently sitting at 47.9%, which is the highest it's ever been.

I mentioned before dual working parents, of which now about 71% of couples with children under five are both employed.

they need childcare.

This has been a 48% increase since 2005.

So what I'm saying here, we're now in a childcare generation.

We have an entire generation of kids raised in the childcare sector with working parents who demand high quality care and for the government to support them to make this happen.

This chart's a little difficult to see, but 57% of all children between the age of zero and four now attend childcare.

And we now have the largest portion of zero to five year olds than we've ever had in our population.

Here we see 1.4 million children now aged between zero and five, and this population, as I said before, is growing.

So now let's talk about how parents actually choose childcare.

It's important.

It's not about price.

It's about location, availability, and quality over price.

From an investment perspective, this means that it's not a race to the bottom and revenues remain robust.

This survey is from the ACCC and it shows exactly that.

So how many childcare centres do we need all up?

Knowing this tells us how large the opportunity can be for both of us.

Well, we need

over 300 in 2024.

It's a pretty amazing number and as you can see here this number is continuing to grow over the coming years.

As you can see the numbers here are pretty interesting.

85% of all operators are very small.

They have zero to five centres.

The rest of the operators are large corporates and Liscos.

Why is this important?

Well it means there's strong competitive pressure in the industry.

There's improved quality all the time.

and there's a focus on innovation and care.

This also avoids much of the concentration risks of only dealing for a few operators.

We can pick and choose who we do business with.

So, look, with all this in mind, and if you like the industry, what are the investment options?

How do you get involved?

Well, I suppose first of all, you could make a direct investment.

You could purchase a childcare centre.

You'd probably earn about 25% return, but I don't think that's really feasible for most of us.

Or the other option is you could become a commercial property investor and purchase a childcare property.

They sell for about 5% yield and they're very expensive.

It's not something all of us can do.

Definitely another option is much more accessible.

You can participate in equities, accept the risk and purchase say either G8 or Mayfield, two of the longest listed ASX childcare operators.

So how would that look?

Well, if you put a dollar into G8 in 2018, you'd have about 44 cents today.

If you put a dollar into Mayfield in 2018, you'd do a bit better, you'd have $1.22 today.

Another option

you can invest in a REIT.

REITs own childcare properties and returns seven or eight percent per annum.

And if you put a dollar into Charterhall Social Infrastructure Fund in 2018, after six years today, you'd have about $1.26.

So after all this, here comes the plug.

The next thing you could do is invest in the Phoenicia Childcare Income Fund and start receiving monthly distributions from next month.

The fund pays 10% per annum.

So how do we provide this 10% return?

Well, the fund makes a cured loan to experienced childcare operators.

Loans are to the most experienced who have large portfolios of childcare centres at the moment.

We're a very experienced finance team, we've got over 20 years of lending into childcare and have been direct lending for more than seven.

Our loans are all secured with first mortgages and operating conservative LVRs and they're backed by our strong credit committee who are all industry specialists.

So, who are Phoenixia?

Well, Phoenixia is a private credit specialist.

We're listed on the ASX, which means that we're transparent, we're well regulated, we have the appropriate licenses, we have the systems and procedures in place to do this well.

Thanks for your presentation, Patrick.

How does the child care income fund mitigate risks in the current economic climate?

Yeah, thanks a lot, Angelina.

That's actually a really great question.

Look, a couple of things are going on at the moment as we know.

We've got rising interest rates, cost of living pressures taking place.

Well, the childcare industry does pretty well in both of these spaces.

For instance, most childcare centres operate at about a 25 to 30% return, so there's a strong profit margin there for which they can survive these moments.

Cost of living actually exists in them as well.

More people need to work, that's an actual fact, and that's growing demand in the industry.

The other piece that I think is important is that both of these factors mean that the regulators, the government, will continue to support the childcare industry.

We believe that eventually one side of government or the other will get to a space where the childcare subsidy increases to 100% for all parents who earn less than $80,000 a year.

This will continue to help the industry grow.

What do we do internally, I suppose, is the other thing when you think about risk management in the current environment.

Look, we're risk managers by trade.

This is our living.

We're very experienced.

We have the appropriate licences.

We have to operate the regulations.

We rely on valuations.

We do all the things that a normal bank would do in this situation.

We assess risk.

We assess the client risk.

We look at the site.

We look at the location.

We're conducting a full assessment of the circumstances before we lend any money to the operator.

As I said before, all our operators are really experienced and that helps a lot too.

I think that pretty much covers it.

Thanks Patrick.