Private lender Finexia sees 'huge opportunity' in ‘childcare generation’

Finexia Financial Group aims to become leading private lender to childcare sector in Australia
The company works with operators to open up new centres as demand for childcare continues to increase
Constraints put on traditional in commercial lending means greater demand for private credit among childcare centres

Non-bank lender operating in the private credit sector Finexia Financial Group is carving out a niche in the childcare sector, which has strong tailwinds and attractive structural characteristics.

Finexia Financial Group (ASX:FNX) is focusing on markets and opportunities that major banks have traditionally dominated but have recently abandoned with its strategy aimed at becoming the leading private lender to the childcare sector in Australia.

Listed on the ASX in 2015 as a securities dealer/licensee CEO and director Patrick Bell says FNX has 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 says.

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

In addition to its childcare-focused lending, Bell says FNX also undertakes 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.”

At the end of H1 FY24 Bell says its loan book was ~$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 says.

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.

Childcare generation ‘a huge opportunity’

Bell says childcare is a growing sector with accelerated growth of the Finexia Childcare Income Fund supported by multiple favourable independent ratings, further attesting to its unique position in the market.

“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 says.

“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 says government support has grown substantially for childcare in the past decade and looks like continuing to do so with cross-party support for ‘universal’ childcare and a ‘system stewardship’ model.

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

He says women workforce participation is almost at an historical peak and this is resulting in childcare industry revenue forecast to substantially increase.

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

“35% 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 says 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 says.

“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 says essentially FNX’s offerings reflect what bank policies might look like without the stringent constraints faced by Authorised Deposit-taking Institutions (ADIs).

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

Bell says banks will also not fund a centre to any significant gearing level until occupancy is 50%, 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 says.

Bell says private credit also has 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 says FNX offers a product that is not merely a gap-filler in credit policies but one that is better structured, offers robust risk management, and is appealing to borrowers.

And while FNX’s interest rate for lending is usually much higher than a traditional bank this does 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%.

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

Childcare resilient to economic cycles

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

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

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

“The government funds more than 70% 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.”