The performance of listed childcare companies in both Australia and New Zealand so far this century makes one wonder whether such investments meet the cliché definition of insanity: doing the same thing over and over but expecting different results.
Did the professional investors who contributed to NZX-listed Evolve Education's A$18.9 million capital raising last week consider this question?
• Kiwi education company Evolve reports $100m loss
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• Evolve to raise $63.5 million at steep discount to repay debt, buy Australian centres
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Perhaps they took comfort from the fact that managing director and 19 per cent shareholder Chris Scott kicked in A$3.3m, New Zealand chief executive Timothy Wong contributed another A$4m and other directors committed to A$700,000, 42.3 per cent of the issue.
The new Evolve shares were sold at 13 Australian cents each compared with the last trade on the ASX ahead of the capital raising at 14.5 Australian cents and they last traded on the NZX at 14.7 cents – that compares with the December 2014 $132.3m float price of NZ$1.
The placement followed another $63.5m capital raising as recently as May.
Evolve's latest available balance sheet shows it has lost $124.3m through to September 30 and the commentary around the latest first-half loss was that the company had been through a board and executive shake-out and had embarked upon "aggressive, positive change".
Scott took the helm in mid-August at the same time as Chris Sacre became Australia country manager and Wong's appointment was announced early October.
Both Scott and Sacre previously worked for Australia's largest listed childcare centre company, G8 Education, Scott as a founder and managing director from 2010 to 2016 and Sacre as chief financial officer from 2007 to 2016.
Wong sold a business, Creative Garden Early Learning Centres, to G8 in 2014.
But looking at G8's progress since it listed on the ASX in 2007 hardly inspires confidence.
Its latest balance sheet shows A$127.1m in accumulated losses to June 30.
Last month, G8, which operates a number of brands including Kool Kids, Jellybeans and Kinder Haven, shocked investors with its second profit downgrade in three months as revenue rose less than expected and wages grew faster than anticipated.
Evolve's 2014 prospectus offers a few clues as to why investing in listed childcare operators downunder might not be a great idea.
In both NZ and Australia, childcare centres are both heavily regulated and largely dependent on government subsidies. Evolve's prospectus showed about 69 per cent of revenue came from government funding – the rest came from payments from parents.
It also shows that sector-wide, government funding in NZ jumped in 2007 when the 20-hours-a-week policy came in and had risen 145 per cent by 2013.
Combined with rising labour force participation by women and sustained population growth of children under six, Evolve's future was rosy, the prospectus implied.
So what went wrong?
Most recently, it was fewer kids in centres, as the first-half commentary said: "Portfolio occupancy held flat until mid-June when it started to decline from 76.2 per cent to 72.3 per cent in early October 2019."
That's been a recurring theme in Australia as well, with government funding coinciding with an explosion in centres, coupled with a rising wage bill.
Employee expenses are the sector's biggest cost and governments in both countries keep upping the ante on that front.
In 2014, registered teachers had to make up at least half the staff at each centre.
Education Minister Chris Hipkins said earlier this month his government will be lifting that teacher requirement to 80 per cent with the aim of taking it to 100 per cent long term.
A similar upskilling process with accompanying rising costs has been occurring in Australia.
There are also a raft of employee-to-children ratios centres have to meet, not to mention stipulations about such matters as toilets and outside space.
A number of NZX-listed companies have run into strife as a result of depending on the vagaries of government policy.
Now long gone from the NZX, Wakefield Hospital's directors fell foul of the Securities Commission (The FMA's predecessor) for holding "an honest but mistaken belief" that, because it had been relieving the pressure on public hospitals for years by providing government-funded heart surgery, that was likely to continue.
Wakefield reckoned the Helen Clark-led government wouldn't win office. That government frowned on the private sector providing services it felt should be the province of government alone – until lengthening hospital waiting lists and public pressure forced re-engagement with private hospitals again.
Abano Healthcare is another – changing policies and cost-cutting by district health boards destroyed its pathology business in 2015 when it decided it couldn't provide an adequate service at the price DHBs were demanding.
As for other listed childcare centre operators, NZX saw Kidicorp come and go within four years last decade with owner Wayne Wright saying "we just couldn't survive" as a listed company, Australia's ABC Centres collapsed in late 2008 owing A$1.6 billion and shares in ASX-listed Think Childcare have shed more than 40 per cent in the last two years.
There has to be a reason why none of these companies have flourished in the listing arena and, possibly, it could be that businesses largely dependent on government funding will never be the reliable earnings share market investors crave.