It’s not often that the notes to the financial statements make you question the quality of your education. But note 11 covering the balance sheet line item of intangible assets in Affinity Education’s 2025 full-year accounts, made little sense to any student of finance.
The accounts, which were made available in April and reposted this week to include the auditor’s sign-off, showed deepening losses of the privately owned childcare operator from $27.9 million in 2024 to $85.2 million. That is no surprise given the struggles in the sector and the abuse scandals that have rocked the major providers.
Yet that note disclosed that Affinity had actually become a more valuable business over 12 months, at least for the purposes of testing the $1 billion of goodwill on the company’s balance sheet. Affinity made the heroic assumption that the future owner of its business would be prepared to pay 11 times profits, measured by earnings before interest tax, depreciation and amortisation. That’s a 40 per cent increase from the eight times multiple it applied the prior year, and the 7.7 times used in 2023.
For good measure, Affinity also nudged down the discount rate used to calculate the present value of the business from 9.47 per cent to 9.3 per cent. That’s despite the Australian 10-year bond rate increasing from 4.4 per cent to 4.7 per cent. A lower discount rate, all things being equal, increases the value of an asset because future cash flows are mathematically judged to be worth more in the present.
The higher multiple and lower discount rate meant that the near $1 billion of goodwill on Affinity’s balance sheet remained entirely intact despite a decline in EBITDA from $106.7 million to $71.3 million (after adjusting for lease payments which count as interest under new accounting standards), and a halving in EBITDA margins over three years from 20 per cent to 10 per cent.
So real world operating conditions got much harder, but somehow the goodwill impairment test got much easier. That seems a stretch. But does it matter? Affinity is owned by private equity firm Quadrant so how it determines its goodwill should be none of our business.
However, the corporate regulator did spend most of 2025 on a mission to understand the growing importance of private assets, and what it means for Australian investors, the capital markets and integrity.
Among its concerns was that there was a mismatch in standards between private and public companies, which might put more transparent listed companies at a distinct disadvantage relative to their privately owned peers.
A comparison between Affinity and G8 Education does little to allay these concerns. We have been able to observe the struggles of G8 Education in real time as its share market value has slid 84 per cent from $1 billion to $120 million. There was more bad news last week as the company faced legal action over unpaid bills.
G8 had embarked on an aggressive roll-up strategy snapping up small childcare operators to expand its profits, and it hoped, its share price. The outcome was an accumulation of $1 billion of goodwill on its balance sheet; the difference between the aggregate consideration paid to buy out other operators and the value of the hard assets it acquired.
But G8 had little choice but to impair its goodwill by $349 million at the end of the year. The test, its auditors said, was complex and involved modelling future occupancy levels, rates, expenses and discount rates to determine cash flows.
The company left its discount rate unchanged at 11 per cent, which reflects the weighted cost of capital, or the returns demanded by providers of capital.
G8’s impairment test, the company explained, assumed lower occupancy rates than the strategic targets of management and reflected the grim operating conditions of the industry as family budgets are strained, birth rates are declining, trust in the sector had been eroded while more centres are popping up to provide competition.
For what it is worth, both G8 and Affinity are audited by EY out of Brisbane, albeit by different partners, and we can take comfort that there’s not much sharing of information going on.
Meanwhile, all indications are that conditions are getting worse. Official March quarterly data revealed the industry dynamics aren’t getting any better, as kids enrolled in childcare fell 2.9 per cent to 835,250 while the number of centres increased by the same percentage to 9643.
On Friday, a small listed operator, Mayfield Childcare, was forced to withdraw its earnings guidance citing a worsening operating environment: specifically “pressure from labour costs, occupancy volatility, wage increases and broader sector conditions”.
These are all reality checks that public companies must confront but which private companies can delay.
Affinity was acquired by Quadrant in June 2021 for a reported $650 million when the manager was on a hot streak.
In December 2020, Quadrant’s seventh buy-out fund received a rock-star reception, raising $1.2 billion from super funds, pension funds and sovereign investors. This is the fund in which the Affinity investment sits.
Quadrant has little obligation to provide anyone other than these investors with valuations of the business, and wasn’t about to tell us when we inquired.
We appreciate they are providers of patient capital – the selling point of private equity – compared to wild and wacky equity markets. But at what point is the patience of private equity investors tested?
G8 Education’s share market valuation is around four times its 2025 earnings before interest tax and depreciation. If that was applied to Affinity it would arguably be worth less than the $650 million of debt reported on its balance sheet.
Affinity, it should be noted, was able to renegotiate terms with its lenders with only minor amendments to its covenants so perhaps it is in better shape than it financial statements present.
The relationship between public and private market valuations is a fraught one and a constant point of tension in the asset management industry.
There is some merit in the case made by private market operators that these valuations should not move in lock-step with public markets, even if cynics believe that hiding from equity market volatility is the sole motivation for institutions owning private assets.
There are times when public market valuations swing from one extreme to the other in the absence of material changes in operating conditions.
The super funds took a lot of heat for making only modest adjustments to the value of their infrastructure assets in March 2020 as share market prices cratered. With the benefit of hindsight the private valuations prevailed, and some of our prized listed assets were snapped up on the cheap.
Try as they might, private market operators can ignore the listed market for only so long.
In that context, it will be interesting to see if the local venture capital funds, the super funds and global investors who own Canva, the fabulous Surry Hills software company, feel any urge to alter their carrying values to reflect the lingering concerns about artificial intelligence disruption.
As far as we know most of Canva’s investors are sticking to the $ US42 billion ($60.4 billion) valuation based on its last funding round.
That’s despite all of Canva’s publicly traded peers have been sold down hard in the past six months due to fears that AI models will make them obsolete in five years’ time. It’s a threat Canva has poo-pooed as they’ve enthusiastically embraced the power of AI to improve their offering.
There is no reason at all to doubt them. Canva’s top line keeps growing, and its investors aren’t in a rush to make adjustments, at least not yet. But the problem is their peers such as Figma and Adobe are saying similar things, as are a host of other embattled listed software executives, and are being totally ignored by the market.
These businesses have had their goodwill indiscriminately impaired, not by their boards or their auditors, but by the sharemarket, which isn’t in any rush to restore it.
