With private equity’s interest in autism expected to accelerate in 2020, providers in the space are poised to have a potentially lucrative year.
The autism market, though one of the smallest sub sectors in behavioral health at an estimated $7 billion, currently commands some of the industry’s highest valuations.
“In autism, [multiples are] upwards of 20 times in some cases,” Dan Davidson, managing director at investment bank Coker Capital Advisors, recently said during a Polsinelli webinar. “But even small $1 million EBITA providers are getting north of 10 times — and sometimes even well above that. That truly is an out-of-control marketplace.”
However, not all autism providers are created equal when it comes to making for an attractive PE investment. To take advantage of the out-of-control market place, providers must be very in control of a few different factors, industry experts told Behavioral Health Business.
While some of those factors vary depending on the size of the autism provider, others — such as turnover — are universal.
Like the rest of the behavioral health industry, autism providers are struggling to find and keep qualified workers. In fact, nearly every state in the country has an insufficient supply of certified applied behavior analysis (ABA) providers to meet the demand for services, according to a study published online in the journal Psychiatric Services last December.
That makes low turnover a hot commodity highly sought after by PE firms and their platform companies, according to Chris Donovan, a transactional health care lawyer and partner at national law firm Foley & Lardner LLP.
“You want to have a workforce that’s not constantly in turn and that has some stickiness to it,” Donovan told BHB. “Being able to retain a qualified body of therapists is important.”
Also important is a provider’s ability to show consistency in the client-base their therapists serve. Specifically, PE investors look at the frequency and source of an agency’s referrals.
“Those are the kinds of things I think PE firms are going to be looking at in terms of a baseline valuation,” Donovan said.
Additionally, providers are likely to have a leg up if their offerings fall in line with 2020 trends. This year, experts predict PE will take special interest in operators who can show their success rates and who offer a diverse set of autism services, from diagnostic capabilities to various modalities of care.
“I think you’re going to see in 2020 a stage-two development in autism, where the platforms are going to get much more sophisticated in their offerings,” Donovan said. “Secondly, PE companies that I’ve talked have indicated they are going to significantly invest in infrastructure, data management and financial management to prove that their outcomes are superior.”
Meanwhile, other aspects PE considers before investing depend upon the size of an organization.
Take a small autism provider hoping to be added on to a firm’s platform company, for example. To be most competitive, it would need to illustrate a proven ability to grow and adapt to change, according to Eugene Goldenberg — managing director at health care-focused investment bank Edgemont Partners.
“It’s really about top-line growth and how quickly you’re able to fill these new cases,” Goldenberg told BHB. “Often the challenge is not growing, but it’s really finding the staff to take care of the individuals.”
And while it may sound obvious, it’s also important for small providers to have their books in order and their business buttoned up, according to Roger Strode, a transactional health care lawyer and partner at Foley.
“That’s oftentimes a very difficult thing for smaller, mom-and-pop type [providers] — they’ve either grown quickly or they just don’t have the internal expertise to get their house in order,” Roger told BHB. “[If that’s the case], hire a good investment banker. [They] are the ones that know how to make a market for your business.”
For larger providers, things are more complicated, Goldenberg explained. In addition to looking at many of the aforementioned factors, PE will scrutinize a large provider’s growth strategy, including how it picks acquisition targets and how long it takes them to ramp acquisitions up to maturity.
“For larger assets, if you can have a proven de novo strategy and a proven M&A strategy, I think that significantly increases the multiple that would be commanded by your particular platform,” Goldenberg said. “That’s probably one of the most important factors in your valuation.”