What ‘Record Deal Flow’ Will Mean for Valuations in Various Behavioral Subsectors

Despite the drastic drop in overall mergers and acquisitions amid COVID-19, deal activity in the behavioral health space remained robust in 2020. Last year, the industry saw 163 deals overall, according to proprietary data collected and analyzed by the M&A advisory firm The Braff Group.

That represents a year-over-year drop of just under 6%, with the advisory’s president, Dexter Braff, predicting a record-setting M&A rebound for the year ahead.

“With vaccines portending an economic revival, substantial pent-up acquisition demand and increased seller interest in anticipation of a rise in capital gains, we anticipate that 2021 will produce record deal flow,” Braff told Behavioral Health Business in a statement.

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Braff’s comments echo those expressed by panelists on BHB’s recent 2021 outlook webinar. Speakers on the virtual call said they predict the year ahead will be largely driven by private equity (PE) buyers looking to purchase behavioral health providers in the outpatient and autism treatment spaces specifically. 

As a result, behavioral health valuations will be similarly high in 2021, they said, especially for certain subsectors. 

“There’s a lot of capital in these private equity funds, and … a fair amount of capital on corporate balance sheets as well,” panelist Burk Lindsey — managing director in the health care investment banking group at Raymond James & Associates — said on the webinar. “Interest rates are low, so capital is plentiful.”

Five to seven years ago, Raymond James typically aimed to get private, platform-sized behavioral health companies valued at 10 times, Lindsey said, broadly defining a platform-sized company as one with $10 to $15 million of EBITDA, while acknowledging there are also many smaller than that.  

These days, such a valuation would make for a solid transaction, but “not one you would go around bragging about,” Lindsey said. Instead, those numbers are to be expected for deals in mature subsectors of behavioral health, such as the acute psychiatric hospital space.

“Most of the businesses that have really attractive growth profiles, that have been successful growing both organically and via acquisitions and de novos and that are consolidating attractive segments within behavioral health are trading at anywhere from … 10x to 12x for platforms,” he said.

Meanwhile, valuations in smaller, less mature subsectors such as outpatient mental health and autism treatment are typically higher. Because the opportunity in those spaces is so quickly growing and dynamic, buyers tend to put greater emphasis on sellers’ forward-looking projections rather than their past performance.  

“We’ve seen … companies regularly trade at 15x plus,” Lindsey said of the autism space in particular. “I’ve even seen some businesses trade in the 18x to 20x range.”

Meanwhile, valuations for smaller autism providers have started to soften as of late, according to Kevin Taggart, managing partner of the health care M&A firm Mertz Taggart, who was also a panelist on BHB’s recent webinar. Now that the autism market has been hot for several years, platforms have started to realize they can open de novos for a more attractive price, he said. 

Meanwhile, outpatient mental health providers have also started to see “crazy multiples,” Taggart said.

LifeStance Health and Refresh Mental Health are two examples. Both national outpatient mental health providers scored huge PE investments last year, with TPG Capital in April investing $1.2 billion into LifeStance and Kelso & Company in December buying a majority stake in Refresh.

“Even smaller companies in that space are starting to get bigger multiples because a lot of private equity groups have seen how successful that those two exits were,” Taggart said. “There’s only been two. There’s still plenty of room for others to join that fray at this point.”

Another sector that can demand disproportionately high multiples is the opioid treatment program (OTP) space. Much like with the autism services and outpatient mental health spaces, a scarcity of providers amid high demand is fueling the trend. 

“[OTPs] are still very attractive and can get high single digit or low double digit multiples, even as a non-platform in some cases,” Taggart said during the webinar. 

2020 deal trends

Deal data from 2020 helps paint a more complete picture of the behavioral health M&A landscape going into 2021.

Within the space, mental health and substance use disorder (SUD) treatment were among the strongest performers transaction-wise last year, according to The Braff Group. 

The mental health segment saw 44 deals, tying its record set in 2019, while the SUD space saw 51 deals, down two year-over-year. 

“With pandemic fueled increases in demand, we’ve already seen several high-profile transactions in the [mental health] space,” Braff told BHB. “This could very well signal a break-out year in acquisition interest in multi-location mental health clinics and providers in 2021.”

For similar reasons, Braff said he also expects the SUD space to have another strong year. 

Also of note: Data from The Braff Group indicates that 2020 saw a “modest fall-off” in new private equity sponsored platform deals, but a record number of follow-on PE transactions. Plus, M&A activity in the autism space fell for the first time since 2010, dropping by more than 27%. 

“This was due in large part to the substantial fall-off in census – notably in clinic settings – that rocked the [autism] segment when the pandemic virtually shut down the country in March,” Braff said. “As many providers have rebounded with the implementation of strict health protocols and telehealth, we anticipate a robust year in 2021 as jittery private equity sponsors return and make up for lost time.”

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