As demand for behavioral health care is growing, so too is investor interest in the space.
That’s especially true on the private equity (PE) front. In fact, behavioral health dealmakers predict PE buyers will help fuel record levels of M&A in 2021.
Among those active PE players is Council Capital.
Headquartered in Nashville, Tennessee, Council Capital invests in lower middle market health care and health care IT businesses, taking controlling and minority stakes in companies with revenues between $5 and $50 million.
And in recent years, Council Capital has been particularly active building a portfolio in behavioral care.
Those investments run the gamut of behavioral health and include the professional services organization Triad Behavioral Health, the autism treatment provider NeurAbilities Healthcare, the addiction treatment provider SaVida Health and, most recently, the intellectual and developmental disabilities (IDD) provider ViaQuest.
Council Capital operates four closed-end funds, with Council Capital IV — its most recent fund — backed by $200 million in capital from strategic health care investors, pension funds, foundations, endowments, funds of funds and family offices.
Council Capital’s first investment from its fourth fund came just a few weeks ago when it invested in ViaQuest, a Dublin, Ohio-based provider of IDD, behavioral health and hospice services. However, the firm is likely to make many more behavioral health investments in the years to come, according to Eric Keen, a general partner at Council Capital.
Specifically, Keen said he’s bullish on low-cost behavioral settings and providers innovating the way they deliver services. He recently spoke to Behavioral Health Business to share Council Capital’s behavioral outlook and investment strategy, as well as what it looks for in the behavioral health companies in which it invests.
You can find BHB’s conversation with Keen below, which has been edited for length and clarity.
BHB: Council Capital makes investments through the entire health care spectrum. How big of a focus is behavioral health for the firm?
Keen: We’re investing out of our fourth fund right now. It’s a $200 million pool of third-party capital. Our prior fund … was a $154 million pool. From the third fund through the fourth one, we’ve spent a huge amount of time in and around behavioral health.
In our third fund, we made eight investments. Of those eight investments, four of them either [were] behavioral health providers or touched behavioral health through technology or training.
ViaQuest [is] our first investment of our fourth fund. [It is] a perpetuation of that strong belief that started pre-COVID … that it’s OK to acknowledge that we have frailties. It’s the destigmatization of behavioral health challenges broadly. That’s the thesis we’ve believed in and been investing in for some time now.
Might the fourth fund become more weighted towards investments in behavioral health care?
I don’t know if it’ll be more [but] it will certainly be a continued focus. It’s always a little hard to predict how capital can be allocated. There’s a whole bunch of variables that have to come together. I don’t know if half our deals will be in behavioral health like they were in the third fund, but I think a healthy portion will be.
What does Council Capital look for when it comes to the behavioral health care companies it invests in?
There are some areas with behavioral health that we don’t want to invest in, [but] there certainly are areas we do like to invest in.
We’re always trying to find the low-cost point of care. That generally means we’re not going to be investing in big, fixed-wall businesses. [With] psychiatric hospitals, we don’t think that’s where the market is going. It’s not really how we’re equipped as a fund to invest. In-home, outpatient clinics or virtual are all areas that we would focus on.
We have invested in behavioral support, the intellectually and developmentally disabled population, substance use disorder [and] the autism marketplace. We spend a lot of time looking at technology-enabled search solutions to enable the provision of care, [such as] telehealth and virtual solutions. We also spend a lot of time looking at pediatric mental and behavioral health solutions.
Would Council Capital invest in brick-and-mortar operators if those operators started offering virtual services comparable to the amount of in-person services provided?
Absolutely. For us, it’s just a question of: What does the unit economic model look like? And can we generate an attractive return on invested capital?
Our autism provider business, [NeurAbilities Healthcare], is brick-and-mortar. We’ve got locations to provide center-based therapy to children largely diagnosed with autism.
We’re not afraid of brick-and-mortar. We like the virtual piece when it enhances a total episode of care. We use it as a complement to brick-and-mortar in a lot of cases.
Has the pandemic affected any of the firm’s investment plans?
Our thesis all along has been that care needs to go to a low-point cost, and by definition that’s generally in-home or virtual. The pandemic did not really impact our portfolio a great deal. In fact, the first half of last year versus the first half of 2019, revenue across our portfolio was up 25%. Our companies performed really well … at the deepest trough of COVID.
The way we think about investments hasn’t changed that much, either. We’ve tried to integrate virtual care more into our care delivery continuum as a result of COVID. That’s just been a change we’ve adopted.
What does the future hold for Council Capital and its investments in behavioral health? Does the firm have a set amount of money ready to deploy, or a near-term target number the firm would like to hit?
I’d say behavioral health will continue to be a very critical part of our investment thesis. We are big believers in understanding specific markets … really well. We continue to see very positive trends, … so we will continue to invest in behavioral health.
It’s a little tough for me to say we’re going to invest X amount into behavioral health. But it will continue to be an area of emphasis and focus for us, as we think it’s one of the areas with the most tailwinds in the entire health care delivery market.
At the moment, is Council Capital’s fourth fund the firm’s top investment priority?
We are … focused on continuing to mature the portfolio in our third fund. We still have six companies in Council Capital III.
Working on the fourth fund, we would expect that would take us three to five years. Then we’ll be thinking about raising the fifth fund three to four years out in that timeframe.
But there is no crystal ball of how long it’s going to take for us to deploy capital. It’s not any time in the near term.
How do you regard the behavioral health care market on the whole, as far as challenges and opportunities investing in the space?
It’s a marketplace that has largely been underinvested in historically. The demand for services exceeds the supply of providers, so there’s a lot of growth opportunity.
That’s not going into each sub-sector, because each sub-sector has different demand drivers. But just broadly, there’s more demand than there are suppliers, so there are broad market growth [opportunities], not only from a customer demand [perspective] but also from a payer demand [perspective]. You [also] see the government putting more money into supporting behavioral health services.
If you ask me [about] the challenges, it’s hard to evaluate quality.
If I go to 10 orthopedic surgeons and I have a torn rotator cuff, 10 of them are going to probably [treat it] the same. If I go to 10 behavioral health professionals with anxiety, everyone may treat that differently. It’s just a harder thing to put evidence-based concrete protocols around, so determining outcomes is just harder.
What advice do you have for behavioral health companies looking to score an investment from a firm like Council Capital?
You have to show some sort of historical trend of success. Success doesn’t have to be financial, but financial is one way. Clinical [success] is another way. Showing that you have a business model that’s scalable and that you can replicate [is important].
To show that I can open up multiple locations and make the economics work, that [means asking]: “How much does it cost? How much do I have to invest upfront? How long does it take me get to break-even? How long does it take me to pay back my original investment?”
Understanding the whole unit-economic picture is a really important piece. Having data [helps], so that people can understand what you’re doing, how you’re doing it and the effectiveness of [it], which is a little hard. If you see patients seven times [as a therapist], and you have some way to show that after seven times people… [get better], that’s powerful. Clinical differentiation with a unit-economic model that’s compelling is a really good way to find an investor.