When the book is written on behavioral health mergers and acquisitions (M&A) in 2021, the story will show that dealmaking continued to generate big business.
Various estimates have the behavioral health sector on track for another record breaking year, with subsectors like mental health, substance use disorder (SUD) treatment and autism care poised to reach M&A highs. One firm keeping tabs on the activity is The Braff Group, which previously estimated that dealmaking within the sector will have jumped 33% by the time the cork is popped on the champagne to close out 2021.
“The environment in M&A right now is just extraordinary,” Dexter Braff, CEO of The Braff Group, said during a recent webinar about behavioral health dealmaking trends that was hosted by Expert Webcast, a business roundtable video platform.
Braff and fellow panelists spent the approximately hour-long discussion giving their thoughts on the flurry of deals between providers. One prominent point hit upon during the webinar was the pandemic, and the role that it has played in facilitating transactions.
Braff previously touched upon the topic of COVID-driven activity in Chicago during last month’s inaugural INVEST Conference. There, he used some colorful language (which, by his own admission, has a tendency to get him into trouble) to describe the M&A environment.
“COVID has made us all insane,” Braff said at the time to attendees at INVEST.
During the webinar, Braff expounded on those thoughts in regards to the dealmaking activity. A significant factor contributing to it, he said, has to do with the defensiveness of the sector, given that the pandemic has led to worsening behavioral conditions, accompanying the increased demand for behavioral health services that had already been occurring pre-COVID.
“Behavioral health care has done extremely well, because of the focus that it’s now getting [with] expectations for increased utilization and funding, as all of us are dealing with mental and psychological impacts of what’s happened through the pandemic,” Braff said.
Also weighing in on the panel discussion was Dana Jacoby, who is the CEO of the Vector Medical Group, a Denver-based health care management consulting firm.
Regarding the pandemic, Jacoby also highlighted how COVID has negatively impacted the behavioral wellness of many nationwide. One area she delved into was telehealth, which became an alternative for many after the onset of the pandemic necessitated that certain services be performed remotely.
It has been estimated by consulting firm McKinsey & Company that telehealth claims were 78 times higher in April 2020 compared to two months prior. Although telehealth utilization has dipped since then, it is now consistently estimated to be around 38 times higher than it was in February 2020.
“There’s been a stigma around some of these situations with mental and behavioral health,” Jacoby said during the webinar. “Now you can reach out into the patient’s home and see them, coupled with digital therapeutics coming to the market at a time when they could address a lot of their challenges.”
Despite COVID’s effects, Jacoby believes other factors have been at play with the high level of dealmaking going on for behavioral health. She more than once described the behavioral health space as being “fragmented” among different kinds of providers — from mental health to SUD treatment to autism care — all of whom were likely to continue seeing a rise in behavioral health demand even without a pandemic.
“I don’t think by any way or stretch it was just a COVID situation here,” Jacoby said. “This was probably something that was going to crescendo. COVID just really brought it to the forefront, and accelerated if nothing else.”
Jeremy Levy, who is a Berwyn, Pennsylvania-based private equity and M&A lawyer for the firm Troutman Pepper, also participated in the discussion. In regards to the current M&A activity, Levy — like Jacoby — had his own word that he occasionally used to describe the landscape, which he categorized as being “frothy.”
“The end of 2020 was as frothy, if not more frothy, than it is right now,” Levy noted during the webinar. “Everyone was really trying to make up for a lost year.”
In the first quarter (Q1) of 2021, 54 deals occurred among behavioral health providers, according to The Braff Group. Although down from Q4 2020, Braff himself earlier this year said that the industry was poised to have a banner year.
“With buyers, particularly private equity sponsors, eager to capitalize on anticipated increases in utilization post-COVID, and sellers, whose businesses were disrupted [but are] returning to normal, …, 2021 could very well be a record year for behavioral health M&A,” Braff told BHB in a statement in May.
Behavioral health M&A in 2021: Turning the page
Flash forward to the recent webinar, Levy talked about the current spate of behavioral health M&A as a way of sorts to make up for lost time, as far as buyers and sellers regularly conversing with each other — in a variety of ways — on possible deals.
“I was having conversations with clients about whether or not they were willing to do a deal with someone whose hand they couldn’t shake,” Levy noted. “A lot of this is [about] meeting a management team, it’s establishing a personal relationship. You’re not just buying a business, you’re buying a team, and so they sat on the sidelines for a while.”
On the webinar, Braff said that the number of deals before year’s end could even surpass his firm’s original projections of a 33% year-over-year rise — due in part to factors like a possible capital gains tax raise that might compel some providers to sell assets.
“We could likely see a year … exceeding the previous record by almost 40 or 45 percent,” Braff said.
Braff also thought back to last year’s challenges with behavioral health M&A amidst COVID. In spite of some activity grinding to a halt, the sector closed 2020 with roughly the same number of deals it did one year before.
If last year was any indication, and 2021 provides proof, behavioral health dealmaking will continue to remain strong going forward, especially as buyers and sellers reconnect with each other more in a post-COVID world.
“If you talk to a lot of [private equity] guys, they still think they’re making up for … last year,” Braff said during the webinar. “Psychologically … there’s a sense of we need to make up for a bad year.”
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