TCIV: With Demand for Behavioral Health Services Surging, Cash-Flush Investors Ready to Spend

With surging demand for services and available funding stemming from the COVID-19 pandemic, increased access to debt for investors, and buyers itching to make up for a perceived shortage of deals last year, behavioral healthcare is “really attractive from an investment standpoint,” Dexter Braff, MBA, MS, president of the Braff Group, told attendees in the opening session of the Treatment Center Investment & Valuation Retreat on Friday in Scottsdale, Arizona.

“When you marry all of those things together—I promise I won’t say ‘perfect storm’ because that’s a lazy cliché—but these things have come together to create a market that is extraordinary,” Braff said.

Behavioral healthcare as a whole is on pace to see a record number of transactions in 2021, Braff said. Community-based mental health programs and clinics have “captured the fancy of buyers,” creating a strong surge in the subcategory. Addiction treatment programs, however, continue to see the highest volume of deals overall.

Private equity has been a driving force in behavioral health, particularly in the addiction space. Private equity is on track to be responsible for more than half of addiction treatment transactions for the 4th time in 5 years, accounting for more than 50 of a projected 80 deals in 2021, Braff said. Autism is the only subcategory with a higher percentage of deals involving private equity, with around 90%, Braff noted.

Within addiction treatment, medication-assisted treatment programs have seen the most total activity in recent years, but midrange and value-tier residential programs have experienced the greatest growth as market interest in luxury residential programs has waned. High-end residential is on pace for about 5 deals in 2021, down from a high 18 in 2016. The midrange and value-tier program space, meanwhile, is on track for about 30 transactions.

While there has been reluctance in some corners of the industry to embrace programs that accept Medicaid, that stance may be misguided, Braff said.

“Medicaid is where the money is,” he explained. “Medicaid is where the people are. That is where the activity is going to be happening, and that’s where programs ought to be.”

The private equity industry as a whole is currently sitting on a record $828.7 billion in “dry powder” that firms are eager to spend. Factoring in that in most transactions, private equity firms will only fund half of their investment with their own money and rely on lenders for the remaining 50% of the purchase price, private equity actually has a buying power of about $1.6 trillion, Braff said.

Meanwhile, Braff cautioned that optimism bias—overestimating the likelihood of good events and underestimating the potential for bad events—could become a factor in the coming months. While it is absolutely correct that organizations will see increased utilization of services and funding, expectations are generating outsized valuations.

“As a result of COVID, interest has spiked again. People look at COVID and think, ‘This is going to increase utilization and there’s more funding, so whatever path we were on before, it’s even on a better path,’” Braff said. “Optimism bias plays in that whatever people are thinking of, it’s probably not as good as what they are thinking. That’s not bad. They’re right that it’s going to be better, just not as much as they think. Once the numbers actually come, the optimism gets capped. Once it can’t be free-floating, it’s natural for some of that optimism bias to get tempered by reality. It’s a natural phenomenon that happens all the time.”

Looking ahead, Braff said he expects community-based programs to experience a significant jump in interest, as patients grow more accustomed to outpatient services, particularly driven by telehealth. In general, programs that deploy technology in some form within their service offerings tend to generate more interest from buyers, Braff said.

Lastly, Braff highlighted psychedelics as an area of medication-assisted treatment to keep an eye on in coming years. Of note, he said the legalization of marijuana has played a role in the concept of once-illegal substances having therapeutic value, potentially opening a door for psychedelics. Whereas private equity is the dominant force in most areas of addiction treatment, venture capitalists—who generally are more involved in early-stage businesses—are more likely to get involved in psychedelics, Braff said.

Reference

Braff D. Treatment center mergers & acquisitions: the deals, the data, and the direction. Presented at: Treatment Center Investment & Valuation Retreat; December 10-12, 2021; Scottsdale, Arizona.