Behavioral health care mergers and acquisitions are setting new records in 2017. With two months left in the year, announced transactions in this sector have already surpassed 2016’s then-record of 45, making it the most active year for M&A.
What’s driving deal activity? Earlier in the year, we saw a couple of REIT acquirers move into the space, which is something that didn’t happen last year. REIT activity has since tapered off. The real driver is private equity firms building out their portfolios.
In 2016, PE firms made 11 direct behavioral health acquisitions and 13 add-on deals via a portfolio company, according to our database. So far in 2017, private equity firms have only made eight direct acquisitions, but PE-sponsored add-on acquisitions increased 225%, up to 26 deals.
Add-on acquisitions have become increasingly common, according to Behavioral.net. Original platform investments usually target firms with $5 million to $10 million in annual revenue and $1 million to $2 million in adjusted EBITDA in order to get a solid foothold in the market. But follow-on acquisitions have lower transaction values as investors find value in factors other than size.
Behavioral health was historically a self-pay market, but due to changing reimbursement structures, PE firms may seek out targets based on existing payer contracts as they look to diversify their payor mix. A firm with a solid technological infrastructure is another example of added-value, especially as these capabilities become more and more important in healthcare in general.
Location is another factor that is heavily considered in an add-on deal since a tight geographic footprint is necessary to add value to a portfolio. Additionally, PE firms want a portfolio that penetrates the several subsectors of the market. Many providers are looking to treat co-occurring disorders or broaden the continuum of care that they offer. So, instead of seeking out the most financially attractive firms in the market, PE targets firms that can fill the gaps in their care offerings.
