The Behavioral Health Care sector has enjoyed growing interest from private equity and other investors in recent years. Federal legislation regarding coverage of mental health conditions certainly boosted that interest, as has the growing public acceptance of the magnitude of need for services.

Also, the fragmented nature of this sector has kept platform-building acquisitions rather low. From a focus standpoint, behavioral health care covers mental health issues, as well as substance abuse, eating disorders, autism spectrum services and care for individuals with developmental disabilities. Co-morbidities often exist, particularly between mental health and substance abuse conditions.

Then there’s the issue of location. Many companies have one or two facilities in a single market, or region of a state. Operators with more than five or 10 properties or programs are attractive to investors looking to build national or regional platforms.

The publicly traded giants such as Acadia Healthcare Company (NASDAQ: ACHC) and Universal Health Services (NYSE: UHS) have moved beyond buying these smaller players and into joint ventures with them, focused on building facilities in their communities. That’s one reason 2017’s dollar volume was so limited: de novo construction trumped mergers and acquisitions.

In 2017, just six publicly traded companies announced acquisitions in this sector, and two were real estate investment trusts (REITs). Two not-for-profits made acquisitions in their local markets. The majority of acquirers were privately held, and accounted for 41 of the 49 deals.

2017 by the Numbers

Deal volume surged 71% in 2015, to 41 announced transactions, over 2014. As we close the books on 2017, preliminary data show deal volume continues to grow. Some 49 transactions were made public in 2017, up 7% compared with 2016’s 46 deals.

Dollar volume is much more uneven, and not a good measure of investor interest. Because this sector remains fragmented, many transactions are between private parties. Even if the deal is made public, the financial terms rarely are.

2017 is a case in point. In 2017, dollar volume sank 81% to $639.5 million, based on publicly announced prices. Only four deals reported a price, and two of those prices were based on REIT acquisitions. By contrast, the value of behavioral health care transactions reached $3.4 billion in 2016 (up 166% compared with 2015), and one deal accounted for 65% of that total.

2017 Trends

REITs began to move into the behavioral health space in 2017, just as they have in the Hospital sector. Two of the four deals to carry prices were announced by a REIT.

Care Capital Properties (NYSE: CCP), a healthcare REIT that was spun out from Ventas (NYSE: VTR) in 2015, acquired six inpatient properties from Signature Healthcare Services LLC, doing business as Aurora Behavioral Health, for $380 million.  The hospitals are located in Arizona, California and Illinois, and were recently expanded or are being expanded to increase bed capacity. At the time of the announcement, these facilities had 712 beds, making the per-bed price $533,707.

MedEquities Realty Trust (NYSE: MRT) picked up four behavioral health hospitals for $25 million from AAC Holdings, Inc. (NYSE: AAC). The deal included two standalone intensive outpatient treatment facilities in Las Vegas, Nevada and Arlington, Texas; a 110-bed sober living facility in Las Vegas; and a 56-bed sober living facility in Arlington that is expected to expand to 131 beds by mid-year 2018. Pre-expansion, the price works out to an average price per bed of $150,602.

Private equity firms stepped up their acquisitions in 2017, and a few new players entered the sector as some current players made exits. Eleven of the 49 transactions anounced in 2017 were made by private equity investors, and none of the deals involved the same acquirer.

Substance abuse treatment programs and facilities have been popular with private equity investors in recent years. In 2016, six of the 11 transactions announced by these firms targeted such providers. In 2017, the tide shifted. Just three acquisitions by PE firms focused on substance abuse, and two on eating disorder programs. Instead, autism-spectrum programs and services were the more popular targets, with six transactions announced.

In 2018, we expect to see the same, if not higher, level of investor interest in behavioral health care services. Barring repeal of the Affordable Care Act and its provisions on parity with other healthcare services, of course.