Throughout 2020, there wasn’t much to write about in the Rehabilitation sector. The industry was under regulatory pressure from CMS in the beginning of 2020, and then Covid-19 came around, making things even more difficult. Social distancing guidelines hindered in-person appointments, and we imagine that the effects of surgery cancellations at hospitals trickled down into this sector as well. U.S. Physical Therapy, Inc. (NYSE: USPH), one of the largest rehabilitation providers, saw a 13.8% drop in net patient revenue in 2020 compared with 2019, for instance.

However, It was more difficult to discern the effects in the M&A market. The sector barely breaks double-digit deal volume on a quarterly basis in normal times, so there was nothing headline-worthy in comparison to the declines seen in sectors such as Long-Term Care or Physician Medical Groups. In our recently published Health Care Services Acquisition Report, we found that in 2020 there were 32 deals announced in the Rehabilitation sector, compared with 37 in 2019. In the first two months of 2021, 17 deals have been announced, highlighting the real momentum in this sector.

However, there remains plenty of room to grow in the market. Even USPH in its 2020 annual report admitted that “the physical therapy business as well as the industrial injury prevention services business are both highly fragmented with no company having a significant market share nationally.” Rehabilitation services are also split across many different venues: hospitals, therapy clinics, physician-owned clinics, chiropractors and more. There is plenty of opportunity to consolidate, and many buyers are ramping up their efforts, especially those in the private equity space.

In the first two months of 2021, 76% of transactions in the Rehabilitation sector were committed by a private equity firm or a sponsored company. Phoenix Physical Therapy, fka Phoenix Rehabilitation and Health Services Inc., a portfolio company of Audax Group, announced three transactions for clinics in Alabama, Maryland and Michigan. CORA Health Services, a portfolio company of Gryphon Investors, bought two clinics in North Carolina and one in Florida. We anticipate seeing private equity continue to perform more add-on acquisitions throughout the year, especially as the pandemic dwindles down (hopefully).

Let’s also not forget the sale of Kindred Healthcare’s RehabCare business in early October 2020 to Select Rehabilitation, a portfolio company of Flexpoint Ford, LLC. RehabCare provides rehabilitation services and tools to skilled nursing, assisted living and independent living facilities. The combined company of RehabCare and Select Rehabilitation has more than 2,300 locations in 43 states, employing 17,000 therapists across a myriad of care settings.

The deal marked Kindred Healthcare’s exit out of the rehab therapy services business so it can focus on its joint ventures in building its presence in the LTACs, inpatient rehab hospital, and now behavioral health care businesses.

However, in February, the market was hit with a big headline deal. ATI Physical Therapy, the largest single-branded outpatient physical therapy provider in the United States, announced it was merging with Fortress Value Acquisition Corp. II, a special purpose acquisition company.

The healthcare M&A market has been dominated by a surge of SPAC deals, or private companies going public through reverse mergers with a special purpose acquisition company, so it was only a matter of time until we saw one in the Rehabilitation sector.

ATI Physical Therapy was a portfolio company of Advent International, which will remain ATI’s largest stockholder and be closely aligned with Fortress and public stockholders at transaction close. According to search results in our Healthcare Deals Database, Advent bought ATI in 2016. Before Advent and ATI paired up, ATI was a prolific buyer in the Rehabilitation sector, acquiring 11 companies and clinics from 2013 to 2015.

Existing preferred holders of ATI, including GCM Grosvenor, are also rolling a significant portion of their existing stake. Proceeds from the deal will be primarily used to repay existing debt and preferred equity, delivering financial flexibility to fuel ATI’s significant organic and acquisition growth opportunities. The combined company will operate as ATI Physical Therapy, Inc. and remain NYSE-listed under a new ticker symbol.

Cash proceeds raised will consist of FVAC II’s cash in trust of $345 million and a fully committed common stock PIPE of $300 million at $10.00 per share from institutional investors including Fortress Investment Group LLC, Wells Capital Management, Weiss Asset Management and Monashee Investment Management.

The deal might be the first of major deals in the industry as major tailwinds start to come into play, including aging demographics, the shift toward outpatient rehab care, and an appetite for less invasive forms of therapy. Investors have a lot to gain by seeing what is up for grabs in this sector.