An influx of capital into the addiction treatment space, investors’ renewed confidence in the behavioral healthcare sector, and a potential scaling back of the capital gains tax rate increase proposed earlier this year have merger and acquisition activity remaining on a record-setting pace.
Overall, the third quarter saw moderately strong activity with 25 total transactions announced, down from 33 in the second quarter. With 93 deals announced thus far, 2021 remains on track to eclipse the record 116 transactions reported in 2020.
Of note, a record 10 private equity platform transactions, including three in mental health, three in addiction treatment, and three in the autism services and intellectual/developmental disabilities space, were reported in the third quarter.
“Initially, I believe this was driven by the potential for a capital gains tax increase,” said Mertz Taggart Managing Partner Kevin Taggart. “But I also think behavioral health has become more attractive to many investors because it has held up very well during the pandemic, especially compared to other potential investment options.”
Note: Total industry transactions does not necessarily equal the sum of the sub-industries, as many transactions include more than one sub-industry.
The Biden-Harris administration previously introduced legislation that would move the tax rate on long-term capital gains from 23.8% (including the 3.8% Medicare tax) to 43.4%. If passed, the changes were expected to take effect on Jan. 1, 2022. The bill, however, has met resistance in the Senate in recent weeks, and its passage is now far less certain.
“It appears that any increase to the capital gains tax rate will be more modest if it even gets done this year,” Taggart said. “I think concern among investors on this front has certainly lessened since the beginning of the year, and I also believe that momentum for M&A activity will continue into at least the first half of 2022.”
In the meantime, Taggart said that bandwidth for third-party advisors, especially attorneys and accounting firms that perform quality of earnings assessments, will remain the most likely potential roadblock to deals closing in the final three months of 2021.
Nearly $3 billion in capital poured into the addiction treatment sector in the third quarter, including a pair of deals each valued at more than $1 billion. Although down slightly from the 17 deals in addiction treatment that were announced in the second quarter, the 13 deals announced in the third quarter are a signal that investors believe future growth opportunities in the behavioral health sector remain vast.
Activity in the addiction treatment space was highlighted by Patient Square Capital acquiring Summit BHC from FFL Partners and Lee Equity Partners for $1.3 billion. The selling firms were each poised to reap four times their invested capital, according to a report by PE Hub.
Private equity firm Onex Partners completed its acquisition of Newport Healthcare in a $1.3 billion deal, outpacing the expected $1 billion-plus valuation that had been expected, per PE Hub.
Wayspring, formerly known as axialHealthcare, announced in September that along with changing its name, the company received a $75 million investment led by Valtruis, along with Centene Corp., CareSource, HLM Venture Partners, and other existing investors.
In July, BayMark Health Services acquired Mt. Sinai Wellness Center, a residential treatment center in Dahlonega, Georgia. Mertz Taggart provided exclusive M&A advisory services in this transaction, representing the seller.
Bradford Health Services acquired Cornerstone of Recovery, which operates two Knoxville, Tennessee-area inpatient facilities, growing Bradford’s network to 25 facilities across four states in the Southeast.
BRC Healthcare expanded its portfolio with deal for four substance use treatment programs in Nashville, Tennessee: Nashville Recovery Center, NRC Clinical, Nashville Detox Center, and Tennessee Recovery Clinic.
Broadstep Behavioral Health announced a deal for Coastal Southeastern United Care, which provides behavioral health and substance use disorder treatment for adults, adolescents, and children in 10 North Carolina counties, as well as Dillon County, South Carolina.
Memorial Hermann Health System sold Houston-based Memorial Hermann Prevention & Recovery Center and its network of outpatient programs to Discovery Behavioral Health, expanding Discovery’s network of more than 100 programs nationwide.
Kolmac Outpatient Recovery Centers in Maryland announced in July that it had completed a merger Concerted Care Group, which operates three locations in the state.
Recovery Ways continued its multistate expansion in early August with a deal for Idaho Behavioral Health, which operates four programs in Idaho.
Greenbrook TMS acquired Achieve TMS in an $8 million deal.
Windrose Recovery expanded its portfolio of privately owned addiction treatment programs in the Midwest with its acquisition of Positive Sobriety Institute, which offers addiction treatment for professionals and individuals in Chicago.
Just 7 deals involving mental health treatment providers were announced in the second quarter, down from 15 in Q2, but the list of third-quarter deals includes three significant platform transactions.
NorthEast Health Services, InterCare Psychiatric Services, GR&W Health and My Transformation announced a merger to create Transformations Care Network, a multistate, outpatient behavioral health platform that is backed by Shore Capital.
The Thurston Group, a private equity firm that focuses on investments in healthcare services companies, acquired ARC Health.
Connections Health Solutions received $30 million in funding from the Heritage Group in the crisis stabilization company’s first-ever round of growth funding.
Other deals in the mental health sector announced in the third quarter include:
Two Sigma Impact acquired Circle of Care, a home- and clinic-based pediatric therapy provider in Texas.
Ginger and Headspace announced a merger to create a digital mental health platform to be known as Headspace Health.
Monte Nido & Affiliates completed its acquisition of Walden Behavioral Care, which becomes eating disorder treatment provider’s fifth affiliate.
Atar Capital, a global private investment firm, announced that its portfolio company Pathways Health and Community Support acquired Renew Consulting in northwest Oregon.
Delic Holdings Corp., a psychedelic wellness platform, announced it is acquiring Ketamine Wellness Centers, creating the largest psychedelic wellness chain in the United States.
Puget Technologies announced it is moving forward with its acquisition of Behavioral Centers of South Florida.
Autism Services and Intellectual/Developmental Disabilities
Eight deals were announced in the autism and I/DD space in the third quarter, continuing the pace set in Q2, which saw 7 deals. Activity in this space was highlighted by a pair of significant platform deals.
Cerebus Capital acquired Lighthouse Autism from Abry Partners in a deal reportedly worth $400 million, according to PE Hub.
Ontario Teachers’ Pension Plan Board, an institutional fund manager serving working and retired teachers in the Canadian province of Ontario, acquired Acorn Health, an applied behavior therapy provider.
Sevita, the Centerbridge Partners-backed provider of community-based care that was previously known as The Mentor Network, was an active buyer in the third quarter. The organization acquired three companies: Good Neighbor Homes, New Directions, and Aspire Human Services.
Autism Cares Partners announced two acquisitions that will expand the company’s presence in the Northeast—Massachusetts-based autism treatment organization Puddingstone Place and Autism Bridges, a multistate autism treatment organization based in New Hampshire.