While buyers likely will be viewing the marketplace through the lens of the COVID-19 pandemic until the midpoint of the year, a confluence of factors has the Braff Group, the mergers and acquisitions firm that specializes in healthcare services, feeling bullish about market activity in 2021, president Dexter Braff told Treatment Center Investment & Valuation Retreat attendees in a session presented on Friday.
Broad market deals—transactions of $500 million or less across all industries—decreased 37% from the first quarter of 2020 to the second, according to Braff Group data, a drop that coincided with the onset of the pandemic, although they quickly regained 25% the following quarter. Smaller deals—those below $50 million in purchase price—had a more modest decrease at the beginning of the pandemic, largely because buyers felt more comfortable continuing to take smaller risks, Braff said.
“The themes here are that M&A went down less for smaller deals…which is the overwhelming majority of healthcare service transactions,” Braff said. “The market moved toward those deals that are on the smaller side, and they moved into healthcare, and so to a large extent, we saw a rise in acquisition activity in healthcare services businesses.”
On an annualized basis, behavioral healthcare deals are on pace to be down 24% year-over-year for 2020, but most of the drop was attributed to fewer deals made in the autism services subcategory, which had an unprecedented surge in 2019. Substance use disorder M&A, meanwhile, has been more resilient, accounting for nearly 40% of all behavioral health sector deals—a proportion consistent with some of the better years in behavioral health M&A activity from the past decade, Braff said.
On the subject of autism services M&A activity, Braff said substantial disruptions in services caused by COVID cooled the market, causing money to shift back toward other subcategories within behavioral health. Braff said he believes interest autism service acquisitions is likely to return, although likely not at the exclusion of other behavioral health segments, a phenomenon observed in 2019.
Deals for SUD providers to surge in 2021
Several factors have the Braff Group feeling “extremely bullish” about the prospects for substance use disorder treatment M&A activity in 2021. Many of the “old” reasons for buying—parity, increased funding at local, state and federal levels, and destigmatization—aren’t going away, and looking ahead post-pandemic, expectations are that demand for behavioral health services, particularly SUD treatment, will be especially strong because of the mental health impacts created by COVID.
Another factor: U.S. private equity is sitting on a large quantity of “dry powder”—an estimated nearly $1.3 billion available investment dollars to fund acquisitions that needs to get spent—and there are several sectors, such as restaurants, travels and hotels, that buyers aren’t going to be immediately jumping into. That narrowing creates an outsized demand, Braff said.
“[Private equity investors] have got to spend that money, and they’ve got to do it quickly, which is another reason why we feel strongly about what we expect to see going into 2021: Demand going into next year is likely to be substantially elevated,” he said.
While tax changes implemented by the incoming Biden administration would seem to make sellers apprehensive, there is enough pent-up demand on the buyer side to offset costs, Braff said.
“Sellers are going to pull back at the very same time buyers must get deals done,” Braff said. “While they don’t want to have to pay for the increased taxes a seller might have to incur, if they want to get a deal across the finish line, they’re going to have to do that.”