Why 2023 Could Be the Year of the Mini Deals in Behavioral Health

The current financial climate could mean fewer behavioral health mega deals next year.

But investors are likely to continue to have a healthy appetite for smaller transactions, industry insiders believe.

“I think buyers will become more selective, but I think the demand remains [there],” said Kevin Taggart, managing partner at Mertz Taggart, during Behavioral Health Business’ INVEST. “We still see huge demand every time we bring a company to market, so I think that equation still keeps them at least level. I don’t think they’re going to go up.”

Founded in 2006, Mertz Taggart is a Fort Myers, Florida-based healthcare M&A firm that has completed more than 100 transactions since its inception, according to its website.

The behavioral health M&A market has slowed after the blockbuster year of 2021. In 2021, there were 158 behavioral health deals. Meanwhile, there were just 70 deals in the first half of 2022, according to Mertz Taggart data.

“[The] pressure in the market, it will obviously have an impact on transactions, but the world … that I play in is primarily in the $10 million to $100 million transaction value,” Crystal Contini, chair of the M&A practice group at McDonald Hopkins LLC. INVEST said. “So for that space, I haven’t really seen a slowdown.”

“It’s as busy as it was six to 12 months ago,” Contini continued.

Founded in 1930, McDonald Hopkins is a law firm of 150 lawyers with 50 service and industry teams. It has offices in Ohio, Michigan, Florida, Maryland and Illinois.

Crystal Contini, chair of the mergers and acquisitions practice group at McDonald Hopkins, spoke to INVEST. Photo: BHB

While 2021 was a banner year for lenders, banks are also tightening their belts, going into a bear market. This means that borrowers may have to temper their expectations in 2023, which could lead to buyers cutting back on deal sizes.

“This year, leveraged loan volume is down 50%, refinancing is down 75% on dividend deals, and our dividend recaps are down 92%,” said Maurice Estes, managing director at Capital One Healthcare, during at the event. “A lot of lenders are really taking a step back by being very cautious about how they allocate their capital.”

In the current environment, “there’s probably room for growing term loans and smaller deals to do,” Estes noted. But even in those cases, it will be difficult to get mega deals done while the secondary market is trading so low, he added.

Virginia-based Capital One Healthcare is a medical investment bank.

Investors look to ambulatory digital services

While deals in the behavioral health sector have declined overall, there has been an uptick in deals in the mental health sub-sector. There were 43 mental health transactions in the first half of the year, compared with 25 in the first half of 2021, according to data from Mertz Taggart.

Outpatient mental health, in particular, has seen some big deals this year. One of the biggest acquisitions of the year was UnitedHealth Group’s (NYSE: UNH ) Health Services division Optum’s purchase of outpatient mental health services provider Refresh.

“We’re much busier with outpatient mental health,” Taggart said. “I think because of the refreshments and the life positions of the world, there are a lot of groups trying to implement them. And so we see this in our practice as well.”

Investors continue to monitor digital behavioral health providers.

But questions still arise about the industry’s long-term direction.

“I think it just carries a lot of risk. And don’t get me wrong, there are many successful companies that are doing very well. And I think there is a need for virtual services,” Rush Brady, AVP of development at Odyssey Behavioral Health, told INVEST. “With the acuity of our customers, we’re just not sure it’s an effective kind of stand-alone platform.”

Behavioral health provider Odyssey Behavioral Health operates 12 treatment centers and 19 outpatient locations. It was founded in 2015 and offers psychiatry, eating disorder treatment and outpatient services.

Rush Brady, AVP of Development at Odyssey Behavioral Health, spoke to INVEST. Photo: BHB

An example of the long-term direction of an industry is its employment pattern.

Many digital providers use a 1099 contract model instead of hiring full-time clinicians. This can lead to many compliance and billing challenges, according to Contini.

But the shift from contractors to full-time employees can reduce profits.

“So a buyer comes in and now he’s thinking, ‘Okay, what do I need to do to make this business successful in the future?’ And the buyer starts thinking, ‘Well, maybe I really should make them all employees, just so that I can have the rules.”

Also, many clinicians like the freedom of being a 1099 employee. Shifting the workforce to a full-time model may lead to retention issues in the future.

“So it’s a bit of a catch 22,” Contini said.

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