Skip to main content

Investors Taking Wait-and-See Approach to Addiction Treatment Sector

January 31, 2020

After years of robust activity, data from the fourth quarter of 2019 suggests investors are taking a wait-and-see approach to the addiction treatment industry. It’s a trend that Kevin Taggart, managing partner of the M&A advisory firm Mertz Taggart, expects to continue through the first half of 2020.

“There are still deals getting done, but some of them are distressed opportunities that investors are picking up,” Taggart tells BHE. “We’re still getting a lot of calls from people who are struggling for one reason or another. It seems to be people who have a lot of beds in either detox or residential and are struggling to fill those right now.

“Certainly, there is still a market for quality providers who are doing things the right way. It just seems like a lot are struggling.”

In its Behavioral Health M&A Report for the fourth quarter of 2019, Mertz Taggart says it tracked 21 transactions overall in behavioral health, including deals not publicly announced. For the year, 2019 saw 85 deals, down slightly from the 97 transactions recorded in 2018.

Of the 21 transactions in the fourth quarter, 10 were in the addiction treatment sub-category. Consistent with other industry analysts’ findings, Mertz Taggart says private equity is showing increased interest in autism services, and there is a potential for add-on transactions over the next 3-to-5 years.

Positioned for acquisition

Mertz Taggart noted in its report that with healthcare in general placing a greater emphasis on value-based services, providers benefit by demonstrating quality of care. For addiction treatment center operators looking to be acquired or draw investment from private equity, Taggart says there are several traits that will help draw interest from investors, starting with keeping a modest capacity. Some operators have gotten “too far out over their skis” in pursuit of aggressive growth, Taggart says.

“Don’t expand too rapidly in terms of number of beds, just because we’re seeing a lot of bigger ones that are struggling to fill. If you’ve got a campus with a couple hundred beds, that’s a lot to fill every month,” says Taggart, adding that a capacity of 20 to 50 beds is ideal.

Other characteristics that play well with investors include demonstrating a history of ethical marketing practices, solid clinical programs, proper billing procedures, and a track record of not engaging in excessive patient drug testing.

“And if you have some in-network contracts in your local market—you don’t have to be 100% in network, but if you have some contracts—I think those are still attractive to lots of folks,” Tagger says.

Overall, Taggart says, the behavioral healthcare sector “is still pretty immature from an M&A perspective” and subject to significant ups and downs. Still, he expects those who withstand a tepid first half of 2020 to reap rewards down the line.

“The need is not going away, unfortunately. The market will come back,” Taggart says. “I believe it will come back stronger for the players that make it. If people can fight through these next six to 12 months, there will be a bright future both for the providers and the M&A marketplace.”

Back to Top