Private equity drives almost all investment and dealmaking in autism therapy and launched the space to record highs a few years ago.
But now investors and their autism therapy platforms are waiting for something to give before getting back into the dealmaking game. But what that is not clear, experts in the space tell Autism Business News. A few notable deals could be just as likely to help dealmaking in the sector reset as anything else.
Several macroeconomic and autism therapy segment-specific issues gave private equity investors pause, leading to a significant slowdown in investments and acquisitions. However, this is not a new normal, nor does it imply that the private equity experiment in behavioral health is over — far from it.
Overall, interest in the behavioral health market is still high. Data presented by the M&A firm The Braff Group shows that platform deals in overall behavioral health in 2023 nearly mimicked 2022 with 29 total deals. This suggests continued confidence in the segment’s future. Meanwhile, total deals in autism therapy fell by about half to 22 last year.
But if something moves in the near-term, several industry insiders predicted a flurry of activity near the beginning of next year.
“It’ll be very healthy for the space to see a couple of, let’s say, regional to large platforms transact and reestablish the guideposts around what [valuation] and [investment KPIs] investors want to trade on,” Thaddeus Davis, senior managing director at Leerink Partners, told ABN at the 2024 Autism Investor Summit.
Davis’ assessment is that the autism therapy market is a 7 out of 10 for investment and dealmaking outlook. Davis, along with several other banking and finance professionals, told ABN that their autism therapy pipelines have picked up and that they are hearing similar conversations from their peers and competitors.
Despite the slowdown in investing — in no small part due to high-profile stumbles and the workforce challenges — the underlying demand dynamics still attract interest from investors. What’s more, Davis and others at AIS said that the operating environment in autism therapy has somewhat clarified and stabilized.
The workforce issue is at the top of the list for nearly all strategic decisions for autism therapy providers. Rob Marsh, now ex-CEO of Chatsworth, California-based 360 Behavioral Health, told ABN that they’ve seen workforce pressures abate to a manageable level. Several other sources echoed this sentiment. As those pressures have become more manageable, they’ve received more inbound correspondence from other autism therapy providers seeking to sell to 360 Behavioral Health.
“In the first part of 2023, you know, we entertained half a dozen discussions,” Marsh said. “And in the latter part of 2023 and to this point this year, we’ve probably done more than 20 calls with different providers that are ready to exit or that are picking our brain about what we’re seeking in the market.”
There are other reasons to expect a pick-up in dealmaking.
A key motivator that could get investors moving in the autism space is a building in capital that needs to be deployed. Global financial services provider Bain & Co. found that “buyout funds alone are sitting on a record $1.2 trillion in dry powder, and 26% of that is four years old or older, up from 22% in 2022.”
“There’s been some money on the sidelines that’s going to be coming back in,” Brett Blevins, CEO and founder of Commonwealth Autism Care, told ABN. “People have now had time to survey some of the mistakes that were made over the last few years.”
The greater sophistication of what the autism therapy industry is about on the part of investors has been talked about for some time. It’s seen as a major downward force on autism therapy deal multiples and valuations.
The historically aberrant multiples and valuations leading into the 2021 peak may be contributing to the standstill in the autism therapy dealmaking space. Several experts have said the high multiples achieved in the past are much less likely to happen today. So, investors and autism therapy executives have not been particularly eager to trade for less than they did in the past.
“People need to have more honest conversations with themselves over value expectations,” Tommy Spiegel, vice president at investment bank Provident Healthcare Partners, told ABN. “2017, ’18 and ’19 were the Wild West; several health care sectors go through those cycles and then normalize. We’re at normalized now.”
Data presented by The Braff Group at the Autism Investor Summit shows the typical range of multiples compressing over the last few years, with deal multiples floating between 8-times and 9-times earnings.
In addition to the financial considerations, several experts told ABN that cultural fit is an increasing consideration in dealmaking. While a time-worn business principle, several said they believed it was not prioritized in deals that had a subsequent stumble, especially when that involved high staff turnover.
“We’re in a service industry. If you don’t have a cultural fit and say 25% or 50% of your clinicians walk out the door after you close the deal, you just lost your business,” Dan Cross, CFO at 360 Behavioral Health, told ABN.
Perfect cultural alignment between organizations is rare, despite the organization being a part of the same industry, Cross added. Factors such as leadership teams, management styles across leadership levels and operational structures make each culture unique. This can challenge dealmaking and may be another impediment, even if for the best, across the space.
“We’ve looked at a ton [of organizations],” Cross said. “Each one of them has a little different culture and style … clinicians can be finicky about little things.”
