A Non-Profit Buyout?

About a year and half ago, Hanley Center CEO Terry Allen was approached by a private equity firm wanting know if Hanley might be for sale. The private equity firm talked about the high multiple CRC paid for Sierra Tucson – CRC is thought to have paid in excess of 9x cash flow – implying, according to Allen, a similar juicy multiple for Hanley. Then they made the usual pitch to get management on side, offering Allen continued employment, as well as the prospect of riches through an equity participation in a new, for-profit Hanley. All that, if Allen would push a deal with Hanley’s board. (Such cozy deals have sometimes outraged shareholders of public companies targeted by private equity.) Naturally, I showed it to the board, but I certainly wasn’t interested in pushing for it, and the board had no interest at all. Thus has private equity descended on the non-profit treatment sector. And Hanley is not by any means the only non-profit to have been approached recently, with venerable Caron, and others, reporting similar interest. Trolling the halls at the latest Naatp Leadership Conference, private equity firms made numerous approaches, but so far their efforts have gotten nowhere.

Certainly, the prestige, nationally known non-profits make ideal targets for private equity, who, unless they are turnaround specialists, typically look for market leading marquee properties when they enter a new arena. Bain’s CRC deal, which included Sierra Tucson, is a perfect example. And while it is definitely not unheard of in the medical industry for investors to take over non-profits – the wholesale conversion of nonprofit hospitals by players like Tenet in the 1990s is case in point – what private equity is running into, and will likely continue to, is the unusual devotion to mission found among treatment center nonprofits. The top non-profits see themselves as sacred guardians of efforts to treat the disease of addiction in a medical world that often dismisses the disease as an afterthought, despite its central role in the etiology of illness. And while foundations could use the private equity cash from a sale to further the cause of addiction recovery in other ways, it will likely be hard for private equity to overcome the mission sense of the big non-profits.