Investor Interest High as Small Center-Focused Vehicle Launched

Intense Interest

Behavioral healthcare in general, but especially addictions, continues to be the object of intense interest by investors large and small, but as the end of the first half of the year closes in deal pace has been slow with just one deal of note, Elements Behavioral’s acquisition of Pennsylvania-based Clarity Way. There is, however, quite a bit of expansion going on at existing centers both on the public and private side of the business some of which we here at Treatment Magazine have covered.  It is not unusual for merger waves, and addictions/behavioral health is indeed in the middle of such a wave with hundreds of deals done over the past few years, to move in fits and starts. And with more than 10 thousand treatment centers listed by SAMHSA, it will be many years, if ever, before players emerge with large shares of the approximately $34B annual revenues addictions market. CRC Health Corp.,with its $450M of annual revenue is by far the largest “pure play” addiction care services provider in the nation and has had acquisitions as the basis of its growth model  – a strategy interrupted largely by problems that arose at the company because of the monster housing-led recession – and CRC at best, even after well over a decade acquiring treatment centers, probably represents just a couple of percentage points of the overall addictions care market, both on a revenue  and assets basis. And the addiction treatment business is an extremely opaque marketplace, with an absolute paucity of easily available macro financial data, which of course makes for great opportunity for smart, diligent investors but also slows down the pace of deal making as investors are more wary.

The Big Guns

Treatment Magazine has also over the last year or so spoken to an increasing number of professional fund managers, some of them partners at what are the oldest household names in private equity who describe to us recently closing multi-billion dollar investment funds and who are nosing around addictions/behavioral health – but especially seem to like addictions. The fundamental issue for these types of funds – we cannot name them as they sought confidentiality and were in fact more looking to tap into Treatment Magazine’s 10-yr history of addictions deal making and industry knowledge than to do an interview – are that they are very big with mostly bare minimum $10M annual cash flow requirements of their possible targets. The problem with that is that there are a tiny number of for-profit addictions players in the treatment industry that throw off those kinds of numbers. Private side-focused addictions non-profits of that size typically are very well-known, doing fine and ain’t got no “For Sale” sign anywhere even remotely near their highly mission-driven situations, although Chicago’s Gateway Foundation is reviewing strategic options with bankers. And the for-profit owner addictions center founders are being inundated with calls and have no interest to take anything less than the highest cash flow multiple pricings for their centers, some of which have eye-popping profit margins difficult to replace when it comes time to reinvest sales proceeds. What may wind up happening is that one of these big investment players may just decide they want in and have to pay the price, like CRC Health Group founder Barry Karlin did when he paid a reputed 13x for Sierra Tucson way back in 2005, with that $130M price and the multiple still very likely holding the record for the most ever paid for a single treatment center in history. In South Florida, for example, someone may decide 

American Addiction Campuses

On the other side of the spectrum is the tiny deal above describing the creation of Addiction Campuses of America, ACA. In its press release, ACA says it owns campuses “across the United States” and we certainly wish them well with that, but the reality for the moment is that ACA has just bought two tiny relatively unknown centers in the Deep South to form the beginning operating basis of the company. The largest is Turning Point Recovery with a staff of about 20 located in Southhaven, MS and serving the northern part of that state and the Memphis, TN area; and the other is an even smaller Christian outfit out of Mufreesboro, TN called Spring2Life.  ACA  is identified clearly in the press release as an acquisition platform and is funded by two small high growth focused investment funds, one called Fulcrum Equity Partners out of Atlanta and the other Harpath Capital of Nashville. The founder and presumably CEO of ACA is a marketer from Brentwood, TN called Brent Clements whose resume has him recently having some success on the marketing side, and his slightly more than a year at Michael Cartwright’s American Addiction Centers in 2012-13 appears to have very much influenced Addiction Campuses of America, right down to its name which is of course very similar to American Addiction Centers. Fulcrum says it was Clements’ desire to help people that impressed them enough to open their checkbook, but we here at Treatment Magazine suspect it was more his proven knowledge and experience getting “heads in beds” as an addictions marketer that was what probably really impressed both Fulcrum and Harpath enough to do a funding, that and the very strong potential investment prospects with consolidation of the many thousands of very small residential and outpatient centers across the nation.

Small, Nimble Capital

It is in this arena, the thousands of very little treatment centers, where small, nimble capital boutiques and private money has ample opportunity to score with paying low cash flow multiples and, with the right executive talent, add value and hit the jackpot. This is WAY WAY easier said than done. The key here, as always, is finding the right executive talent, of which there is a major shortage right now in the addictions industry. And by the right executive talent, we mean guys with experience and a dedication and proven ability to deliver high quality care, and who know where the bodies are likely to be buried. And to deliver quality care, you gotta have the right clinicians too, of which there is also a major shortage in the industry. We believe here at Treatment Magazine the key to the long term success of consolidation plays of large numbers of very small treatment centers is some kind of mechanism by the acquiring entity that raises and ensures a standard of care throughout as new centers are acquired.        

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