The autism services sector dominated behavioral health mergers and acquisitions (M&A) in the third quarter of 2019, accounting for nearly half of all transactions, according to data from Mertz Taggart, a leading mergers and acquisitions advisory firm.
Out of the 19 behavioral health deals completed in Q3, eight involved autism and applied behavioral analysis (ABA) service providers. This trend highlights the growing interest of private equity (PE) platforms in the autism space, with 2019 showing a significant increase in activity compared to the previous year.
Private Equity’s Growing Interest in Autism Services
Private equity investment in autism and ABA services has seen a notable uptick. Year-to-date, PE platforms have accounted for eight transactions in the sector, compared to only five during the same period in 2018. According to Mertz Taggart’s Q3 Behavioral Health M&A Report, this momentum is expected to continue.
“Multiple secondary transactions should be expected in subsequent quarters as investors look to add scale and build out more comprehensive portfolios,” said Kevin Taggart, Managing Partner at Mertz Taggart.
Several factors are driving this heightened interest. The autism industry remains highly fragmented, with many small providers operating independently. Additionally, demand for autism services continues to rise, creating a lucrative market for investors. As managed care organizations increasingly deliver autism services under Medicaid, providers of scale are becoming more valuable to payers and investors alike.
“Many of the buyers will also be eager to make connections with payers as they operationalize care delivery across wider geographic areas,” Taggart added.
Overall Behavioral Health M&A Activity Declines
Despite the strong performance of autism-related deals, overall behavioral health M&A activity experienced a decline in Q3 2019, both month-over-month and year-over-year. The quarter saw 19 behavioral health transactions, down from 25 in Q2 and 23 in Q3 2018.
With fewer than 60 behavioral health transactions recorded year-to-date, it appears likely that 2019 will end with a lower deal volume than 2018, which saw nearly 100 transactions. A key factor contributing to this downturn is the decline in addiction treatment deals.
Addiction Treatment Transactions See Significant Drop
The addiction treatment subsector has been a major driver of the overall decline in behavioral health M&A activity. In Q3 2019, there were only seven addiction treatment transactions, a steep drop from the 17 recorded during the same period in 2018. However, the Mertz Taggart report notes that “early indicators point to a possible upswing to round out the year.”
The decline in addiction treatment transactions may be attributed to increased regulatory scrutiny and reimbursement challenges in the sector, which have made investors more cautious. While the long-term outlook for the industry remains positive, many stakeholders are adopting a more measured approach to acquisitions.
Mental Health Deals Show Modest Growth
Unlike addiction treatment transactions, mental health deals saw a slight increase in Q3 2019. The quarter recorded four mental health-related transactions, up from three in Q3 2018. However, this was a decline from Q2 2019, which saw seven deals in the subsector.
The modest increase in mental health M&A activity suggests that investors continue to see value in the sector, particularly in outpatient and telehealth services, which have become increasingly popular among payers and providers alike.
The Long-Term Outlook for Behavioral Health M&A
Despite the overall decline in 2019 deal activity, the behavioral health industry remains an attractive space for investors. According to Mertz Taggart’s Kevin Taggart, the sector has been on a sustained wave of M&A activity for several years, and this trend is likely to continue.
“Behavioral health has been on a sustained wave of M&A activity for the past several years,” Taggart said. “Scale continues to be the primary focus among private equity investors and strategic buyers alike with a goal to increase long-term value.”
As demand for behavioral health services continues to grow, investors will likely remain interested in opportunities to consolidate and scale businesses, particularly in high-demand areas like autism services. The coming quarters will reveal whether the recent slowdown in M&A activity is a temporary dip or part of a broader shift in investor sentiment.
