By Sarah Pringle, PE Hub
Sponsors are fleshing out the best ways to invest in the autism sector as demand for treatment services grows and as an evolving reimbursement market calls for more sophisticated models of care.
On the heels of private equity’s biggest bet in the sector to date — FFL Partners’ $270 million-plus deal for Autism Learning Partners — the noise around autism-treatment has only increased in the first weeks of the year.
KKR provided even more validation to the sector in January when it invested in newly formed Blue Sprig Pediatric. Around the same time, industry giant Center for Autism and Related Disorders kicked off an auction, Buyouts reported.
Industry ‘just starting to evolve’
“This industry is just starting to evolve,” said Ali Satvat, who leads KKR’s new $1.45 billion strategic growth fund through which it backed Blue Sprig. “There are players that do one thing well and players that do another thing well. … The complexity of and [number] of different models in the space really reinforces why we think management is so important here.”
Others financial buyers with a vested interest agreed. Despite favorable underlying drivers and a lot of eager buyers, the autism sector encompasses hundreds if not thousands of rapidly growing providers, many of which are small operations. That makes finding strong management teams with institutional quality a tough feat, sources have said.
“The impediment to grow for a lot of these companies is professional management, so well run companies are at a premium,” said John Hennegan, whose Chicago PE shop Shore Capital Partners has invested in three providers.
KKR, for its part, partnered with former PSA Healthcare COO Keith Jones to launch Blue Sprig, a deal that Satvat said came after it canvassed some 30 or so potential opportunities. Jones, adding that they’ve now looked at double or so that number, will serve as CEO of Blue Sprig. The Houston group just closed on a second investment, which has yet to be announced, Jones noted.
In many ways the PE interest in autism treatment, and particularly in the applied behavioral analysis, or ABA, method of therapy, is similar to the evolution that’s occurred in other healthcare-services markets.
For instance, unlike dental, which remains fragmented, autism treatment still has a ways to go in terms of establishing what makes a true platform or what makes a fair deal multiple for a given model, Satvat said. “In autism we still haven’t figured that out as a market,” he said.
The industry may be in its early innings, but several sponsors have already scored a piece of the market. At least a dozen platform-like groups and several other behavioral-health businesses with an autism component have received financial backing.
High price tags have added to the buzz.
The highly anticipated ALP auction produced a deal valued at a mid-to-high-teen multiple of Ebitda, while Stepping Stones Group and Invo Healthcare Associates, which recruit and place therapists in schools, were said to have produced deals valued around the 14x to 15x Ebitda range, Buyouts reported.
“The Invo, ALP, Stepping Stones and Learn It deals … have crystallized the potential value in the market. So you’re seeing bigger funds get very aggressive for smaller companies,” said Shore’s Hennegan.
LLR Partners bought Baltimore ABA-therapy group Learn It Systems in May 2016 from Milestone Partners.
Shore owns both Orlando’s Florida Autism Center and Dallas’s Behavioral Innovations. Hennegan said BI is seeking add-ons in the Texas market. The firm also retained a minority interest in Stepping Stones, though it made about 7x its money when it sold a majority stake to Rothschild Merchant Banking affiliate Five Arrows Capital Partners in January, Buyouts reported.
Other sponsors that have invested in the space include Wicks Group, Jordan Co, Baird Capital, Petra Capital and WindRose Health Investors (formerly MTS Health Investors).
Among the latest to join the fray is Pharos Capital Group, which through Family Treatment Network in January purchased ABA-therapy provider Behavior Care Specialists.
In another January deal, Altamont Capital Management through Sequel Youth and Family Services scooped up a pair of New York City special-needs schools — one that concentrates on autism — from Veronis Suhler Stevenson-owned MetSchools.
And another deal may be brewing. Trimaran Capital-backed ChanceLight, a small piece of which is focused on autism treatment, is also exploring a potential sale, Buyouts recently reported.
“Valuations in the sector are high and that may make it difficult for some people to find an entry point from a valuation standpoint,” said Petra Capital’s David Fitzgerald, whose Nashville firm owns Alternate Behavioral Strategies, a Salt Lake City ABA therapy provider. “More than anything, you just don’t have a lot of businesses of scale.”
The fact that there are so few players of scale also makes it an appealing area for PE, as does the supply and demand imbalance, Fitzgerald noted.
And then there’s the rapid expansion in the rate of diagnosis. The Centers for Disease Control and Prevention recently estimated that one in 68 children has an autism spectrum disorder.
A recognition that payers are calling for a standardizing of care protocols in the industry has also fueled sponsor enthusiasm. Because commercial insurers in 46 states now must cover autism services, treatment for autism-spectrum disorder has more funding than ever, which begs for a more cost-effective system of care.
“There’s an increasing expectation for providers in this space to be able to document quality care, document quality outcomes and act in a medical-model capacity,” Blue Sprig’s Jones said, explaining that many groups in the past didn’t need to collaborate with commercial insurers.
In other words, many small providers historically depended on reimbursement from Medicaid and other government programs. Now there’s an opportunity to boost reimbursement and margins.
“There’s hyper-fragmentation and the large providers in the space today … have a journey to embark on in order to professionalize themselves,” Jones said.
Besides migrating to relationships with providers that effectively measure quality and benchmark outcomes, Petra’s Fitzgerald added that he expects payers to increasingly seek models that touch on the full continuum of care as opposed to just one setting.
The market as it stands includes home-based, school-based, center-based and staffing providers. The various models have all received interest from financial buyers, but sources expect more hybrid approaches will emerge as sponsors look to build larger groups.
While Blue Sprig plans to lean toward the center-based model, having a comprehensive set of services will be important to become a scale provider, Jones said.
Still, a lot of these small firms are literally mom and pops, Satvat added. “They’re parents and families that grew [businesses] out of personal interest and need to solve a problem,” he said. “We see the unmet need, but we also see the reality of what’s in the market right now.”
Satvat declined to divulge how much capital KKR has reserved for Blue Sprig, but called it well-capitalized.
While initial plans are to grow in Texas, he hinted that the idea is to create a player of scale that stretches beyond a regional provider, with no intentions for a quick flip.
“We’re very actively engaged right now,” Satvat said. “The pipeline has probably never been richer. It does allow us to be selective on partnering with good approaches.”