The Evolving Landscape Of Behavioral Health Transactions: Insights From Industry Professionals (Podcast) – Healthcare – Food, Drugs, Healthcare, Life Sciences

In this episode of “Counsel That Cares,” healthcare
attorney John Arnold and Erika
Haanpaa, a managing director at Cain Brothers, discuss
mergers and acquisitions (M&A) trends in the behavioral health
industry. Mr. Arnold and Ms. Haanpaa highlight increased investor
interest in the sector, particularly in autism-related services and
substance use disorder (SUD) treatment, along with labor challenges
and wage inflation that have affected areas including applied
behavioral analysis (ABA) therapy and intellectual and
developmental disabilities (IDD) services. The speakers also
examine the challenges that value-based care models face because of
difficulties in measuring outcomes and aligning incentives across
physical and mental health services. Looking ahead to 2025, Mr.
Arnold and Ms. Haanpaa predict a moderate increase in deal
activity, though not as robust as some are forecasting, with
continued interest in behavioral health investments driven by
ongoing market needs and maturation of existing private equity
portfolios.

Podcast Transcript

Morgan Ribeiro: Welcome to Counsel that Cares.
This is Morgan Ribeiro, the host of the podcast and a director in
the firm’s Healthcare Section. On today’s episode, we are
continuing a series we recently started with observations on trends
impacting our clients and the behavioral healthcare space. For this
conversation, I’m joined by John Arnold, a partner in the
firm’s Healthcare Transactions practice, and Erika Haanpaa, a
managing director at Cain Brothers. John and Erika are here to
provide insights on the evolving landscape for behavioral
healthcare transactions. While behavioral health mergers and
acquisitions activity over the last, past 12 months or so is down
from the levels that we saw in 2021 and 2022, we are still seeing
strong investment interest in the space, and key investment drivers
include the still-unmet social need for behavioral health
treatment, expanded third-party reimbursement and evolving business
models that create opportunity for established providers and new
entrance. At the same time, capital constraints, higher interest
rates, inflation, ongoing staffing challenges and lingering
economic uncertainty have made buyers more selective and placed an
even greater emphasis on due diligence and vetting applicable
regulatory and third-party reimbursement issues, which we will talk
about all of this in our conversation today with John and Erika.
And before we jump into our discussion, would love for each of you
to share more on your background and the work that you do in the
behavioral healthcare sector. So, Erika, I’ll turn it over to
you.

Erika Haanpaa: Thanks, Morgan. Hi everyone, I
am Erika Haanpaa. I am a managing director at Cain Brothers and I
run our behavioral health practice, and I spend all of my time
working with providers in the behavioral health space. And most of
that is focused on advisory buy-side, sell-side-type transactions,
but Cain Brothers is part of KeyBanc Capital Markets, which is a
full-service investment bank serving clients across all sectors and
all services and needs. I’ll leave it with that and happy to
share more as we have conversation.

Morgan Ribeiro: Thanks, Erika. John, how about
yourself?

John Arnold: Thanks, Morgan. I am a partner in
our nationally recognized Healthcare Transactions practice. I spend
100 percent of my time in the healthcare space working across
various healthcare services sectors. In addition to my work in ABA,
outpatient mental health, IDD addiction treatment and other
subsectors in the behavioral health space, I’m very active in
dental physician practice management and other outpatient
healthcare services sectors. I’d point to a part of the body or
name a specialty or provider type, I’ve probably done a deal in
that space. I predominantly represent PE groups in their portfolio
companies on transactional matters, but also handle sell-side
engagements involving private equity and strategic buyers. And
I’m usually the first phone call when a client has a legal
need, and it’s the diversity of my practice, both in terms of
the sectors I work in day-to-day work I’m doing, that is
probably my greatest source of stress but the thing I enjoy the
most about what I do well.

Morgan Ribeiro: Well, thank you both for that,
and let’s just get started and jump into the conversation.
First, I’d like to focus on where you are seeing transactions
happen across the behavioral healthcare sector. So, Erika I’ll
start with you, can you touch on what’s really driving the deal
activity that we’re currently seeing in the behavioral
healthcare space?

Erika Haanpaa: Yeah, I think this year it’s
really been autism that has been the most active, and part of that
— will probably talk about this a bit more later — part
of that is a little bit of when you think about the cycling of
performance that a lot of providers have seen in the space, that
for many 2022 was a bit slower year, then 2023 picked up and we
have, you know, a nice track record of positive performance for the
companies that have gone to market this year and are potentially
coming to market soon. And then within the other subsectors as SUD
seems to have a bit more, I’ll say, consistent deal flow,
doesn’t quite seem to cycle as much as what you might see in
other areas of behavioral health in that it’s perhaps a bit
more mature than some of the other subsectors as well. So there
hasn’t been as much of kind of cycle timing impacting the deal
flow there, and there are a number of tuck in that can happen in
just about any market in that space. You know, we’ve seen some
areas slow down a bit, not as much in eating disorders or mental
health really this year, at least not that I’ve seen. And IDD
has been a bit quieter for the past couple of years, but I think
those trends will probably shift again here in the near term.

Morgan Ribeiro: Right. And John, how about you?
Anything to add there?

John Arnold: Well, I agree with Erica on the
ABA space. I think we’re starting to see the 2.0 era of
investments in the ABA space. I think Erica’s behavioral
framework deal at the beginning of ’24, the spark that
jumpstarted deal activity for the year, and it’s not just
platform deals, I’m seeing an uptick in platforms using M&A
to grow. I do think the uptick in the add on-deals in the ABA space
will be less in part due to high interest rates and some existing
platforms not being well positioned to turn on the M&A. But I
think it’s also due to the ability of ABA companies to grow
organically and through de novo opportunities. I think for the same
reason, though, the cost of admission doesn’t have to be a
hundred-plus million-dollar platform deal. You know, it can be a
solid asset in a good region with the ability to expand into
attractive markets, that can be your first play in ABA. At the same
time, though, there’s not many large founder-owned assets out
there now, which can be a limiting factor for investors who are
looking to spend a little more capital but maybe don’t have the
capital to go out and buy an existing platform.

Erika Haanpaa: John, just to tag on to that, I
think in ABA there’s a ton of opportunity for organic growth,
as you mentioned, and there’s a little bit more complexity in
trying to do a tuck in that space when you think about the
perspectives of the clinicians and actually getting cultural
alignment, which is something that’s so hard to measure on a
piece of paper. So I think that that presents its own issue with
tuck-ins.

John Arnold: Yeah, I agree on the add-on deals
being the more complex for your traditional tuck-ins. I think there
are kind of nontraditional add-on deals where you have some
pre-2020 platforms that haven’t fully recovered from COVID and
post-COVID, you know, labor inflation cost and staffing issues that
are not bad businesses. But they’re not going to trade like a
traditional platform would, and those could be strong pickups for
existing platforms over the next 12 months, 24 months.

Erika Haanpaa: I agree with that point
completely, and I actually think there are probably a good number
of somewhat subscale that could be very complementary and have some
of that alignment and could mesh all together when you think about
the evolution of M&A in the ABA space.

Morgan Ribeiro: So, John, you mentioned
we’re going into, about 2.0. What is 1.0? What did that era
look like, and how does that differentiate from what we’re
seeing now kind of in this new era of investment?

John Arnold: Yeah, I think in the kind of 1.0
era there was everyone wanted to get in and they wanted to make a
splash, they moved quickly and they were often planting flags in
new states with, you know, good markets, good demographics, good
rates but that may be, you know, half a country over from where the
management team is and they’re predominantly home-based. While
I think the recent trend has been certainly more toward regional
density and center-based care, and I think it’s just much
easier to manage and operate a successful business when you’re
not spread thin in 15 states and you’re really dense and doing
well and, you know, in three to five states. Erica, you’ve
probably seen a shift in kind of how the valuations and financials
of the deals have changed somewhat.

Erika Haanpaa: Yeah, and I’ll say, I think
the home-based models are still in. Multistudy models still get a
lot of interest, and we can talk more about that later. But on the
overall kind of valuation impacts and agree with everything, what
you said about, you know, regional density and the like. On the
valuation impacts, I think what we’ve seen really shift in
there relates to investments in ABA platforms, is that, you know,
not 17, 18, 19, 20 kind of time frame, you would likely see full
maturity adjustments underwritten as it relates to the EBITDA. So I
don’t think the multiples have changed quite as much, but the
EBITDA that is underwritten has changed. So I think you can
justifiably and arguably get credit for run rate adjustments in,
you know, kind of looking at the EBITDA performance of businesses,
but getting credit for those earnings that are on the come,
that’s just much less likely to happen today.

John Arnold: You make a good point about the
home-based services versus center-based services and the
center-based services almost being an add-on to the home-based
programs, not shifting fully away from home-based. We also see a
bunch of school-based and, you know, certain school programs like
the business itself as a school for children with autism, and those
are attracting investor interest.

Erika Haanpaa: Yeah. And I think within that,
if you think about the ABA market in particular, the centers tend
to focus on kids that are before school age, whatever the exact
numbers are for any individual provider. But then the home-based
services allow for continuity of care and school-based, I should
say, of care, once a kid kind of graduates from that early
intervention center-based program. And there’s a lot of demand
for those services.

Morgan Ribeiro: You mentioned earlier IDD, we
can dive in that deeper on some of the trends that we’re seeing
there.

Erika Haanpaa: Sure. So within the IDD space, I
think we really haven’t seen much activity since 2021. Part of
that I would attribute to the labor challenges of, you know, late
’21. 2022 was a really tough labor year, especially in kind of
high turnover sectors and, you know, areas where you might have
lower wage staff that are performing some of the functions [that]
were hit really hard during that time frame when, you know, great
resignation, people not returning to the workforce post-COVID when
there was a really high demand for these services. Well that all
led to massive labor inflation for the cost of labor. So that
certainly impacted these providers. IDD doesn’t tend to be a
really strong margin business, it all depends on, you know, the
states, the rates and the wages. But that has a real impact on the
ability to transact when you’re seeing those types of
fundamentals impacted. That has all normalized now, I’m glad to
say, and you know, states are finally catching up with some of that
wage inflation. So it’s looking very positive, and I think
we’ll start to see more activity in the space.

Morgan Ribeiro: John, that so much of what
you’re seeing?

John Arnold: Yeah, I agree. It’s a very
fragmented market. I think a lot of the main providers and markets
are still nonprofit, and faith-based, in and of itself, can make
transacting, you know, difficult. And from an investor’s
perspective, it is more complex than other behavioral health
sectors. It is more complex than an ABA business. Reimbursement
rates can vary wildly by market. Programs are almost exclusively
waiver-based programs. Sometimes there’s other funding from the
state and local government agencies, so you can be highly dependent
on those agencies for your funding, and kind of the diversification
of your revenue streams, I think, is important here. I think, as
Eric noted, I mean, it’s a space where the impact of labor
inflation cost and staff shortages was particularly significant, I
think, even relative to other behavioral health spaces.

Morgan Ribeiro: Switching gears a little bit to
substance abuse, I know that’s an area where we’ve seen a
lot of activity in over the last few years or some larger
platforms. I would say this is one area in particular where
we’re seeing some regulatory headwinds. Erika, we want to talk
about what you’re seeing in this space in terms of deal
activity.

Erika Haanpaa: I’ll say Morgan, my ears
kind of caught up when you said regulatory headwinds, and I was
thinking maybe John can talk a little bit about that.

John Arnold: Yeah, I think, look, there’s
been not always the best press releases about substance abuse
disorder facilities programs, and it’s a space where I think
there’s just increasing kind of regulatory scrutiny, not
necessarily in the sense of AG oversight and big scary things
everyone’s been focused on for the last few months, but more so
AHCA and fraud and abuse issues, just licensure issues. When we
look at a residential, you know, SUD business, one of the things we
often have to talk to our clients about when we’re on the buy
side, maybe this is their first investment in the space, is, you
know, look, the facility did have 17 licensure violations last
year. Of those, 17, 16 were fairly normal course for this type of
business considering the patient population services they’re
providing and other factors. Here’s the one you really need to
worry about, right? So it’s kind of one licensure violation.
That’s a unique way of having to look at things. You’re not
used to it that way. It is an area where I think there is kind of
more regulatory scrutiny, more ways of kind of messing things up
and where I think the compliance function becomes more important
than it does in perhaps like, you know, in ABA space. Not to say
it’s not important there, but there’s just more with the
job and more to be attentive to if you’re running, you know,
inpatient substance abuse facility, right.

Erika Haanpaa: Well, and I think actually that
brought out one of the main factors for me, is I think about SUD
treatment facilities because there is a wide variety of quality and
compliance as it relates to those programs. The ones that are most
actionable in terms of a transaction are those that are most
compliant and have high-quality reputations. And from an overall
market perspective, I think there always is demand from an
acquisition, like appetite for an acquisition of a high-quality SUD
treatment provider, because the demand for these services isn’t
going away, it just continues to grow and get worse. And you know,
the providers that are focused on and driving and delivering that
quality care are the ones that also have the best relationships
with the referral sources, the payers, and good reputations just
across the broader community. And there’s demand for that.

John Arnold: I think the programs that are on
top of compliance are on top of outcomes. You know, they can tell
you, here’s our patient dropout rate and here’s the data
that backs up the success of our treatment programs. And then those
that you know, have built out and have a comprehensive service
program, right, because these patients typically have dual
diagnoses. And that allows for introducing your psychiatric and
other outpatient services expanding into IOPs. I think the programs
that, you know, offer the more comprehensive service offerings are
going to be best positioned and more attractive to investors in the
long run.

Morgan Ribeiro: Well. And then another area
that’s been growing even beforehand, but particularly
post-COVID, it’s teen and youth services. And that kind of
covers the gamut. But primarily, you know, those that have been
diagnosed with depression or anxiety or other behavioral health
disorders. So maybe talking about some of the programs and
investments that are happening in that space.

Erika Haanpaa: So I think there’s a lot of
demand for investment in that space and a lot of interest. There
just aren’t a ton of scaled or semi-scale of assets out there.
There are a handful. But beyond that, there’s a lot of kind of
smaller providers that are starting to gain traction. And I think
part of that is we talk a lot about the evolution and time frame
for the growth of these different subsectors within behavioral
health. I’m just not sure there was quite as much an
appreciation for the need for services for this population in
particular. Of course, like we had seen Newport and some of the
other providers, but there weren’t a ton that were focused on
this, until kind of COVID, I think that’s when the awareness
really shot through the roof for these services.

John Arnold: I agree. I mean, post-COVID,
you’ve got these shifting societal views resulting in, you
know, what I would describe generally as like a very positive focus
on teen and youth behavioral health. And then increased instances
of teens and youth being diagnosed with depression and anxiety.
Studies showing that the keys to long-term treatment success is
early diagnosis and intervention and treatment and probably not
where it should be, but increased funding and some legislative
reforms focused on it. But to your point, almost in its infancy,
everyone kind of sees the tailwinds, but kind of what’s out
there, right? So like in the PHP/IOP space, not much of any scale
in the market right now that we are seeing kind of start up to know
those who are entering that space. And so maybe deal activity there
is, you know, 18, 24, 36 months out perhaps, and then, you know,
programs for youth, got to take a step back, they’re going to
be structured differently, I think, than those for adults. Right.
If you’ve got a IOP program, you got to account for the fact
kids are in school. They’ve got all sorts of activities that
they’re doing these days, probably many of which are
contributing to their stress and anxiety. You know, they do. I know
how jampacked my kids’ days are and, you know, in IOP program,
it’s called an intensive outpatient program for a reason. So
even if you’ve got something successfully happening in the
adult space, it’s probably not going to translate perfectly to
the youth space. It’s not as simple as just changing the name
to youth or teens and doing the same thing.

Erika Haanpaa: Well and I think on that point,
it’s important that you have clinicians that are focused on
working with that population to deliver the outcomes that
everyone’s looking for. You mentioned it being in its infancy,
so there are residential, some IOP programs, also companies that
are delivering services in schools. So I think we’ll see a
variety of ways people are tackling this problem, but it’s
really just getting started.

John Arnold: Yeah. And I think less intensive,
kind of more traditional outpatient end of the market counselors, I
think there are some reimbursement issues there. It’s a very
fragmented, open space right now where there’s a lot of
opportunity, I think, to improve care, be a part of the solution
here. But it’s so fragmented, reimbursement rates are so low,
that it’s challenging to kind of make that work.

Morgan Ribeiro: Over the last few years,
we’ve heard a lot about the impact of labor and wages, I would
say, overall, in healthcare, but particularly the impact it had on
behavioral healthcare sector as a whole, but particularly on deals.
So can you talk more about the impact of labor and wages?

Erika Haanpaa: I think it hit the IDD and ABA
spaces hardest, probably. Because those are subsectors that have
traditionally high turnover. Anyway, in normal times they have
pretty high turnover, and that’s part of being a growing
provider in those services. But when you add another 10-20 percent
turnover rates and something that might already be as high as 80
percent, that makes it really hard to keep up with the staff needs,
not only to support your existing clients because you need to
refill that slot for somebody that recently left. Then to think
about adding staff or new hires, especially in a time when people
would accept the job and not show up. And we were seeing that kind
of thing. It made growth really hard to come by in those industries
and then created some pressure on the margins. I think we saw many
different ways people tackled the labor challenges, and I think
many of the businesses in the space are frankly more resilient for
it today because they have come up with creative solutions to
source talent, to train talent and to have a clear pipeline of
talent to support the growth that they’re expecting.

John Arnold: Yeah, I agree with that. I mean,
you can look at the ABA space. Recent study I saw said that there
were less than 100,000, I think less than 70,000 BCBAs in the U.S.
There’s over 2 million children diagnosed with autism. So
you’ve got staff shortage to begin with. You’ve got labor
inflation costs, and they’re down by a few percentage points,
that doesn’t mean the cost of the labor is not an ongoing
concern. I will say I’m hearing less about rising labor costs
and conversations have kind of returned to the, I think, recurring
issue of like turnover. Right. We were talking about that in 2018.
We’re talking about that today. 2018 we weren’t talking so
much about labor inflation costs. So the staff turnover point I
think is just somewhat inherent in the business. And it’s
really not surprising. I mean, these staff work physically
demanding jobs with high-need patients, and when reimbursement
rates in ABA, for example, have kind of stagnated in some markets,
I mean, it makes the wage inflation issue much more challenging,
right? It’s going to continue to be, I think, a factor that
folks are looking at when they’re making their investments. But
I do feel like it has changed now toward the conversations we were
having in, you know, 2018, 2019, pre-COVID about staff turnover,
right. Like what is your staff turnover rate, how do you retain and
train your providers? And it’s not so much about the cost of
labor anymore, but it’s still there. And then, you know, I
would just say my experience is anecdotal, but it’s certainly
been that this is usually a mission-driven career for many
providers, especially those who have, you know, gone to
postgraduate programs and gotten license, so BCBA, for example. And
I think having a business that shares their mission and is focused
on outcomes and supporting their delivery of care is the best thing
you can do. And I think that’s going to overcome a lot of a lot
of issues. I think that’s where folks have been devoting their
time and resources in the last few years.

Erika Haanpaa: I agree with you. I think that
certainly rings true for the kind of more senior kind of
master’s level clinicians. I think on the technician side,
you’ll certainly have a subset of those that see this as a
long-term career. But part of that workforce tends to be a more
transient workforce, and that’s just part of the business.

John Arnold: And this is not a warning, and I
would not call this a trend because what I’ve seen has been
pretty region-specific and recent, but I have seen an increased in
organized labor in the behavioral space in the last few months. It
again, may just be recent experience, I’m suggesting that this
is something to watch for. But the reasons behind, you know,
organized labor, if you look at nurses who have organized, right?
It’s really not that different than in the behavioral health
space. So just something to watch out for and pay attention to in
the coming months to see if that picks up.

Morgan Ribeiro: Let’s talk about what’s
important to buyers as they’re out there in the market. I mean,
of course they’re interested in EBITDA and the financial
metrics, but it seems like clinical outcomes and quality are
increasingly important component and how they’re really
measuring that when they’re looking at positions or
investments.

Erika Haanpaa: So I guess my answer would be
there isn’t a consistent way outcomes are measured, but as a
provider that will frankly be more interesting in a process, and
when demonstrating outcomes, I feel it’s imperative on the
provider to decide which outcomes are important to them and be
demonstrating those outcomes for the payers and everyone in their
ecosystem. I think within behavioral health, because there
isn’t like a specific blood marker that you can show
improvement in — certainly you can show goals mastered in
ABA, but how they’re identifying, tracking and measuring those
goals can vary from provider to provider and which scores we’re
looking at in assessments, those things can be variable — but
that the provider within their organization is doing something to
keep an eye on outcomes and trends and has defined what good is for
them, I think, is an important piece of that.

Morgan Ribeiro: One of the things that
we’ve seen just in terms of overall, just at a federal and
state level, some of this scrutiny around private equity or kind of
investor-backed healthcare that we need to maybe dispel some of
those perceptions. Is that something that you’ve seen in
working with your clients in the behavioral health space in
particular?

John Arnold: Yeah, we can debate some other
time. Some of the messaging out there around private equity
investments in healthcare. One can say with confidence is the
resources and capital that private equity can bring to the table is
invaluable for many of these businesses that are often mom and pop
businesses that did not have the resources. They did not have the
sophistication. They didn’t have the expertise to develop and
implement a robust compliance program to do a HIPPA security risk
assessment. They didn’t even know what that was, right? And so
I think what we see, especially when you go to the recap, is
you’ve got a company that, you know, started with like little
to no compliance infrastructure, and through the investments and
expertise, sophistication, that that investor brought to the table,
now have a thriving, robust compliance program that’s operating
as it should be. They are auditing the charters of new providers
who start, they are following up with them and educating them on
issues, they’re doing their rogue exclusion checks on a monthly
basis and the state-level exclusion checks on a monthly basis,
they’re doing their annual, have a security risk assessment. So
they’re doing the right things that you don’t see in
companies that lack that kind of capital and resources. And what I
think is often missing from the discussions is the ability of
private equity-backed behavioral health platforms to serve the
neediest populations, where maybe the reimbursement rates
aren’t as great, but because they can bring scale, they can
innovate, they are able to successfully serve those populations and
have great outcomes. And that’s not talked about. I will leave
it at that. But there are certainly two sides to the story
that’s being told out there. And it seems like one side
certainly kind of getting most of the words, and there are so many
great things that these companies bring to the table.

Morgan Ribeiro: Absolutely. Yeah. So I want to
maybe switch gears a bit, but it’s also a term that I feel like
gets a lot of play and would like to get your feedback on it. I was
actually just at a conference this week, and one of the speakers
said that value-based care is sort of a wastebasket term.
There’s a lot of questions, I think broadly across healthcare,
about the success of value-based care and some of those
initiatives. What are you all seeing in terms of value-based plays
in the behavioral health space?

Erika Haanpaa: I think value-based care and
behavioral health gets a lot of talk, but the ability to implement
something that is truly value-based is exceedingly challenging,
especially when you think about, within the payer system, the
behavioral side and the physical healthcare side are separate. And
if you wanted something that was truly value-based, frankly, a lot
of the savings on behavioral interventions may actually come in the
reduction of physical healthcare costs, and within the peer
organization, one side of the house isn’t incentivized to save
money for the other side of the house. It’s really hard to
create something that is truly value-based. It’s not even
really the incentives. They don’t necessarily have insight into
what’s happening with those outcomes, right, in those savings
that occur. And they may be occurring, you know, a couple of years
down the road versus in the next 30 days.

John Arnold: I agree, I think value-based care
in the behavioral health sector is squishy at best right now. It is
a great concept. It is something to strive for. But the practical
realities of it and the current highly fragmented market where
there’s often, you know, not the scale and data necessary to
truly implement something meaningful. I don’t see it happening
in a very meaningful way now or, you know, probably in the next few
years. It is a process.

Erika Haanpaa: Going back to that, one of the
points I made earlier, there isn’t a consistent way to measure
outcomes and show improvement across all areas of behavioral health
as well. So that makes it even harder.

John Arnold: And even in certain sectors where
on paper it makes sense. So you can think like substance abuse
disorder, you know, medication assisted therapy or office-based
opioid treatment, much cheaper than residential settings, much
cheaper than someone being in the hospital. That should be
something where on paper, value-based care makes sense, but
actually implementing that’s a totally different story.

Morgan Ribeiro: Absolutely. Can I switch gears
here a little bit back to what we were discussing earlier, John,
around going to private equity- and investor-backed behavioral
health. Of course, the state legislation that’s being
considered kind of across the country in various states around
private equity investments and healthcare practices. California
bill AB 3129 has received a lot of attention, and fortunately for
many, Governor Newsom did recognize that there was duplication in
that legislation that had passed there and ended up, you know,
vetoing that. I think that there’s still a lot to be considered
here and how that impacts behavioral healthcare deals that are
getting done at a state-by-state level. So if you were to do an
acquisition or you’re looking to sell a practice in a certain
state like Indiana or Oregon or California, that’s going to
impact how deals get done. So, John, maybe you can talk more
specifically about some of the state legislative actions that
we’ve seen over the last 12 months or so.

John Arnold: Yeah. Thankfully, Governor Newsom,
you know, did veto AB 3129, citing it being duplicative of
legislation that it passed for them in the last 12 months or so. It
certainly would have been detrimental to healthcare access and
costs, I think, and introduced significant uncertainty and
ambiguity internally. We had assessed the bill, and you know, we
had a running list that was two pages long of very fundamental,
straightforward questions about, you know, what does this mean?
Right? So the bill was very concerning, and thankfully it was
vetoed. It hasn’t stopped the train, though. There’s
legislation pending in Pennsylvania right now. Indiana recently
passed something. You noted the legislation that was passed in
Oregon. And I think it’s notable that AB 3129 and many of these
other bills, you know, do pick up licensed counselors,
psychologists and other forms of behavioral health providers. And
so I think that they’re kind of more extreme and they are
picking up kind of the full spectrum of healthcare providers from
hospitals to marriage and family therapists. At the other end of
the spectrum, you know, I think they’re kind of honing in on
licensed healthcare facilities. So I mentioned the Pennsylvania
bill as an example. Current iteration of that — it’s
evolving by the day almost — but the current iteration of
that has kind of really narrowed it down to kind of healthcare
facilities and health systems. So there’s kind of a licensure
component to what’s pending there. My hope is that we’ve
reached the peak of this frenzy of states targeting private equity
investments in healthcare, or at least that legislatures will take
a step back and take a more thoughtful and informed approach to the
issue. Again, we can debate pros and cons of private equity
investments in healthcare, but any debate like that has to at least
start with acknowledging that, you know, private equity investments
can and often do lower healthcare costs, increase access to care,
improve outcomes, support services to the most needy populations.
And they’re able to do that because they have access to
capital, resources and sophistication that non-feedback companies
just simply don’t have.

Morgan Ribeiro: Going along the lines of deal
making, I think obviously that impacts, you know, our kind of
statement as a firm has been around you know, the sky is not
falling, right. I think it’s just really considering how these
legislative actions could potentially impact how the deal gets
done, the timeline and sort of sticking through that. If you’re
aiming to get a deal close by a certain date, sort of factoring in
the states’ specific licensing requirements, etc. So I also
think over the years, you know, the cadence of deals and the timing
to close has shifted quite a bit. And in the behavioral setting,
I’m just curious — maybe, Erika, you can lead on this one
— what that timing looks like from start to close and some of
those considerations for those who are listening, who are looking
to get deals done in this space.

Erika Haanpaa: Yeah. In fact, this has been
across all of healthcare. The timing kind of in the initial phases
of sale process. So preparation that always varies a bit, but we
want to do as much work as we can in the preparation phase. But
from the timing of starting to reach out to buyers, you know, that
timeline to indications of interest and letters of intent for a
kind of, call it a traditional auction process, that hasn’t
changed that much. It fluctuates a bit with each client, but
it’s, you know, a couple months. What has changed is the timing
between getting a letter of intent and closing a transaction. At
least in my perspective, what I’ve seen, it seems to take a bit
longer in terms of the timing to complete all that due diligence,
kind of get the rep and warranty policy underwritten and then, you
know, kind of sign and then subsequently close the transaction. Of
course, part of that is the regulatory, which is out of
anyone’s control, but the timing to, you know, get to sign a
purchase agreement and do all the diligence, that does seem to be
taking a bit longer where it’s, you know, maybe a couple of
years ago it would be 30 days and almost everything would be done.
Now it seems more like two months based on the transactions.

John Arnold: I agree. And the other area where
I’ve seen a little bit of a shift has been, these are probably
more vintage companies who are kind of going to market, the
reaction they’re getting isn’t maybe what they were looking
for. And so I’ve got several that have kind of been stop and go
for the last 18 months. We’ve started a process two or three
times. We’ve kind of slowed it down. And I think that’s
been a product of a whole host of factors that we’ve already
talked about. And a lot of it interest rate-driven issues for some
buyers and trying to kind of make the economics of it all work. But
I do think in the last six months or so, that has stopped for the
most part. I think it’s been a go. It’s been a go. So
I’m not seeing that as much as I was just, you know, one or two
that are a little stop and go but that’s been positive. So I
think some of the just the uncertainty around dealmaking generally
is kind of phasing out at this point, and that, that wasn’t the
case, you know, this time last year.

Erika Haanpaa: I agree completely.

Morgan Ribeiro: Last question for you guys.
We’re obviously, hard to believe, heading into the end of the
year and starting to look towards 2025. You all have any sort of
predictions and what we can anticipate in the behavioral healthcare
sector for next year?

Erika Haanpaa: Well, I’d say broadly across
dealmaking, I hear a lot of talk about activity kicking off very
robustly in 2025 with more things getting ready to come. Maybe
I’m slightly optimistic, but not quite as optimistic as that
talk would lead me to perhaps be. Maybe a little bit of skepticism,
maybe healthy skepticism after what the past couple of years has
been. But I do think the transactions we’ve seen this year,
particularly in ABA, but in other areas as well, are leaning toward
continued momentum, I think, and behavioral.

John Arnold: I agree. And if you just were to
look at the market of existing PE-backed companies and you do the
simple math on how long they have been invested in those companies
and what their typical timeline is to sell those companies, I
think, you know, there’s a number out there that needs to go to
market for liquidity purposes. But just more generally, I think the
activity is going to be picking up. I’m not as optimistic as
others, but I also think the past few years haven’t been as
down as people may lead you to believe. I think it’s relatively
steady if you look at it linearly and 2021 part of it.

Erika Haanpaa: Ignore that big spike.

John Arnold: It’s about kind of resetting
what expectations are. It’s just disingenuous to think that
2021 is like the new normal. It’s not. If you look at it as
kind of more linearly, where are we? I don’t think activity has
slowed to the extent that people have made it sound. I mean, you
can look at the stats and they kind of are what they are, but, you
know, we’ve certainly been steady. Has it slowed down a little
bit? Sure. But is it dropped off? No, not at all. And I think the
interest rate environment is kind of normalizing. So I think all
the fundamentals are there for 2025 to be busier than 2024 was for
sure.

Erika Haanpaa: I agree.

Morgan Ribeiro: Well, that’s exciting. I
look forward to checking back in with you guys this time next year.
See if our predictions were correct. Appreciate your time, both of
you today. And always a pleasure to talk to you.

Erika Haanpaa: Sounds like a plan. Thank
you.

John Arnold: Thanks, Morgan.

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