Private Equity Looking at Rehab Companies in the US


December 9, 2014

The recent healthcare law in the US has had an impact on private equity firms’ interests. As more Americans are now covered for addiction treatment, valuations for rehab companies have been going up and private equity firms have been quick to move in.


The Law
Reuters reported yesterday how the changes in the law have attracted private equity firms to this new area in healthcare. Under Barack Obama’s healthcare law, ten core health benefit areas are covered and these include substance abuse and mental health disorders, for instance different addiction treatments.


As young adults are also covered under their parents’ insurance plans until they are 26, more young people are able to receive affordable treatment for drug abuse and eating disorders.
Furthermore, the economic recovery in the US is moving along, albeit slowly, which means more people can afford rehab treatments now.


Improved Profit Margins
All of the above has benefitted rehab clinics. The prices for treatment have been climbing up and clinics have been able to bring down costs, as there is constantly more demand than supply.
According to the National Institute on Drug Abuse, there are currently over 14,500 specialised drug abuse and addiction treatment facilities. Yet the industry remains very fragmented, which has opened up room for consolidation.


Bigger clinics, as well as private clinics that don’t rely on government-backed insurance, would be more able to run higher margins. Brokerage William Blair had reportedly estimated that, “earnings before interest, tax, depreciation and amortisation (EBITDA) margins at rehab treatment centers, as a percentage of revenue, can reach as high as 25 percent”.


This has led to increase in evaluations of these companies. Listed companies have also been trading at much bigger values and this has helped attract private equity companies both in terms of selling existing assets, as well as buying them.


Private Equity Moves In
Private equity firms have been keen to move into the market. A managing director from an investment bank Harris Williams & Co told Reuters, “The appetite among private equity firms for these assets tends to be greater because there is less payer reimbursement risk and the growth opportunities are so great”. Experts believe the market for rehab clinics has grown from $21 billion a year in 2003 to $35 billion a year at the moment.


One of the biggest deals was the private equity arm of Goldman Sachs Group Inc. investing in Advanced Recovery Systems late last year. The private equity firm Bain Capital also took hold of one Habit OPCO Inc. in a deal worth $58 million.


There are further rumors that private equity firms are looking into other companies in the industry. One large substance abuse service provider AAC Holdings Inc. went public at the start of October and so far, it has seen share rises up to 70%.


Private equity firms that are already holding these clinics are also looking to sell their stakes. There have been rumors that private equity and venture capital firm Frazier Healthcare is looking for a potential buyer for its stakes in the Elements Behavioral Health company. So interest towards the field is currently buzzing.

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