All in the mind

After years of investing in healthcare, Thoma Cressey Partners is developing a strategy for pursuing specialty mental health providers, a sector the firm says is poised for growth. Dave Keating reports.

When Mort Geller had an idea for a new behavioral healthcare business in 1990, he knew the area well. His daughter Jena had been suffering from anorexia for years and, in trying to help her, Keller found that there weren’t very many treatment options that matched her needs.

It was for this reason that Keller, who already owned a hospital services company in Phoenix, bought Remuda Ranch in Wickenburg, Arizona. He converted the town’s most prominent dude ranch into a Christian-based treatment center for women and girls with eating disorders.

The center had such a tremendous response thatm within a few years, three other behavioral treatment centers opened nearby, and the whole town soon transformed into a magnet for the those seeking mental care. Today people come to Wickenburg to treat eating disorders, personality problems, mental disorders, and addictions to drugs, sex or alcohol.

Peter Ehrich, Thoma Cressey Partners

Peter Ehrich, a partner with Thoma Cressey Partners, says the firm has noticed that many companies within the specialty behavioral healthcare sector have taken off in the last decade. It was for this reason that the firm decided to target this area.

“For a couple years we’ve been looking at the behavioral healthcare business,” he says. “We concluded that we didn’t want to go head-to-head with general psychological inpatient businesses, but we realized that there’s an outstanding opportunity in a number of these smaller behavioral inpatient niches. There are people suffering that are not getting the type of care they need.”

Thoma Cressey decided to go after these opportunities by creating a platform company called Haven Behavioral Healthcare in May. The company, based in Nashville, Tennessee, will be led by chief executive officer Vern Westrich, the former president of the behavioral health division of Ardent Health Services. This month the company made its first acquisition, buying Remuda Ranch for an undisclosed amount. The investment came from the firm’s eighth fund, a recently closed a $765 million (€609 million) vehicle that will focus on deals between $40 million and $100 million.

Thoma Cressey isn’t the only private equity firm to be eyeing the mental health sector. Last year saw London-based Cinven’s £552 million ($1.03 billion) acquisition of psychiatric care business Partnerships in Care from its parent company General Healthcare Group. Last year also saw a lucrative exit by London-based Doughty Hanson from British mental healthcare provider Priory Group. The deal was valued at £875 million, returning an IRR of 71 percent over three years. Banc of America Capital Investors has also seen success with its current portfolio company Ardent Health Services, also based in Tennessee.

But Ehrich says Thoma Cressey has developed a different sort of strategy. Rather

There are people suffering that are not getting the type of care they need.

Peter Ehrich

than going after huge behavioral healthcare companies like Franklin, Tennessee-based Psychiatric Solutions, which has 61 inpatient facilities across the country, it will focus on small, specialty treatment centers. But Ehrich cautions that even for these small companies, the regulatory environment can be challenging. That’s where he hopes the firm’s healthcare expertise will prove useful.

“Our firm has invested in regular hospitals for 25 years,” he says. “Psychiatric hospitals are even more regulated, it’s quite possibly one of the most regulated environments out there. You’ve got to have exceptional management, a corporate culture that doesn’t cut corners and, of course, be compliant at all times.”