Would you rather flip burgers or work for Blackstone?
Autism platform bankrupt after labor market disaster
Transacted
June 18, 2023
Happy Sunday. Let’s get started:
Certain deals are bellwethers within their niche or vertical — everyone has their eye on the outcome, which can determine market perception and future valuations, or whether future assets transact at all.
The one outcome you really don’t want to see? Bankruptcy (no surprise).
Unfortunately, that’s where we’re at with The Center for Autism and Related Disorders (CARD), Blackstone’s 130-location autism platform.
What’s interesting with this one — there was never a slowdown in demand, which is so frequently the critical piece of a bankruptcy story. Perversely, demand really could not have been better.
Let’s break it down:
Two years after Blackstone’s initial purchase, the pandemic upended the investment. CARD took a heavy hit when in-person visits halted, though bounced back from the initial shock relatively quickly.
The bigger issue was the dramatic tightening of the labor market. For a bit of background…
- The bulk of the work at autism clinics is handled by registered behavior technicians (RBT). It’s an entry-level role and pays like it. Very different work than flipping burgers — but, that’s essentially the pay scale autism providers are on.
- With historically low jobless numbers and a wide open field of alternatives, the competition for RBTs ratcheted up. Providers could increase wages to compete, or let jobs sit vacant (but oftentimes both happened).
- Compounding the problem, the labor question isn’t resolved when the hire is made. The RBT role is incredibly demanding, high-stress, and emotionally intensive. Given it’s also an early career landing spot, it’s naturally high attrition, with turnover routinely in excess of 30%+ per year.
The end result, Blackstone and CARD couldn’t hire new employees, their current employees were constantly quitting, and any replacements they found were significantly more expensive than their predecessors.
Struggling to staff clinics and unable to meet demand, CARD began turning away patients.
That all sounds pretty bad, but probably would have been manageable if not for CARD’s payor contracts.
The business had previously negotiated long-term reimbursement deals, some dating back to 2012. At the time, it seemed like a solid move. Lock in coverage and rates so you have a sustainable, predictable business.
Unfortunately for CARD, that supposedly savvy deal-making turned out to be a donkey-brained blunder. Just like how your morning coffee is now $8 (+ 30% tip), CARD’s cost of service delivery ballooned over the ~ten years since those deals were struck.
By late 2020, a number of CARD’s contracts were operating at a negative margin. The more patients CARD signed up, the more money it lost.
But, like so many of 2023’s bankruptcies, the cherry on top was CARD’s debt burden.
Initially levered at a relatively conservative ~5.0x, the business took out additional debt financing to weather early pandemic clinic closures.
Combine the greater debt load with the fundamental challenges facing the business, and things quickly got ugly. Toss in twelve months of aggressive rate hikes, and it’s almost surprising CARD didn’t plunge into insolvency sooner.
The Company’s well-known struggles, alongside issues at competing platforms, drove a change in market perception for the previously hot roll-up strategy, dragging down multiples and cooling demand for autism assets. It’s never really a good look when you see a sponsor-backed platform close nearly 100 clinics.
But, just as CARD kicks the bucket, things may now have finally turned a corner, according to industry bankers and operators.
There’s a clear go-forward playbook. Figure out a way to solve, or at least improve, labor recruitment and retention, avoid locking yourself into unprofitable contracts, and then ride the demand wave straight to a hefty exit.
At least that’s the plan for CARD’s founder, Doreen Granpeesheh, who’s nearing a deal to acquire CARD out of bankruptcy for $25 million. Probably not the outcome she expected back in 2018 when Blackstone bought their majority stake from her at a valuation of $600 million.
Best to adopt this attitude when someone brings up PE involvement in children’s mental health providers
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🍾 Deals, Deals, Deals | The week's most interesting transactions
1. Fast-casual Mediterranean chain Cava had a spicy first day of trading, with shares more than doubling from their $22 IPO price.
That’s great for lovers of bland hummus (and investors Revolution, Riverbend, T. Rowe Price, Act 3, and Kitchen Fund). But, the big takeaway here is that we might be one step closer to an IPO window that’s open for business again.
The Cava float proved there’s institutional interest in new offerings, which is exactly what you want to hear if you’re a pre-IPO business like Stripe, Instacart, or Reddit (not to mention an equity capital markets banker).
Biotech is testing the waters too — Turnstone Biologics just filed for an $86 million IPO. The clinical-stage developer of solid tumor immunotherapies, backed by Versant, OrbiMed, and F-Prime, is hoping that biotech’s nasty 2022 slowdown is nearing an end.
2. Agricultural trading business Bunge is scooping up Viterra, a Glencore and CPP-backed agri-trader, for $8.2 billion.
It’s a huge shakeup to the agricultural commodity industry and creates a business with enough scale to rival heavyweights Cargill and Archer-Daniels-Midland.
The deal caps off a solid turnaround for Bunge. Shares slid 35% from 2014 - 2018, plummeting when former CEO Soren Schroder got caught on the wrong side of a soybeans bet (happens to the best of us). D.E. Shaw launched an activist campaign and dumped Schroder, presenting successor Greg Heckman with a chance to patch things up.
3. New Mountain Capital is cooking up something interesting in medical claims processing (yes, I know that sounds impossible).
Last month, they signed a deal to carve out AI-enabled value-based care business Apixio from Centene. This week, Apixio announced a merger with ClaimLogiq.
ClaimLogiq is a complex claims platform that uses ML and natural language processing to automate reviews of medical documents. Backed by EIR partners, NMC took a minority stake with a growth investment back in 2022.
NMC has a tested playbook here — they sold claims processing business Equian to UnitedHealthcare for $3.2 billion in 2019, having bought for $225 million to merge with Trover Solutions.
Apixio is one to watch. We’ll see if New Mountain can post some big numbers and turn this into the next big healthcare private equity success story.
This week’s other big dog deals…
⁃ Nasdaq agreed to buy trading and risk management software firm Adenza from Thoma Bravo for $10.5 billion.
⁃ Novartis reached an agreement to acquire Chinook Therapeutics for $3.4 billion, including a $200 million earnout. Focused on kidney disease, existing backers include Samsara, Frazier, BlackRock, and Versant.
⁃ TriNet Group has brought in Morgan Stanley to lead a sale of the company, currently trading at a $7 billion market cap.
⁃ KKR and HarperCollins are reportedly bidding for publisher Simon & Schuster, whose proposed $2.2 billion acquisition by Penguin Random House was blocked by antitrust regulators.
⁃ Barrick Gold has held preliminary discussions with $17 billion market cap miner First Quantum Minerals over a potential acquisition, but has gotten the cold shoulder thus far.
⁃ Rosen Group, a manufacturer of O&G pipeline testing equipment with $200 million of EBITDA, has handed Baird the mandate to lead a sale process.
⁃ Bain made an initial approach to acquire SoftwareOne, a Swiss cloud software provider, for $3.2 billion. The Company rejected the offer, claiming it “materially undervalues” the business.
⁃ Earthstone Energy has reached an agreement to acquire Novo Oil & Gas from EnCap Investments for $1.5 billion.
⁃ Gibson Energy agreed to purchase the South Texas Gateway terminal from Buckeye Partners for $1.1 billion.
⁃ One more energy deal — Patterson-UTI Energy agreed to buy NexTier Oilfield Solutions in an all-stock transaction that creates a $5.4 billion oil services firm.
⁃ Apollo, Sixth Street, and Warburg Pincus are each among the field of bidders vying for installment lending firm GreenSky, currently in a sale process banked by Goldman.
⁃ EQT has brought in Goldman to lead a process for content marketing firm Sitecore in a deal that could be worth up to $2 billion.
⁃ Michael Andlauer has reached an agreement to acquire the NHL's Ottawa Senators from the estate of Eugene Melnyk for approximately $1 billion. Andlauer, founder of a healthcare cold chain logistics business, is a big hockey guy, with the Senators purchase slotting in alongside majority ownership of Hamilton Bulldogs (Ontario Hockey League) and a minority stake in the Montreal Canadiens.
⁃ Towerbrook is looking for liquidity on Kevin's Natural Foods, a pre-made meals business that could bring in north of $700 million.
⁃ Duke Energy has agreed to sell its renewables business to Brookfield Renewable for $2.8 billion.
⁃ Just a couple extra Bs, no biggie — KKR has bumped up its bid for Telecom Italia's landline grid by €2 billion, submitting a revised offer of more than €23 billion.
⁃ Pritzker Private Capital is reportedly among the potential buyers tracking chemicals business Chase Corp., currently trading at a market cap of $1.2 billion.
⁃ GoldenTree is readying an exit of hotel chain Travelodge in a deal that could be worth up to £1.2 billion.
⁃ Madison Dearborn Partners is offloading gum business Bazooka Candy Brands, which could be worth nearly $700 million.
⁃ Glencore is down bad — after having earlier bids rejected for the whole company, they’ve now offered to buy Teck Resources’ steelmaking coal business.
⁃ Madhive, an adTech developer, completed a $300 million raise from Goldman Sachs at a $1 billion valuation.
⁃ Mistral AI, a French generative AI startup, took in $113 million from a combined seed through Series B raise. Lightspeed led, with participation from JCDecaux, Motier Ventures, Headline, and Sofina, among others.
⁃ Synthesia, a provider of generative AI video software, raised a $90 million Series C led by Accel, with participation from Kleiner Perkins, GV, and Firstmark.
💰 Fundraising | The firms stacking it up across buyout, growth, and venture
⁃ TA Associates brought in $16.5 billion for its 15th fund.
⁃ TCV is having a tough go of it, nearing a raise that’s 50-75% less than its target of $5.5 billion.
⁃ GrowthCurve Capital raised a $1.4 billion debut fund.
⁃ Addition raised a $1.5 billion fifth venture fund.
⁃ Constitution Capital Partners raised a $1.1 billion sixth flagship fund and remains in the market for a separate $300 million special situations vehicle.
⁃ Bicycle Capital is targeting a $500 million debut venture fund.
⁃ The Engine is seeking $350 million for its third venture fund.
⁃ Recharge Capital is launching with a $200 million debut fund focused on ex-U.S. women’s health investments.
⁃ Peakview Capital raised $145 million for both direct and indirect venture investments.
⁃ Hidden River Strategic Capital raised a $245 million debut buyout fund.
📜 Bullpen Reading Roundup | Get quick with the ALT + Tab
1. If someone tells you they’re running a one-man hedge fund, 9.9 times out of 10 it’s some WallStreetBets operation in their parent’s basement.
This week, the WSJ profiled the other 1%. From a non-descript Back Bay office, David Abrams has delivered annualized returns of 15% since 1999, when he set up shop after a stint at Seth Klarman’s Baupost. That’s 3.0x the S&P 500, and has helped Abrams haul in assets under management of over $8 billion. (Check it out: WSJ)
2. Google and OpenAI are reportedly discussing compensation arrangements with media firms whose content they’re leveraging for their AI platforms.
News Corp., The New York Times, Axel Springer, and The Guardian are at the negotiating table trying to make sure ChatGPT doesn’t run them out of business. (Check it out: FT)
3. If you lose your job and can’t make your mortgage payments, you’ll default on the loan and will eventually face foreclosure.
But, if you’re an institutional investor, you might have another option before you’re forced to hand over the keys.
Veritas Investments and Baupost couldn’t make it work on 95 properties in San Francisco, defaulting on nearly $1 billion of CMBS. Rather than admit defeat, Veritas is angling to buy back its own debt to recapitalize the portfolio.
Thanks for reading, catch you guys next week. Drop a line with any feedback or scoops (just reply here; kept anonymous).
— Sam