Hell of a therapy session! Why did KKR pay $1.25B for Therapy Brands?

Why is this important?

Since late 2022, we have witnessed a substantial influx of capital into the rollup space, with strong support from venture capitalists (e.g., Threecolts and Unaric), as well as private equity firms and their “alumni” (Everfield, Tiugo). Sometimes both (Abingdon Software). Considering that the investment horizons of many of these investors are set at 3-4 years, it is valuable to examine recent exit precedents in rollup exits.

Today, we turn our attention to Therapy Brands, a practice management Vertical Market Software rollup that garnered attention when it was acquired by KKR for $1.25B in May 2021.

A Nigerian immigrant’s journey to the American dream

Therapy Brands, formerly named TheraNest, was founded in Birmingham, Alabama, in 2013 by Shegun Otulana. The company initially focused on the development and support of the TheraNest practice-management software platform for counseling centers. Let’s take a moment to highlight the founder’s journey.

In 1998, Shegun left Nigeria for the US as a 18-year-old student amidst political turmoil and violence. Non 2011, he launched Zertis, a software consulting company that also served as an incubator for generating and validating innovative product ideas. In 2013, he launched TheraNest.

Market size

Therapy Brands operates in a behavioral health market in the US, which while growing modestly in low-single-digits, was valued at $140bn in 2022. There are 200K therapists and 80K+ psychologists practicing in the US. Behavioral health refers to life stressors and crises, mental health and substance use disorders, and stress-related physical symptoms. Behavioral health care is described as diagnosing, preventing, and treating these conditions. It includes the services provided by psychiatrists, neurologists, social workers, counselors, and physicians.

Therapy Brands today

Therapy Brands leverages key growth trends in mental and behavioral health markets, benefiting from increased public awareness, expanded insurance coverage, outcome-driven payment models, and acknowledgment of mental health’s cost impact on overall healthcare. The company offers a comprehensive suite of apps that address the fragmented practice management needs of mental health professionals. Their solutions, including practice management, electronic health records, payment processing, revenue cycle management, and data reporting, empower practitioners and organizations in these markets. This allows professionals in practices of all sizes to reduce administrative tasks, focus on patient care, enhance outcomes, and grow their businesses.

Today, Therapy Brands, represented by its 19 brands, delivers integrated payment and software solutions tailored to various behavioral health sub-segments. With a client base of over 28,000 practices, their offerings encompass practice management software with integrated billing, data collection tools, electronic health records, and telehealth solutions.

Early backers: GSV Ventures and PSG Equity

Over the course of its decade-long journey, Therapy Brands experienced at least three significant buyouts. The under-the-radar investor GSV Ventures was among the original backers of TheraNest, with a track record of supporting and incubating similar software rollup concepts in various sectors, including successes like Community Brands and Ministry Brands.

In 2017, Therapy was acquired by PSG Equity, an affiliate of Providence Equity Partners. According to a WSJ report, in 2018, Therapy achieved $45 million in sales and an EBITDA of $18 million. This indicates that at the time of PSG’s acquisition in 2017, the business had revenue figures below the $40 million mark. It’s worth mentioning that there are a few other notable software rollups, such as Dura Software and saas.group, that have surpassed the $40 million revenue milestone.

2nd buyout: Lightyear Capital and Oak HC/FT. Tripling the revenue

In the summer of 2018, less than two years after its previous acquisition, Therapy Brands attracted investment from two notable firms: Lightyear Capital, a New York-based private equity firm specializing in financial services companies, and Oak HC/FT, a venture growth-equity fund known for investing in tech-enabled healthcare and financial services firms. Reports from PE Hub indicate this was a control transaction, suggesting a combination of secondary as well as primary equity.

Public records and press reports reveal that Therapy Brands experienced remarkable growth, tripling in size since that investment, mostly thanks to M&A (9 acquisitions completed).

This stands in stark contrast to Constellation Software, where organic growth tends to hover around zero.

The Finale: KKR paid 25X EBITDA, got a good deal on the debt package

According to PE Hub and Moody’s reports, KKR made a substantial acquisition in May 2021, valuing Therapy Brands at $1.25 billion in enterprise value. This translates to eye-catching multiples of 10 times sales and 25 times EBITDA. Well in excess of Constellation’s multiples at the time, even though Therapy was (and is) a significantly smaller business.

In Moody’s opinion, the rationale for this premium valuation was underpinned 

• Visible and highly-recurring SaaS revenue streams

•  High gross client retention rates (around 95%)

• Anticipated low-teens revenue growth

• High EBITDA margins (around 40%)

• And finally, low capital expenditures requirements that support free cash flow and deleveraging

Not a bad combo, is it?!

KKR financed the acquisition with $970 million in equity and $320 million in debt, of which $235 million was in the form of a first lien and $85 million as a second lien. Additionally, lenders committed to providing $120 million in both first and second-lien delayed draw term loans, along with a multicurrency revolving facility.

While the debt financing may appear relatively small compared to the equity portion, when calculated on a trailing LTM basis, it amounted to approximately 9 times EBITDA based on RLE calculations. This figure is slightly lower than the “over 10x” EBITDA multiple suggested by Moody’s. However, the actual leverage was closer to around 6 times EBITDA, owing to a series of acquisitions completed in 2020 and 2021, which contributed to a higher run rate EBITDA.

Looking through the SEC filings, we conclude that KKR is paying on average 325-400bps over 3M LIBOR for the first and 675bps over 3M LIBOR for the second lien. The first and second lien lender portfolio is quite broad and includes Blackstone, New Mountain, Audax, and Franklin BSP.

Roll your equity

Another interesting aspect is the consistent equity rollover of early investors. When PSG joined the capital stack, GSV remained a significant minority investor. The same happened with Lightyear Capital and Oak HC/FT. Finally, following the KKR acquisition, PSG remained a minority shareholder (but not others, according to PE Hub).

TL;DR

• Software rollups is a highly appealing asset class for mid- and large-cap private equity investors. When the right opportunity arises, these firms are willing to pay substantial multiples.

• The capacity for elevated leverage in these deals is underpinned by robust operating margins. Therapy stands out with its EBITDA margins in the 40s. Our take: target fully loaded EBITDA margin in the high thirties to mid-fifties range to maximize PE interest.

• The upshot is that KKR paid 25X EBITDA. Was it too rich? Well, consider the fact that Therapy had grown EBITDA 3X in 3 years and the sponsor was able to stick 6X leverage on a pro forma basis. Velocity has a price!

• The Therapy case study showcases the power of compounding by staying invested. Its early and subsequent investors opted to roll over to benefit from continued growth and value creation.