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

Disclaimer: Views expressed here are the author's own and based on public sources. The article is intended for informational purposes only. This is not financial advice. Please consult a professional for investment decisions.

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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, Aries, Unaric), as well as private equity firms and their “alumni” (Everfield, Confirma, Abingdon). Sometimes both (Abingdon Software). Considering that the investment horizons of many of these investors are set at 3-5 years, it is valuable to examine recent exit precedents in rollup exits.

Further reading:

• Do it like Everfield: how PE firms structure software serial acquirers

• The patient capital writing big checks into software HoldCos

Today, we turn our attention to Therapy Brands, a rollup of behavioural health Practice Management Software (PMS) providers that garnered attention after being acquired by KKR for $1.25B in May 2021.

January 2025 update: curious how Therapy Brands has fared under KKR’s ownership? Read Part 2 here!

A Nigerian immigrant’s journey to the American dream

Therapy Brands’ predecessor called TheraNest was founded in Birmingham, Alabama, in 2013 by Shegun Otulana. Shegun had come to the US from Nigeria in 1998, as an 18-year-old student. In 2011, he launched Zertis, a software consulting company that also served as an incubator for generating and validating innovative product ideas.

One of such ideas was TheraNest: a software product that allowed behavioural health providers to manage all facets of their business.

Market size

The US behavioural health was valued at $140B in 2022. It is growing at a mid single digit rate. There are over 200,000 therapists and 80,000+ psychologists.

Behavioural health refers to life stressors and crises, mental health and substance use disorders, and stress-related physical symptoms. Behavioural health care is described as diagnosing, preventing, and treating these conditions. It includes the services provided by psychiatrists, neurologists, social workers, counsellors, and physicians.

Therapy Brands today

Therapy Brands leverages key growth trends in mental and behavioural 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 behavioural 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 tele-health solutions.

2017: GSV Ventures and PSG Equity come in

Over the course of its decade-long history, Therapy Brands has experienced three significant buyouts.

The first instance occurred in 2017, when PSG Equity and GSV Ventures supported a recap. Mr. Otulana remained the single largest shareholder.

The under-the-radar GSV (shorthand for “Greater Sum Ventures”) has a track record of supporting thematic software rollups, for example, Community Brands and Ministry Brands. They tend to look for SaaS platform businesses that meet the following criteria

• Solid go-to-market strategy with demonstrable ability to grow organically

• Low customer churn

• Scalable business model that allows for margin expansion by increasing customer count

• Strong technology platform that can be leveraged and recapped through additional brands

According to a WSJ report, in 2018, Therapy achieved $45M in sales and an EBITDA of $18M. It was about to get much bigger.

2nd buyout: Lightyear Capital and Oak HC/FT. Revenue 3x’d

In the summer of 2018, the cap table changed once more. All 3 shareholders sold some of their equity to two new investors:

• Lightyear Capital, a New York-based private equity firm that specialises in financial services companies

• Oak HC/FT, a growth equity investor in tech-enabled healthcare and financial services firms

A PE Hub article suggests this was a control transaction.

Public records reveal that Therapy Brands grew significantly, tripling in size since that investment, mostly thanks to M&A (9 acquisitions completed). According to the ratings agencies, the best was yet to come:

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

Further reading: Does your rollup deserve a Constellation Software multiple?

The (intermediate) Finale: KKR pays 25x EBITDA, gets a good deal on the debt package

As Therapy Brands kept getting bigger, the big fish began to circle it. KKR acquired the business in May 2021, valuing it at a $1.25B enterprise value. Everyone except PSG fully excited. PSG rolled a small stake alongside KKR.

The valuation translated into multiples of 10x sales and 25x 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 $970M in equity and $320M in debt. Of the latter, $235M was first lien debt and $85M second lien. Additionally, lenders committed to providing $120M in both first and second-lien delayed draw term loans, along with a multi-currency 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 a spread of 325-400bps (over the benchmark) for the first lien; and 675bps 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 rollover pattern. The founder remained after PSG and GSV invested. PSG and GSV rolled when Lightyear Capital and Oak HC/FT came onboard. Finally, following the KKR acquisition, PSG retained a minority stake.

Rollovers send a powerful signal about the founders’ / incumbent investors’ level of conviction about the business. But not only: choosing to stay invested can bring very meaningful financial gains, sometimes exceeding the initial cash out.

Further reading: Always Be Rolling? 30 million reasons sellers should roll over equity in PE buy & builds

Key takeaways

• 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 maximise 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 Brands case study showcases the power of compounding by staying invested. Its investors consistently opted to roll over to benefit from continued growth and value creation

So has Therapy Brands fared so far under the mighty KKR’s ownership?

Find out in Part II.