Make no mistake, the positive reimbursement and demand dynamics have made behavioral health the hottest segment for private equity investment according to a new report from PitchBook.

The behavioral health industry has so many attractive features for private equity investors, that even as a behavioral health workforce shortage throws a wrench into its ability to meet patient demand, it still has a long runway for continued growth.

Since 2016, behavioral health, dentistry, dermatology, and vision together have accounted for around half of healthcare provider buyout activity in healthcare according to PitchBook.

But no other segment has seen such explosive growth over the last 5 years, with multiples continuing to become more favorable than other sectors of the healthcare services.

“No other major healthcare provider space has seen such explosive growth in the past five or so years,” the report states.

In other health care settings, organizations with EBITDA of $10 million to $50 million command multiples of 10x to 14x. But for behavioral health, even small providers are able to see multiples of 10x and higher while platform deals for larger organizations see multiples in the twenties, the report states.

Growth strategies must change due to lack of supply

The behavioral health workforce shortage puts limits on likely private equity investment strategies in the sector and favors others. This is notably true in the balance of de novo growth and inorganic growth.

“[I]n several behavioral health subsegments, a severe shortage of providers in relation to both patient demand and private equity buyer interest has driven multiples sky-high and made purely inorganic growth strategies infeasible,” the report states, placing a necessary emphasis on de novo growth.

The rapidly growing hybrid outpatient mental health provider Lifestance Health Group Inc. (Nasdaq: LFST) recently disclosed it was shifting its growth strategy to focus more on de novo growth after a streak of several acquisitions in 2020 and 2021.

Cincinnati-based BrightView Health, an addiction treatment provider, also told BHB in 2021 that it plans to have a balance of de novo and M&A growth as it scales up following private equity investment.

The focus on de novo growth has driven private equity-backed behavioral health platforms to expand into new geographies. About 59% of add-on deals were buyouts of companies in new states. Within that figure, about 42% of add-on buyouts were in new regions of the U.S. Behavioral health saw the largest share of add-on deals done in new states and regions.

Behavioral health has no shortage of tailwinds for growth

Specific to behavioral health, the industry has favorable regulatory and reimbursement tailwinds with several pieces of federal legislation that push reimbursement for these services upward.

This is notably true with the renewed industry focus on parity in compensation between behavioral health and physical care providers. At the state level, Medicaid programs are increasingly covering behavioral health services and at a higher rate.

Presently, telehealth reimbursement is similar to in-person services. Telehealth reimbursement, however, is an unresolved issue at both the state and national levels despite the industry seeing telehealth as a vital part of the industry going forward.

Despite many investors looking to avoid competition with primary care providers, integrating behavioral health with these practices will only help expand access to consumers.

The industry also has the benefit of massive and well-publicized increases in demand for it’s services as the extremity of the pandemic continues to push people to mental extremes. The report specifically cites increases in substance abuse, anxiety and depression.

“The combination of unmet, growing demand and increasingly favorable economic models makes behavioral health unique among the specialties,” the report states.