From Villain to Vanguard: Exploring Private Equity’s Role in Behavioral Health Care

In October, private equity firm Lee Equity Partners bought substance use disorder provider Bradford Health. A couple months prior, Charlesbank Capital Partners – another PE player – acquired autism provider Action Behavior Centers. And in July, Revelstoke Capital Partners purchased eating disorder giant Monte Nido & Associates.

These three deals and others like it reflect how private equity is quickly expanding its reach in behavioral health care. Over the last decade, PE investors have poured billions of dollars into behavioral health. In recent years, they’ve been attracted by skyrocketing demand for services following the COVID-19 pandemic and the opportunity to consolidate a fragmented industry.

“COVID made us all insane,” Dexter Braff, president of M&A advisory firm The Braff Group, explained at the Behavioral Health Business INVEST conference. “The expectations of the investment community, when COVID really put its hooks into the market, made them say, ‘We really need to get into this market; we knew it was good before.’”

As PE has taken a more active role in health care, firms have increasingly found themselves in the crosshairs of consumer advocates.

Proponents of private equity say the infusion of cash gives behavioral health operators the chance to grow and invest in their business. Critics, however, argue that PE buyers prioritize profit over patients and dismantle companies.

During the recently held HLTH event, a panel of PE investors said firms generally don’t deserve the “big bad wolf stereotype” that’s often attached to them.

“Quite frankly it’s hard to think about innovation and expansion or growth without private capital,” Adaeze Enekwechi, operating partner at Welsh, Carson, Anderson & Stowe (WCAS), said at HLTH. “The government will not fund everything we want to see happen in health care.”

WCAS is headquartered in New York and San Francisco. It specializes in health care and technology investments. In 2021, WCAS sold Springstone to Medical Properties Trust.

In 2021, there were more than 200 private equities deals in behavioral health, according to data from The Braff Group. While deal flow in the first half of 2022 lagged behind last year, it was on track to run slightly ahead of 2020.

“While down, sponsored transactions are running only 11.4% behind last year,” Braff wrote in a mid-year M&A update. “But if we break it down between market-entry platform deals vs. follow-ons, the data tells us a bit more. While platform volume is down 28.6%, follow-ons are running a scant 5.6% behind 2021.”

PE firms held accountable

Despite some negative perceptions about PE, it’s not quite the wild west, panelists said at HLTH. PE firms need to prove their responsibility to the limited partners investing in the firm.

“Every industry is judged by the worst examples of that industry. Were there bad actors? The answer is there certainly are,” Christopher McFadden, managing director of KKR, said during the panel. “But I think the critical thing limited partners want to know is they’re not the bad actors. But [their investments] are with people they can have confidence and trust in.”

New York-based investment firm KKR has completed private equity transactions with $692 billion of total enterprise value. In 2021, it created mental health provider Geode Health.

It has also acquired Therapy Brands for $1.2 billion and led telebehavioral health company Brightline’s $105 million Series C round.

Private equity firms have three main responsibilities, according to Fadden.

First, they are responsible to their investors, and have to prove they can make smart and durable investments. Secondly, they have to manage the companies and leadership teams they’ve invested in. The company’s ultimate responsibility is making a successful exit in three to five years.

In turn, PE companies invest a lot of time and money in their due diligence process. Although PE has the reputation of dismantling companies, the bulk of PE investors are looking to buy good companies and strengthen their business.

This helps promote their end game of a lucrative exit, according to WCAS’ Enekwechi.

“There’s a thoughtfulness to how we think about any company, what it contributes to the ecosystem, the health care ecosystem,” Enekwechi said. “It has to be something that we think we can take from good to even better and great. So we’re not looking for a company that you need to completely tear apart and rebuild.”

Growing pains

While private equity companies may not be looking to disassemble a company, change is inevitable, according to panelists.

Private equity firms are responsible for successful leadership. And what a company needs may change over time.

“The team that got a company from $0 to $500 million may not be the right team to get it from $500 million to $1.5 billion. That’s just a fact,” Enekwechi said. “It doesn’t mean there’s anything necessarily wrong with that team. But if you’re looking at a CEO who has been managing and running a company that’s a single-site company, and you now have the vision to take this company from single to multi-site, …that is a different set of skills.”

It’s not uncommon to see leadership changes in growing behavioral health companies.

Private equity-backed Aware Recovery has recently undergone a C-suite shakeup, which its CEO, Brian Holzer, attributed to the organization’s changing needs.

“Some people scale all the way,” Ron Williams, operating advisor at Clayton, Dubilier & Rice, said. “They can handle the business at one level, put another couple of $100 million on, add a $1 billion. They just keep going. Some people don’t. They hit a wall. The leader’s job is to confront that. The leader’s job also is to be certain that when you make change, people understand why you’re making that change.”

Based in New York and London, Clayton, Dubilier & Rice is a private equity firm that has invested more than $35 billion in companies. Its health care portfolio includes Vera Whole Health, which helps manage chronic conditions and behavioral health issues.