Investors Pursue Behavioral Health Platform Deals After Tumultuous 2023

After a year of reckoning, the behavioral health industry is set up to see platform deals return to the market.

In 2023, behavioral health dealmaking was down by roughly 30% year-over-year. This slowdown was partly due to macroeconomic trends, including inflation, high interest rates and the conflicts in Eastern Europe and the Middle East. The bulk of the deals in 2023 were smaller tuck-in acquisitions, but this could change.

“In some ways, behavioral health has fared better than other specialties or other areas of healthcare services just given the reimbursement dynamics have largely been more favorable for behavioral health than other parts of provider services,” Christian Chauvet, a partner at Lee Equity, said during a Behavioral Health Business webinar. “But in a backdrop of high inflation and rising interest rates, the larger strategic [investors] are less acquisitive. That’s certainly affected the smaller end of the M&A market. From a large platform transaction perspective, the performance just hasn’t been there.”


Middle-market PE firm Lee Equity is a veteran in the behavioral health space. In 2022, it purchased substance use disorder provider Bradford Health. It previously invested in the Eating Recovery Center and Summit BHC.

What investors are looking for in 2024

Chauvet noted that the organic growth that many large platforms prioritized over the last year has not pulled through for those platforms to ultimately go to market. Still, platform companies with a proven track record could be ripe for investment.

“I think the strong operators had a relatively solid 2023, and so on the back of a good performance year and a productive debt capital market, I think you’ll see those sponsor exits materialize,” Chauvet said. “Those sponsor exits are great things for the industry because those sponsors are able to exit their platforms and secure a win for their investors and their management team that brings them back to the market, and brings them back looking to partner with entrepreneurs, and build new platforms and put more capital behind the great quality businesses that we know exist in this field.”


While more platform deals could come onto the market in 2024, valuations will come down from the highs of 2021 and 2022. During the M&A craze of 2021, run rate and maturity adjustments were often included in a company’s valuation, inflating its worth.

“Many investors got themselves into trouble around that,” Chauvet said. “When you look at some of the high-profile bankruptcies or distressed assets in the behavioral health industry, a lot of those deals were done in that 2020, 2021 vintage, where the leverage was taken on a forward earnings profile that never really materialized.”

In 2023, several behavioral health companies, including applied behavioral analysis provider The Center for Autism and Related Disorders (CARD) and substance use disorder provider Delphi Behavioral Health Group, filed for bankruptcy.

These public stumbles won’t necessarily mean private equity is adverse to the space. However, it could mean that investors are taking a more measured approach to valuation.

“Even if we see a pullback in valuation, into where I think things will be over the coming year in the six to eight times range, for a lot of providers, that is an extremely healthy valuation, relative to what we would typically expect to see over the long term for businesses with this type of a pedigree,” Dexter Braff, founder and president of The Braff Group, said during the webinar. “The market is extremely attractive.”

The Braff Group is an M&A advisory firm specializing in the health care industry. Founded in 1998, it has closed more than 375 transactions.

Lowering interest rates and a favorable labor market may help drive M&A in this upcoming year. Still, providers who want to take advantage of the climate could take specific steps to ensure a deal.

“I would say the onus has shifted towards that focus on organic growth platform integration,” Chauvet said, “and really demonstrating the value of the business is not just scale, but as differentiated operations, differentiated recruiting, differentiated clinical quality.”

Having a clear vision for the future and the ability to show outcomes to payers in order to negotiate rates is key.

Watch: The Behavioral Health M&A Outlook for 2024 (click for the full webinar)

Areas to watch for in 2024

Behavioral health is still hot across the board despite the deal dip over the last year, Braff said. One area that could be prime for investment is outpatient substance use disorder care.

“Last year, despite the fact that we saw very few segments record any uptick, we did see one area of uptick, and it was substantial. And that was in non-residential substance use disorder treatment,” Braff said. “We saw a record number of deals done in 2023 in that particular space, which is interesting because I can tell you across all spaces, very few segments posted records, and that’s one of them.”

Outpatient SUD treatment has become a popular alternative for addiction treatment care due to the lower cost and increased flexibility for patients. For example, the cost for the least expensive inpatient rehabilitation program per month is $6,000, while the price of a 3-month outpatient rehabilitation program is $5,000, according to the National Center for Drug Abuse Statistics.

Although mental health and SUD care are safer bets in the behavioral health space, the psychedelics industry has been getting a lot of attention over the last year. But investors say the sector might not be ready for the M&A market.

“From what we’ve read clinically, there is extraordinary evidence that psychedelics, in many situations, can be highly effective therapeutic interventions,” Braff said. “From an M&A perspective, there are not enough providers, there’s not enough reimbursement, there’s not enough global acceptance of it as a therapeutic intervention, for an M&A strategy around it. I think you’re looking at much more of an organic development strategy.”

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