The Biden-Harris administration announced new initiatives in December 2023 to combat “corporate greed in health care.” The initiatives will likely not directly block behavioral health deals, but headline risk has caused investors to “suddenly” become more cautious.
Behavioral health, and other provider categories that serve vulnerable populations, may experience less interest from large private equity firms due to headline risk, according to PitchBook’s Q4 2024 health care report. Still, certain sectors of behavioral health, including applied behavioral analysis (ABA), can expect an increase in investor interest.
The decline in sponsor interest in behavioral health will be “marginal,” according to Rebecca Springer, PitchBook’s lead analyst of healthcare, but investors who are on the fence may opt for other options, such as health care IT.
“Headline risk is greatest for the firms that are more in the public eye, so I would be pretty surprised to see some of the mega-fund managers, the Blackstones and KKRs of the world, pursuing new platforms in these areas in 2024,” Springer told Behavioral Health Business in an email. “Smaller firms may also take this into account, however.”
Factors including staffing, reimbursement and interest rates will impact behavioral health dealmaking more so than the Biden administration’s initiative as antitrust enforcement remains “limited by the Federal Trade Commission’s (FTC) operational capacity and will focus on the largest and best-documented cases.”
“Despite the increased emphasis on PE and roll-up strategies in public commentary from the FTC, the legal limits around anticompetitive behavior have not changed, so assuming investors are getting good legal advice early in transaction processes and following that advice, which they should have been doing anyway, there is little risk of deals being blocked directly,” Springer said.
There remains some transaction execution risk in states with more active antitrust regimes, however.
One sector of behavioral health poised for increased dealmaking is ABA therapy.
ABA companies’ valuations were “incredibly overheated” from 2018 to 2021, Springer said. Assets are now being sold off at a discount, making for attractive acquisitions for private equity firms who did not dive into ABA dealmaking earlier as well as for firms who previously found success with ABA investments.
School-based mental health providers are also piquing investors’ interest as a complement to center-based ABA therapy investments.
Tech company CentralReach’s acquisition of SILAS is a “bellwether” for this PE trend, according to Springer.
Lauderdale, Florida-based CentralReach provides end-to-end autism and intellectual and developmental disabilities (IDD) care software. More than 175,000 professionals utilize the company’s tools across the globe.
CentralReach will incorporate Monmouth Beach, New Jersey-based SILAS’s solutions into its suite of education solutions.
SILAS offers social and emotional learning (SEL) behavior solutions for PreK through 12th-grade students. The company currently touches 35,000 students across more than 40 school districts.
“[Schools-based mental health treatment] is a nice complement to center-based ABA,” Springer said.
Overall, investors remain interested in behavioral health. The sector’s sluggish 2023 deal flow was a result of market forces, Springer said.
Among the suppressing forces of 2023 M&A were inflation, staffing shortages, fear of recession and unrest in Eastern Europe, according to Dexter Braff, president of M&A advisory firm The Braff Group.
“Many PE investors have been developing theses around behavioral health but haven’t seen the right opportunity at the right price,” Springer said. “I think you’ll start to see more activity as soon as the sell side pipeline improves, especially in outpatient mental health and pediatrics.”
