As the domestic capital market for behavioral health companies tightens, foreign investment presents a timely new financing opportunity.
Specifically, the EB-5 investment visa program, which incentivizes foreign investors to pour capital into American businesses, could be a new avenue for providers.
High-interest rates and high-profile stumbles in the behavioral health space have significantly slowed investment and M&A activity. Data from PitchBook shows an overall slide in movement by private equity firms and their platform companies, especially in behavioral health. Dealmaking is at or below pre-pandemic levels.
Nonetheless, behavioral health companies continue to have capital and financing needs during phases of inclement investing conditions for sponsors, leaving a need for alternatives.
“What I say about it is that it’s like private equity but cheaper,” Steve Smith, CEO of Seattle-based EB5 Coast To Coast, one of the only firms in the U.S. focusing on the behavioral health industry, told Behavioral Health Business. “EB-5 is cheaper than private equity because the [behavioral health organization] has to accept some extra hassle and uncertainty.”
Further, it’s a funding source that faces potentially rapid shifts in policy and potential bureaucratic headaches, given its proximity to the labyrinthine American immigration system.
EB-5 is shorthand for the employment-based fifth preference category visa. It’s a program that can put non-Americans on a fast-track to getting permanent residency status for themselves and some family members. The program also incentivizes investment-minded visa applicants to invest in rural or economically distressed areas.
Since its inception in 1990 and rollout in 1992, EB-5 investors have put over $50 billion into projects that are estimated to have created about 1.35 million jobs, according to data from the trade association Invest In the USA (IIUSA).
How EB-5 works
EB-5 visa applicants/investors must invest a certain amount of capital in a for-profit company that will create at least 10 full-time jobs or maintain job totals for provably distressed companies. The investment minimum is $1.05 million or $800,000 if the company is in a rural area or an area with unemployment at 150% of the national rate, according to the U.S. Citizenship and Immigration Services (USCIS) website. The $800,000 figure also applies to infrastructure projects.
The process is administratively arduous for applicants and businesses due to the complicated legal process the government has set up — and the heightened scrutiny of the program.
Applying and certifying compliance with the investment program and getting through the queue for a visa can take about three years. However, investments seen as in the national interest get priority. This largely includes infrastructure or defense interests, according to USCIS.
But Smith’s company has had several behavioral health-related projects see applicants get an expedited review.
These include several projects with the company Wise Path Recovery Centers and Kathy Ireland Recovery Centers. EB5 Coast to Coast also owns Wise Path Recovery.
Other considerations
There are several notable behavioral health organizations involved with EB-5 investing. For example, All Points North, a mental health and addiction treatment facility operator, is looking for funding through the EB-5 program.
All Points North presently operates in Texas, Colorado and California.
King of Prussia, Pennsylvania-based addiction treatment provider Recovery Centers of America spent $20 million to renovate an old hospital in Danvers, Massachusetts, into a 210-bed addiction treatment facility. That project benefited from the involvement of EB-5 investors, according to the Boston Globe.
Recovery Centers of America declined to comment for this story. The company named a new CEO in July 2023.
However, there is some degree of so-called headline risk when associating with the EB-5 program.
The program is prone to abuse and fraud. Recently, The New York released an expose on a multi-million-dollar fraud scheme in the program.
The EB-5 Reform and Integrity Act (RIA) became law in 2022. The law is aimed at tamping down fraudsters and opening lanes for nationals from countries whose visas were backlogged. It also revamps the oversight of private entities called regional centers that are vetted and approved by the federal government to pool EB-5 investor money in given regions.
A report by the U.S. Government Accountability Office released in March 2023 found that USCIS only collects some data on fraud and national security risks and doesn’t have “readily-available data about the types and characteristics of fraud unique to the program.”
The same report notes that the popularity of the program experienced a historic dip in popularity from Chinese nationals, the largest cohort of applicants, from 2016 to 2021. The data show a 93% reduction in applications. Chinese nationals are among the applicants who have benefited from the changes brought on by the RIA, Smith said.
More recent data presented by IIUSA also shows dramatic mismatches between the number of EB-5 visas that are available and are actually used over the last several federal fiscal years. The coronavirus pandemic impacted the shift. For several years leading into 2019, nearly all of the apportioned visas were used for each year; after that, thousands of EB-5 visas were left unused each year, with the most recent years seeing a near-full utilization return.
About 89% of available visas were used in federal fiscal 2023. That is a dramatic change in direction from the 16% utilization rate seen in federal fiscal 2021.
An increasing count of investors may translate an increased interest in those willing to invest in projects that could earn an expedited review. The opioid crisis ccontinues,and access to behavioral health treatment continues to be a challenge for rural and disadvantaged communities.
Companies featured in this article:
EB5 Coast To Coast, U.S. Citizenship and Immigration Services
