Is an IPO Worth It? What Good Exits in Behavioral Health Will Look Like in 2024.

Behavioral health dealmaking will likely pick up in 2024 but initial public offerings (IPOs) may be noticeably absent.

The private market — especially private equity investors and their platforms — has more than enough capital and motivation to do deals, making this year a compelling time for exits and trades. Still, experts tell Behavioral Health Business that it’s doubtful that any platform will IPO in 2024. 

“To have a successful IPO and have a long-term sustainable future as a publicly traded company, a company has to have really significant size and scale,” Paul Kacik, managing director and head of healthcare investment banking at Hexagon Capital Alliance LLC, told BHB. “I don’t think — with maybe a very few exceptions — that there are a tremendous number of pureplay behavioral health companies that can claim that they have that size and scale.”

Hexagon Capital is a multi-specialty investment bank based in Corona del Mar, California.

The behavioral health market is still quite fragmented. It’s also still seen as a “mom-and-pop” industry, lacking the sophistication found in other sectors. While this makes behavioral health a compelling investment target, it doesn’t fit the profile of what is sought by the public markets or end up doing well as public companies.

The most recent examples of behavioral health exits on the public markets are Lifestance Health Group Inc. (Nasdaq: LFST) and Talkspace Inc. (Nasdaq: TALK). Both went public in June 2021. The share prices for each company are a fraction of their price at IPO and have faced significant scrutiny.

To varying degrees, each company’s experience highlights the challenge of the public markets. Their examples contrast with the benefits of private investment.

Still, an IPO is not impossible in 2024. IPOs might lend themselves to models that require large amounts of capital to carry the company before reaching sustainable cash flows. This might be conducive to digitally focused companies.

“It’s all about cash and getting more of it and getting more investors,” Hannah Zaitlin, partner and health care transactional attorney at national law firm Foley & Lardner LLP, told BHB. “I think some [investors] are going to want to recoup and get a return on their investment, and companies are going to want to get growth capital. An IPO is always an option, and a good one depending on where the company is at with its development.”

What do positive exits look like in 2024?

Kacik points out that private equity firms have raised large amounts of capital over the last few years and need to deploy it. The amount of undeployed capital, known as dry powder, continues to grow, according to the consulting and research firm McKinsey.

Some of the largest holders of dry powder, according to S&P Global Market Intelligence, are known in the behavioral health industry, such as Leonard Green & Partners (Mindpath Health and The Stepping Stones Group), Warburg Pincus (Eleanor Health), TPG Capital (Banyan Treatment Centers, former Lifestance Health) and KKR & Co. (BlueSprig Pediatrics, Geode Health and BrightSpring Health Services).

“If you’re an entrepreneur and you’ve been growing your business for the last 10 or 15 years and you’ve built a really solid business in the behavioral health space, then there’s plenty of opportunity for a successful exit,” Kacik told BHB.

Even with capital to play with, the private equity scene is more wise to the stumbling blocks of the behavioral health industry. Blackstone’s former investment in the Center for Autism and Related Disorders (CARD) provides a cautionary tale.

This means companies need to up their game when it comes to exits or other deals.

“An exit for behavioral health companies these days will come down to a few attributes: Some of these attributes are table stakes,” Richard Lungen, co-founder and general partner of HC9 Partners, told BHB. “One would be successfully demonstrated outcomes with respect to efficacy and operations. The other is the fundamentals of a path towards profitability and growth.

“Pre-COVID, a few of those things might have been nice-to-haves … there are no more nice-to-haves.”

Companies that demonstrate outcomes and profitability stand out in the market, Lungen added.

While successful exits are highly subjective, key considerations include capital returns for investors and the platform, the impact on the company’s workforce, and increased access to behavioral health services, Zaitlin said. 

The record-setting levels of investment in behavioral health companies, especially telehealth companies, just before and during the pandemic will necessitate some kind of action in 2024, leading to elevated deal volume.

“There’s cash available to be deployed, and there are behavioral health platforms that grew rapidly during the pandemic that have reached a stage where they need to make an exit or do some sort of strategic combination in order to continue growing and to continue to sustain themselves,” Zaitlin said.

For some companies, this may nudge the digital space toward the long-predicted wave of consolidations many experts have said is coming.

“There’s not a lot of appetite for the entities that are buying or implementing the mental and behavioral health companies — the employers, the health plans, Medicaid plans and state governments,” Lugen said. “From their point of view, these companies need to come together to serve the same patient or the same member.”

This approach makes the glut of behavioral health point solutions more “digestible,” according to Lugen.

From the investor’s perspective, private equity firms already in the space need to raise additional funds and exit their platform companies to help prove their acumen, Kacik told BHB.

Pressures on exits

IPOs come with several trade-offs to consider. This includes increased compliance costs and mandated transparency.

“I think it’s just a tall order,” Zaitlin said. “Any health care company has to make compliance the top priority. But that’s even more acute and probably even heavier when you are a public company and subject to that regulatory scrutiny all the time.”

In no small part, this heightened scrutiny has dogged Lifestance Health and Talkspace. The former has been a target of litigation and faced harsh criticism, as well as pressure to tamp down growth. After worse-than-projected losses, Talkspace axed its founders. It also stared down the potentially damaging prospect of delisting. It is now no longer on notice for delisting.

“Why would you want to take the company public and open yourself up to shorter decision-making timelines, the scrutiny that you operate under, and just the cost of being a publicly traded company,” Kacik said. “You’re probably much better off doing a deal with a private equity group.”

Investors, on the other hand, might hold on to their assets especially if they were acquired during a time when multiples were at historic highs. Still, multiples in behavioral health are still “stubbornly” elevated compared to pre-COVID levels.

Even with that, that gives smaller, add-on targets more opportunities to be acquired. Private equity firms may be motivated to do deals that expand the scale or the specialties of their platform companies, Kacik said. He added that multiples are higher than normal but not on par with recent historic highs.

Historically, high inflation and interest rates are likely to make investors and platforms more sober about dealmaking. But it won’t be enough to stall it in the same way as in 2023, multiple sources said. Some said there is an expectation in the market that interest rates will tick down in 2024.

“The lending environment is going to be more conducive to getting deals done,” Kacik said. “There are probably a number of potential platforms that are looking to get deals done. I do think that we will see an increase in activity throughout 2024.”