The behavioral health dealmaking outlook has been sluggish for the past two years. But that could all change in 2025, as private equity investors look to hop back into the game driven by lowering interest rates and limited partners ready to cash in on their investments.

“2025 is going to be the best year that we have seen since 2021,” Dexter Braff, president of M&A advisory firm The Braff Group, said at Behavioral Health Business’ INVEST event. “It won’t be as good as 2021, which was outrageously great, but it’ll probably be the second-best year over the last decade.”

He noted that in 2021, money was cheap for investors, causing deal volume to surge. In fact, in 2021, private equity closed 50% more deals than its previous record. That caused the starting line for valuations to jump to approximately 10 times EBITDA earnings.

However, a confluence of factors made inflation peak in 2022, and the Federal Reserve began to increase interest rates steeply over a short period.

“So the market reacted very harshly to this. It just froze. Now, remember, this also happened after a record number of deals and record valuations…. Buyers said, Hold on, we’re going to take a break here. We bought everything that was out there to buy,” Braff said. “We may have even overpaid for it. This is a good time for us to pull back a little bit. And they did. So private equity retreated substantially.”

But this meant that PE’s unspent capital began to grow. And while PE investors had capital, they weren’t spending it, causing PE platform deals to slide.

Additionally, in 2023, 26% of that dry powder was older than four years, according to a report by Bain & Company.

“That critically is important for what we think will happen in the future. When they raise [capital] private equity,  usually have a fund life of about 10 years,” Braff said. “So they get the money, they invest it, they do what they do to try to increase the value [such as], making follow-on acquisitions, investing in technology, expanding marketing, all of those neat things, so that they can then sell in that 10 year period of time, and they hopefully at a higher amount than what they invested on behalf of their limited partners.”

However, many PE companies have been delaying buying. This has frustrated limited partners who have not had returns in the last two or three years.

“If PE is not buying, that means that PE is not selling because PE often buys other PE transactions. They’re not selling because they didn’t like the marketplace,” Braff said. “And so there’s a situation where I now have to get back into this business of buying because if I don’t, I am not going to be able to meet the returns of my limited partners who are already aggravated with me.”

But there could be a crack in the ice for the behavioral health investment landscape.

“Private Equity needs to buy, and they need to buy fast. But what does that mean? It means that this is not going to be an extended uprise,” he said. “Alright, it’s very likely that 2025 is going to be a big spike, not quite as good as 2021. … But they have to do it now, not in 2026. What that means is that the rush into the market is going to be over a very compressed period of time I’m getting in. I’m getting in now fast deals. Get them done before the end of the year, so we don’t lose more time because we already lost two years, and that’s precious time to build value, and we don’t have any time to waste.”

The macro-level private equity investment trends are essential to behavioral health because these investors are enormous players in the industry. Braff noted that private equity accounted for approximately 60% of all behavioral health deals in recent years–and 90% of autism services deals.

And while 2025 is expected to be a blockbuster year for behavioral health dealmaking, most behavioral health segments have already begun to rebound from the 2023 slump. The one segment that is still lagging is the substance use disorder industry.