This is an exclusive BHB+ story

Private investment in behavioral health has spawned enough scandals and failures to spark widespread skepticism.

This growing distrust now significantly influences behavioral health transactions, making strategies to counteract investor bias essential during the sale process.

“I think anti-private equity bias definitely exists,” Tommy Spiegel, vice president at investment bank Provident Healthcare Partners, told Behavioral Health Business. “Just like any business, there are good and bad players out there. Most of the groups we work with and are aware of are good players.”

The same goes for behavioral health groups. “There are independent groups out there that have plenty of problems,” Spiegel added.

While few executives were willing to speak openly about this issue, few dispute the fact that no organization, by the nature of its tax or ownership status, is fundamentally better or worse. However, there are more than enough missteps and out-and-out bad actions to justify critics gnawing doubts about the pressures that are placed on behavioral health organizations to perform when they step into the world of private investment.

In previous reporting about nonprofit entities, there is greater willingness to talk about the need for an organization to be profitable.

“My five, seven years in for-profit behavioral health have really taught me a lot about being able to balance the fact that if you don’t have a margin, you don’t have a mission,” Jayne Van Bramer, CEO of the nonprofit system Sweester, previously told BHB. “We have to make smart business decisions, which are sometimes difficult.”

Sweester provides behavioral health and support services to adults and families and generated $55 million in 2024.

I Am Boundless CEO Patrick Maynard put it bluntly at INVEST 2024 in October: “There’s no mission without money.”

Profit-bashing sentiment also often misconstrues the innately personal and intimate nature of behavioral health. Such familiarity makes behavioral health entities especially vulnerable to hits to their reputation. A recent major example includes the titan of the behavioral health industry, Acadia Healthcare Co. (Nasdaq: ACHC), taking a hit to its finances following a raft of bad headlines related to the conduct of a handful of facilities.

Organizations that sustain through time very rarely deprioritize clinical quality, Vince Morra, the CEO of growing outpatient mental health provider ARC Health, told BHB. He finds the concept of such an organization somewhat of a misnomer.

“For our organization, if we don’t have good quality, we’re not going to make profits down the road,” Morra told BHB. “In the behavioral health industry, if you’re providing poor quality, you are not going to make it. … In behavioral health, the patient is one-on-one [with a provider] they know.”

Backed by the private equity firm The Thurston Group, ARC Health offers outpatient mental health services and was founded in August 2021.

On top of acquiring several practices, ARC Health has implemented “a ton of things to help drive quality” and frequently uses them to win new business. ARC Health closed 18 deals in 2023.

“We can explain this to new providers and new partners — that this is the number one thing that we care about because if we don’t do that, the rest will not come,” Morra said.

The loss of charismatic founders

Over the last several years, BHB has heard and seen the departure of one or several key leaders, such as founders or popular managers, leading to an exodus of clinicians or other staff. This often pops up because of a misalignment between the leaders of the organization selling and the investment firm buying.

As a result, patient care may be disrupted. Abrupt changes in culture or operations may disenchant staff. Uncertainty around expectations may add undue pressure and distract from previous quality initiatives. In other words, the top-of-the-organization changes may rattle front-line operations and frustrate objectives.

“When we’re selling a business and we’re talking to investors, one of their first questions is always about why they are trying to sell,” Spiegel said. “What are they looking to do post-close?”

A vital part of easing through such a transition is getting a commitment from the selling founder, perhaps other leaders, to commit to sticking around. For founders especially, keeping their deft skills at hand is vital. Buyers and sellers both can consider specific employment, consulting or rollover equity agreements to make post-close engagement worthwhile.

“Most of the time, they are the reason that the business is where it is today,” Spiegel said.

With this challenge in mind, ARC Health focuses on working with clinician entrepreneurs who are early on or in the middle of their career journey. The company also focuses its post-close work on establishing infrastructure that helps acquired practice scale up. ARC also retains acquired firms’ brands, ensuring continuity and familiarity at the local level. It also rolls over founder equity in the same class of shares of the overarching company as other investors, Morra said.

“Our goal is to say, ‘You have ultimate autonomy from a clinical standpoint for your practice, who you hire, who you fire,” Morra said. “‘But we’re going to build tools to help you — understanding that the multiple at exit is dependent on the scalability of the business and the infrastructure of the business.’

“They get it.”

Without the input or the help of founders or whoever is essential to keep around, new owners will struggle to implement the strategies they feel they need to install to lead to a return on their investment. If disregarded entirely, using a corporate takeover approach that, for example, suddenly foists productivity measures or previously not-used key performance indicators may hurt clinical quality.

“We’ve seen groups come in and lead with clinical quality, and then that has these operational benefits — providers are more engaged, they’re keeping the staff, they have better patient retention, payers like what they’re doing, and maybe they get better rates,” Spiegel said. “You get to the same place, but in a mission-driven manner.”

The power of providers

The rise of private investment in behavioral health comes at the behest of clinicians and business-minded founders alike. And those that oppose such practice simply won’t answer when such buyers come calling.

“There are practices that are out there — unless they have a colleague that had a positive experience — will never pick up the phone,” Morra said.

The onus of getting into or continuing to make deals in the behavioral health sector requires that investors make a compelling enough case to convince founders and owners to give up their stake in their enterprises.

Even if not biased against investors or investment-backed platforms, plenty of organizations may not be interested in merging with another organization, may not want to sell in the first place, or might sell if they found the right investor, Morra said.

Spiegel echoed a similar sentiment.

“Just because you’re a good firm with the right motive in your [behavioral health] investment, that doesn’t necessarily mean you’re either the right firm to run that business or know how to run that business,” Spiegel said.

Just as behavioral health organizations of a similar niche can differ in scale and specialty, the particulars of an investor can mean different things to a seller.

Smaller private equity firms — those with $500 million in assets under management (AUM) — are often the most nimble and amenable to sellers and their organizations, according to Morra. The larger the firm, the less flexibility and specialization in its approach.

Smaller firms tend to have the “actual partners that are making decisions involved in the process.” This may not be the case at larger firms.

So long as steps are taken to ensure providers feel it’s worthwhile to stick around post-close, most patients won’t likely know or care who owns the practice so long as they have experiences that meet or exceed expectations.

“It’s the quality of the provider that drives perceptions of quality,” Morra said. “The question becomes, what is the culture of the private equity group adding to that?”