The behavioral health care sector hit an unexpected speed bump in the third quarter of 2019, with deal activity plummeting 35% compared to previous periods. But before sounding the alarm, it’s worth taking a closer look at what’s actually happening beneath the surface.
The Numbers Tell a Story
According to data from HealthCareMandA.com, part of Irving Levin Associates, Q3 2019 saw just 17 publicly announced behavioral health acquisitions. This represents a significant decline from the 26 deals recorded in both Q2 2019 and Q3 2018.
At first glance, these figures might suggest a cooling market. However, the picture becomes murkier when examining deal valuations. Only two of the 17 transactions disclosed financial terms, with a combined value of $14.2 million. This lack of transparency makes it difficult to gauge whether deal volume or deal value is the more meaningful metric to watch.
Private Equity Still Dominates
Despite the overall slowdown, one trend remained crystal clear: private equity firms continue to drive behavioral health M&A activity. PE-backed buyers accounted for approximately 76% of Q3 deals—13 out of 17 transactions—cementing their position as the sector’s primary consolidators.
Two companies stood out as particularly active during the quarter:
Kadiant, backed by TPG Capital, acquired two autism-focused treatment providers—one in California and another in Ohio. The acquisitions align with the growing demand for autism services and Kadiant’s regional expansion strategy.
The Family Treatment Network, owned by Pharos Capital Group, snapped up two Florida-based agencies specializing in applied behavioral analysis (ABA). The deals reflect continued investor interest in evidence-based therapeutic approaches.
A New Wave of Consolidation
Lisa E. Phillips, editor of The Health Care M&A Report, offered an interesting perspective on the quarter’s activity: “We’re seeing a new wave of exits as the smaller platforms are being rolled up into regional platforms, almost regardless of their focus.”
This observation suggests the decline in deal count may actually signal market maturation rather than weakness. As smaller operators get absorbed into larger regional platforms, the pool of available targets naturally shrinks—at least temporarily.
What’s Driving Continued Interest?
Despite the Q3 dip, several factors point to sustained investor appetite for behavioral health assets:
Growing demand: Need for behavioral health services continues to rise across multiple specialties, particularly autism treatment and substance abuse programs.
Regulatory tailwinds: Increased insurance coverage for behavioral health services under mental health parity laws has improved reimbursement dynamics.
Fragmentation opportunities: The sector remains highly fragmented, offering ample runway for consolidation plays.
Demographic trends: Rising awareness of mental health issues and reduced stigma are expanding the addressable market.
Looking Ahead to 2020
Phillips expressed optimism about near-term prospects: “With demand for all aspects of behavioral health services growing, particularly autism and substance abuse programs, we expect to see a healthy level of activity into 2020.”
This outlook seems reasonable given the fundamentals. While Q3’s slowdown deserves attention, one quarter doesn’t make a trend. The sector’s underlying drivers remain intact, PE firms continue to deploy capital aggressively, and the need for behavioral health services shows no signs of abating.
The Bottom Line
The 35% decline in Q3 2019 behavioral health M&A activity represents a notable deceleration, but context matters. The quarter may reflect natural consolidation dynamics rather than fundamental weakness. With private equity still heavily invested in the space and demand for services continuing to grow, the behavioral health sector remains an attractive target for dealmakers.
For sellers, the message is clear: Quality assets with strong fundamentals will continue to attract buyer interest, even if the overall pace of transactions has temporarily slowed. For buyers, a quieter quarter may simply mean less competition for the right opportunities.
As we head into 2020, all eyes will be on whether Q3 represented a brief pause or the beginning of a longer-term trend shift in behavioral health M&A.
