Private equity investment in the behavioral health sector is showing signs of recovery, with PitchBook projecting a rebound in deal activity for 2023. Despite ongoing concerns around workforce shortages, flat reimbursement rates, and broader economic pressures, investors are taking a long-term view of the sector. The combination of strong demand, favorable demographic trends, and market fragmentation continues to make behavioral health an attractive space for private equity healthcare investment.
Sector-Specific Deal Trends
Deal activity has varied significantly across behavioral health subsectors. Private equity investment in autism and pediatric therapy has remained relatively elevated, reflecting consistent demand for services such as Applied Behavior Analysis (ABA) therapy. Meanwhile, mental health and substance use disorder (SUD) treatment deals have experienced a modest decline.
According to PitchBook, mental health and SUD treatment deals totaled 36 through the third quarter of 2022, compared with 58 deals in 2020 and 73 deals in 2021. Autism and pediatric therapy saw 16 deals in the same period, down from 25 in 2020 and 21 in 2021. This data highlights that while some segments face headwinds, others remain resilient, providing opportunities for strategic investors and furthering private equity healthcare investment in the space.
Long-Term Demand Driving Investment
Despite near-term economic challenges, including labor shortages and reimbursement constraints, the long-term demand for behavioral health services remains strong. PitchBook notes that investors continue to “flock to the space due to compelling long-term demand trends,” which are expected to fuel a rebound in deal activity in 2023.
The behavioral health sector has seen significant growth in consumer demand, rising rates of behavioral health issues, and increasing interest from both generalist health care companies and large retail entities. These factors create a fertile environment for mergers, acquisitions, and exits, making the sector highly attractive for private equity healthcare investment.
A key example is the high-profile exit of Kelso & Co. from Jacksonville Beach, Florida-based Refresh Mental Health. Kelso sold Refresh to Optum in March 2022, only 15 months after its initial investment, demonstrating the potential for quick, high-value returns in the space.
Workforce Challenges and Market Dynamics
Workforce constraints remain a major factor influencing deal activity and operations across behavioral health. Segments such as ABA therapy and pediatric care have been particularly affected. While demand remains robust, companies face rising staffing costs, flat reimbursement rates, and challenges in maintaining margins.
Blackstone-backed Centers for Autism and Related Disorders recently announced it would exit 10 of its 24 state markets, and two major ABA providers reported over 650 layoffs combined. These examples illustrate the operational pressures companies face despite strong market demand.
Yet, there are signs of improvement. The number of board-certified behavioral analysts (BCBAs) increased by 65% between 2018 and 2021, enabling both organic growth and new market opportunities. However, significant gaps in service coverage persist: in 2021, 37.4% of U.S. counties had no BCBAs, and 8.2% had no BCBAs in either the county or neighboring counties. This uneven distribution underscores opportunities for private equity healthcare investment to expand services into underserved regions.
Workforce pressures are not unique to ABA. The intellectual and developmental disabilities segment has also been hard-hit, largely because these services, like many behavioral health and medical specialties, rely on low- or moderately-skilled workers. Over the pandemic era, these low-wage workers have seen the highest rate of compensation increases, creating further pressure on margins for providers.
Investment Patterns and Dealmaking Trends
PitchBook’s data shows broader patterns in private equity healthcare investment. Overall dealmaking in health care services was down 10.3% year over year in the third quarter, with combined skilled care and behavioral health deals dipping 29% for the year and 63% quarter over quarter.
While the pace of deals in mental health and SUD treatment has slowed relative to 2020 and 2021, the sector still saw several noteworthy transactions in 2022. The ABA and pediatric therapy space has maintained stronger activity, though platform creation has slowed since its peak in 2018–2019. Large-dollar deals in autism treatment continue, even amid office closures and workforce challenges.
Private Equity’s Strategic Approach
Private equity investors are approaching behavioral health deals with caution but also a long-term strategic lens. Workforce and payer challenges are prompting greater scrutiny of earnings quality and future financial projections. Multiples in previously high-growth segments may begin to cool as staffing limitations constrain growth.
Despite this, independent practice owners continue to enter the market, creating opportunities for consolidation. Private equity healthcare investment in behavioral health remains attractive because firms can acquire and scale practices in areas with favorable demographics and rising demand. This approach aligns with a broader trend in healthcare, where private equity acts as a consolidator, building regional and national platforms across fragmented markets.
Opportunities Ahead
Even with challenges, behavioral health remains one of the most promising areas for private equity healthcare investment. Rising consumer demand, persistent workforce growth, and demographic trends indicate strong long-term potential. Investors are likely to continue focusing on areas with high demand and service gaps, such as autism, pediatric therapy, and SUD treatment, while strategically navigating workforce and reimbursement pressures.
As the sector evolves, deal activity is expected to rebound in 2023, driven by consolidation opportunities, high-value exits, and the ongoing need for scalable behavioral health services. Companies that can manage operational challenges and leverage workforce growth stand to benefit most from this wave of private equity healthcare investment, positioning the sector for sustained growth and profitability.
