After a string of record-breaking years, behavioral health mergers and acquisitions (M&A), including addiction treatment mergers and acquisitions, are expected to slow in 2023. While the pace won’t match the frenzied activity seen in 2021, experts emphasize that this cooling is part of the natural cycle of the market, not a sign of collapse. The industry has experienced booms and subsequent cool-downs, and 2023 appears to be entering a more measured phase.
Dexter Braff, president of M&A advisory firm The Braff Group, spoke at Behavioral Health Business’ VALUE conference, noting that investor and strategic interest in behavioral health remains strong despite a slower deal environment. “We are in a transitionary phase, which is code for an M&A guy saying, ‘It’s not as good as it was last year,’” Braff explained. “The demand for behavioral health still far outweighs the supply. What we also see, though, is a more disciplined approach towards determining what’s going to be bought and how much is going to be paid.”
Historical Context: The Peak Years
The behavioral health M&A market reached its zenith in 2021, fueled by high investor interest, low interest rates, and regulatory optimism. That year was anomalous, influenced by factors like anticipated capital gains tax changes that drove deal volume and multiples to unusually high levels. In 2022, The Braff Group tracked 201 deals—a 24% drop from the 2021 peak—but still a modest 4% increase compared to 2020, a more “normal” year.
Braff described the current market as a return to discipline after a period of exuberance. In prior years, investors often relied on optimistic EBITDA projections, assuming near-perfect operational performance for months at a time. Today, they are increasingly scrutinizing actual results and sustainable earnings to determine valuations.
Economic Forces Shaping 2023
Several factors are expected to depress dealmaking in 2023. Inflationary pressures, workforce shortages, and rising interest rates have made debt financing more expensive, affecting the way investors approach acquisitions. Low interest rates in previous years had made borrowing cheap, allowing private equity firms to leverage deals heavily. With the Federal Reserve increasing rates to control inflation, the cost of debt has risen, reducing the attractiveness of high-leverage transactions.
Braff explained, “If the amount of debt they can deploy is less because it’s more expensive, if they don’t backfill it with equity, then the valuation is going to drop.” As a result, investors are exploring temporary all-equity deals or reducing transaction sizes, planning to recapitalize when debt becomes more affordable again.
Private Equity Remains Dominant
Private equity continues to dominate behavioral health M&A, making up roughly 65% of all deals in 2022. The sector’s share of PE deals has remained steady since 2018, highlighting the ongoing attractiveness of behavioral health for investment. Notably, the 2022 deal landscape saw fewer platform deals and more follow-on transactions, reflecting a strategic pivot toward strengthening existing portfolios rather than launching new platforms.
- Platform Deals: In 2022, platform deals dropped by 40% compared to 2021 and 24% compared to 2020.
- Follow-On Deals: Conversely, follow-on deals rose by 10% compared to 2020.
This trend demonstrates a shift in private equity strategy: focusing on proven assets with existing infrastructure and revenue streams, rather than taking the risk of building new platforms from scratch. Braff noted, “The fact that platform deals are down from 2020 has me a little anxious. We will have to see if it’s just an anomaly because it’s also a very good indicator of what we might expect in the future.”
Subsector Trends: Mental Health, Addiction, and Autism Services
Behavioral health encompasses diverse subsectors, each with distinct deal trends and investment considerations.
- Mental Health: Deal volume in mental health was down 26% in 2022 compared to 2021, but still up 9% versus 2020. Increased telehealth adoption, greater reimbursement, and reduced stigma have driven consistent demand. Braff sees telehealth as a gateway that introduces patients to in-person care rather than replacing it, expanding overall access to mental health services.
- Addiction Treatment: Addiction services saw an 18% increase compared to 2020, despite a year-over-year decline from 2021. Investors remain most interested in addiction treatment mergers and acquisitions, particularly medication-assisted treatment (MAT) and value- to mid-range residential programs. High-end residential treatment, often costing $60,000–$70,000 per month, has seen the sharpest decline in deal volume, reflecting a broader market shift toward affordability and accessibility. Regulatory developments, such as proposed DEA rules potentially ending pure-play virtual telehealth MAT, could further influence addiction treatment mergers and acquisitions in this space.
- Autism Services: Autism therapy deals experienced a slight downturn in 2022, with approximately 200 transactions, making it the third most active sector in behavioral health M&A over the last five years. Workforce challenges, staffing shortages, and wage pressures have impacted providers, exemplified by struggles at the Centers for Autism and Related Disorders.
Valuations and Investor Discipline
Valuations and multiples have cooled from the fever-pitch highs of 2021, when competitive bidding and optimistic projections pushed deals into premium territory. In 2022, equity financing averaged 5.9 times EBITDA, and debt financing averaged 5.6 times. Braff noted that rising borrowing costs have led investors to prioritize actual performance over projected or pro forma earnings.
High-profile missteps in the industry, including issues at Cerebral, Elemy, and Delphi Behavioral Health Group, have also contributed to a more cautious investor mindset. These cases have heightened scrutiny over compliance, operational sustainability, and long-term viability.
Braff emphasized that for investors, the current market is an opportunity to focus on addiction treatment mergers and acquisitions with strong performance histories, disciplined management, and sustainable growth models. “Buyers have gotten more disciplined,” he said.
Outlook for 2023 and Beyond
Despite slower deal volume, the underlying fundamentals of behavioral health remain strong. Demand far outpaces supply, creating opportunities for well-capitalized investors and strategic acquirers. Key trends to watch in 2023 include:
- Continued emphasis on value- to mid-range addiction treatment and MAT services.
- Telehealth as a sustained growth driver for mental health access.
- Cautious valuations and disciplined investment strategies.
- Focus on follow-on deals and portfolio expansion rather than new platform launches.
- A strategic “flight to quality” for addiction treatment mergers and acquisitions, prioritizing companies with sustainable operations and strong regulatory compliance.
Behavioral health remains one of the most dynamic segments within healthcare, attracting private equity and strategic buyers due to its high demand, recurring revenue models, and critical nature of services. While valuations may have cooled from 2021’s highs, the sector offers compelling opportunities for investors who approach with discipline, patience, and an eye toward sustainable growth.
As Braff summarized, “So there still is opportunity, but it’s not as easy to access. When you’re above 4 to 6, you’re in premium land.” Investors who understand the cycles, assess real performance, and prioritize high-quality assets—especially in addiction treatment mergers and acquisitions—will likely find long-term success in behavioral health M&A.
