The world of mergers and acquisitions (M&A) in the behavioral health sector has experienced a notable deceleration in recent years, marking a stark contrast to the frenzied activity that characterized the years before the pandemic. As the industry navigates through a period of uncertainty, it’s clear that the growth trajectory that had defined the behavioral health sector—particularly in M&A—has begun to shift. Industry experts, including Dexter Braff, President of M&A advisory firm The Braff Group, have shed light on these changes, offering valuable insight into the dynamics that have led to a slowdown in deal-making.
A Broader Context: M&A Activity Across All Industries
The slowdown in behavioral health M&A activity is not an isolated phenomenon. As Dexter Braff pointed out at the 2023 Behavioral Health Business INVEST conference, the trend extends beyond the behavioral health industry. A combination of external factors, including inflation, staffing shortages, recession fears, and geopolitical unrest in Eastern Europe, has significantly dampened global M&A activity. These macroeconomic pressures have created an atmosphere of caution among potential buyers and sellers alike.
While deal flow continues, there is a palpable sense of weariness among buyers. In fact, Braff noted that “once the buyer and seller agree on purchase price, there is a 90% chance the deal is going to close.” However, recent experiences at The Braff Group suggest a deviation from this pattern. In 2023, the firm had seen seven deals go from a confirmed purchase price to not closing—something that had rarely occurred before.
This cautiousness among buyers can be attributed to several factors. The Federal Reserve’s uncertain stance on interest rates, along with the sky-high valuations seen in 2021 and the first half of 2022, created a perfect storm that led to overpayment on some deals. Together, these components have led to what Braff calls a “skittish market”—one in which buyers are no longer rushing in, and caution is the name of the game.
Behavioral Health M&A Trends: Slower, but Still Significant
The slowdown in behavioral health M&A activity represents a significant shift in the market. Historically, this sector has been one of the hottest areas in healthcare M&A, experiencing high levels of growth and a steady stream of deals. Yet, as of 2023, that momentum has waned.
However, it’s important to note that while growth within behavioral health has slowed, it has not disappeared entirely. According to Braff, growth in the behavioral health sector has dipped into “very modest negative territory,” indicating that while the market may be cooling off, it is not experiencing a dramatic downturn. This is in stark contrast to the consistently strong growth seen in the sector during the pre-pandemic years.
The Mental Health Subsector: A Glimmer of Hope
Within the broader behavioral health space, certain subsectors have continued to experience growth, and the mental health industry has been one of the primary drivers of this trend. While the total number of M&A deals in the mental health space saw a decline in 2023 compared to 2022, the total number of deals remained 30% higher than pre-pandemic levels, signaling that mental health continues to be a highly attractive segment for investment.
The mental health subsector has benefited from the increasing demand for mental health services, which has been amplified by the ongoing mental health crisis exacerbated by the pandemic. This growing demand, combined with a heightened focus on mental health in both policy and healthcare, has kept the mental health space relatively strong compared to other areas within behavioral health.
Substance Use Disorder (SUD) Treatment: Steady but Flat
The Substance Use Disorder (SUD) treatment segment remains an area of significant interest for investors, though its growth has been relatively flat year-over-year. Despite this, the SUD segment continues to show resilience and opportunity, with certain aspects, such as Medication-Assisted Treatment (MAT), experiencing growth.
MAT has been a particularly controversial treatment within the recovery community, especially among providers who subscribe to traditional sobriety models. Historically, there has been resistance to MAT, with many viewing it as simply replacing one addiction with another. However, Braff pointed out the important benefits of MAT in keeping people employed, maintaining family structures, and reducing recidivism rates. State governments have increasingly supported MAT because it costs far less—around $5,000 per year—compared to residential treatment options, which can be much more expensive.
The continued expansion of MAT within the SUD treatment space, combined with its growing acceptance by key stakeholders, has positioned this segment as a critical area for M&A activity, even as the broader SUD market remains relatively stable.
The Challenges and Opportunities of 2024: A Shifting Landscape
Despite the slowdown in M&A activity, there are still promising opportunities on the horizon for the behavioral health space. One of the key drivers of optimism is the significant availability of institutional loans and the $56 billion allocated for opioid abatement funding. Although only a small portion of this funding has been distributed so far, it holds the potential to significantly impact the industry in the coming years.
Moreover, additional factors are expected to buoy the market moving forward. The DEA’s recent extension of telehealth flexibilities for another year provides a much-needed boost to the behavioral health market, particularly in terms of access to care. The availability of $800 billion in committed private equity funds, which must be spent within a specified timeframe, could also inject new capital into the sector.
Despite the downturn in 2023, the behavioral health sector remains an attractive space for private equity, particularly given the long-term growth potential of mental health and SUD services. However, as Braff pointed out, private equity firms have not been selling their portfolios at the pace they were in 2021, resulting in a “long-time low” in private equity exits. As these portfolios age, the pressure to sell at lower valuations could cause a broader market shift, potentially leading to more M&A activity at lower valuations in the future.
The Takeaway: A Market in Transition
The behavioral health M&A landscape is undoubtedly in a period of transition. While growth has slowed and buyers have become more cautious, there is still substantial capital and interest within the sector, particularly in areas like mental health and substance use disorder treatment. Sellers who are willing to weather the current market conditions may be able to capitalize on opportunities in 2024 and beyond, as the landscape begins to shift once again.
For those in the market, the key takeaway is to be prepared for a slightly more conservative and cautious environment. Buyers will need to adjust their expectations, while sellers may want to focus on hunkering down, improving their operations, and preparing for the eventual rebound of M&A activity. The next wave of growth may not look the same as before, but there will still be significant opportunities for those who can navigate the changing dynamics of the market.
As the market continues to evolve, one thing remains clear: while the behavioral health M&A market may have slowed, it is far from stagnant. The opportunities in this space are still very much alive—and with the right strategies in place, both buyers and sellers can find success in a new era of deal-making.
