Every good story has a villain, and in the eyes of the federal government, the current villain in the behavioral health treatment industry is private equity (PE). This perspective comes largely from the heightened scrutiny from regulatory agencies like the Federal Trade Commission (FTC) and the Department of Justice (DOJ), who have made private equity’s role in healthcare a point of concern. However, for lenders and investors in the field, this scrutiny is seen more as “noise” than a genuine threat to their lucrative investments. Despite the increasing regulation and attention, many still believe that there are significant opportunities in the behavioral health sector, especially in underserved areas like substance use disorder investment, autism therapy, and outpatient mental health services.
Tim Bubnack, the managing partner at HCAP Partners, a private equity firm that focuses on healthcare and other industries, remains cautiously optimistic. At the Behavioral Health Business INVEST event, Bubnack addressed the rising scrutiny on private equity, acknowledging that PE firms are indeed under more federal oversight. But he argued that it’s not as big of a problem as it’s made out to be. “PE is going to get very scrutinized for either making too much money or having a negative impact on the healthcare industry… hopefully, it’s a little bit more noise than the reality of stiff regulations,” Bubnack said. HCAP, which has been actively investing in behavioral health by merging several companies to form a new platform, PAX Health, believes the industry’s potential outweighs the regulatory pressure. Bubnack further emphasized that if regulatory actions were to be taken, they would likely target very large transactions rather than small- or mid-size deals that many PE firms typically engage in.
The Role of Lenders in Behavioral Health Investment
On the other hand, lenders like Tal Lefler, managing director at Capital One Healthcare, see the scrutiny on PE more as a positive force for maintaining compliance in the industry rather than a deterrent. Lefler recognizes that regulatory oversight is necessary to ensure proper practices within the healthcare industry. However, he also argues that the influx of private equity investment helps increase access to care and fosters competition within the behavioral health sector. “Money invested in the behavioral health industry creates access and competition,” Lefler states, indicating that the involvement of private equity firms can actually improve the availability of care for individuals in need.
Lefler also highlighted the importance of compliance for investors, noting that the PE firms that adhere to regulations and avoid investing in companies with open litigation or unresolved issues are more likely to succeed. While acknowledging instances like the downfall of Steward Health Care, where a private equity firm’s mismanagement led to a series of public health failures, Lefler pointed out that proper due diligence is key. He suggested that those who are doing things “the right way” may face minor penalties here and there, but overall, they’ll be able to navigate the regulatory landscape effectively and continue making investments in critical areas like substance use disorder investment.
The Investment Opportunity in Behavioral Health
One key factor that keeps private equity firms interested in behavioral health is the persistent need for services and the growing demand for mental health and substance use treatment. The market is incredibly fragmented, creating fertile ground for investment and innovation. According to Bubnack, some subsectors in behavioral health represent especially attractive opportunities. The substance use disorder investment industry, despite being an overlooked opportunity for years, remains a prime target for private equity. The prevalence of substance use disorders across the U.S. continues to rise, creating a consistent demand for treatment options. With many private equity firms now “long in the tooth” on investments made between 2010 and 2020, they are looking to squeeze out returns, especially in areas like SUD where growth potential remains high.
The autism therapy industry has also emerged as a highly active sector in 2024, with strong growth and a “huge tailwind” behind it, according to Lefler. HCAP Partners is currently evaluating an autism platform, highlighting the ongoing potential for investment in this rapidly expanding market. Autism therapy services have become more crucial as demand for specialized treatment options has risen, and private equity firms are eager to capitalize on this growing market. The outpatient mental health sector is similarly fragmented, with few large players dominating the space, representing another massive opportunity for PE involvement. Bubnack believes that valuations are highly attractive in this segment, and with favorable reimbursement rates, the next three to five years will likely see an increase in deal-making, as well as opportunities for investors to exit with strong returns.
The Future of Behavioral Health Investment
For private equity firms, the attractiveness of behavioral health as an investment is clear. With a vast and underserved market, regulatory changes that improve reimbursement and care access, and the increasing recognition of the need for mental health services in America, the behavioral health sector represents an area of strong growth and opportunity. Bubnack pointed out that “there are not enough providers to address the behavioral health issues that our society has. Period. So that’s a huge driver. It’s a huge challenge as well, but we think there’s an amazing opportunity.” The demand for mental health services, particularly for preventative care to avoid emergencies and long-term institutionalization, ensures that behavioral health remains a vital and high-potential investment sector.
The substance use disorder investment sector is becoming more critical than ever as the demand for services continues to grow. As the country struggles with rising rates of addiction, investing in this space is an opportunity to provide necessary treatment while capitalizing on the market’s expansion. Bubnack points out that the challenges around SUD are substantial, but they also represent a “massive opportunity” for investors who can navigate the complex regulatory environment.
Conclusion
In conclusion, while private equity faces increasing scrutiny from federal regulators, its role in the behavioral health sector is far from villainous. By driving innovation, creating competition, and helping to fill the gaps in the mental health care system, private equity plays a critical part in addressing the massive demand for services. The growing need for treatment options, especially in areas like substance use disorder investment and autism therapy, ensures that investors will continue to find value in behavioral health. As the industry navigates the regulatory landscape, those who do so responsibly will continue to make a positive impact—both financially and in terms of improving access to care for those who need it most. Ultimately, the industry’s future looks bright, and private equity will continue to play a central role in meeting the growing need for behavioral health services.
