Despite sky-high interest rates, the behavioral health industry may be witnessing one of its best opportunities for mergers and acquisitions (M&A) in years. As demand for behavioral health services remains strong, the rising interest rates are having a counterintuitive effect: they are pushing valuations back to more reasonable levels. While 2023 saw a boom in de novo growth strategies, many investors are now eyeing Behavioral Health M&A Opportunities as a way to expand and capitalize on a changing landscape.
Amy Christensen, a partner and co-head of healthcare at The Vistria Group, shared at Behavioral Health Business’ INVEST event that certain parts of the behavioral health market have become prime targets for Behavioral Health M&A Opportunities. “In a couple of the categories where we have invested, M&A has become more attractive, not less,” she stated. Large competitors in specific behavioral health sectors are facing challenges, with some remaining quiet due to financial instability. Meanwhile, smaller companies are grappling with labor and reimbursement dynamics, presenting a window of opportunity for buyers.
According to Christensen, Behavioral Health M&A Opportunities have never been more accessible, especially in areas where companies are struggling to adapt. “It’s creating this interesting buying opportunity where multiples are actually at a reasonable price and you don’t have a lot of competition for deals,” she said. This new landscape allows well-capitalized firms to engage in acquisitions with a lower degree of competition, making this an ideal time for aggressive growth strategies through M&A.
Growing Confidence in Behavioral Health M&A Opportunities
Christian Chauvet, a partner at Lee Equity, echoed this sentiment, emphasizing that while the path for many deals has been rocky, the underlying demand for behavioral health services remains strong. “We believe that there is a strong business model, and we think that there will be successful investments and some consolidation of that sector in the next couple of years,” he said. Behavioral Health M&A Opportunities are still expected to unfold, despite the challenges faced by some high-profile companies that have collapsed in recent years.
While 2023 has seen some setbacks, such as the bankruptcy of the Center for Autism and Related Disorders (CARD), which followed a large investment by private equity firm Blackstone, the market is poised for a shift. Chauvet believes that the next few years will present more favorable conditions for Behavioral Health M&A Opportunities, with higher thresholds for acquisitions due to the cost of financing. “When you’re borrowing at 11% or 12% a year, you really have to be diligent,” he stated, highlighting the importance of due diligence in today’s environment.
The Need for Diligence in Behavioral Health M&A Opportunities
However, the increased scrutiny on deals is causing longer diligence processes, which may result in seller fatigue. Tani Weiner, co-chair of the behavioral health law group at Polsinelli, noted that both buyers and sellers need to be flexible in this environment. “Buyers are becoming a lot more selective and discerning about wanting assets of quality,” Weiner explained. This is where the right Behavioral Health M&A Opportunity will be found—those that offer sustainable value and clinical outcomes, despite a more cautious and methodical approach to acquisition.
Looking ahead, 2024 is expected to bring more Behavioral Health M&A Opportunities, along with continued organic growth. Weiner believes that while de novo strategies will continue to be a path for some providers, others will turn to add-on acquisitions. “It’s been a slow year for platform sales, but I think we’re going to see more platform sales next year,” she predicted. With demand for services still high, more consolidation is expected across the industry, creating favorable conditions for Behavioral Health M&A Opportunities.
Opportunities for Investment in Behavioral Health
Despite the slowing pace of acquisitions, the demand for quality behavioral health services continues to be a driving factor behind M&A activity. As investors become more discerning, the focus will be on finding sustainable, high-quality assets. Keith Farrow, managing director of Nautic Partners, shared that his firm has been more selective on M&A, using it strategically to accelerate organic growth. “We’ve been more selective on how we approach M&A,” Farrow said. For well-positioned firms, a Behavioral Health M&A Opportunity will continue to be an important lever for long-term growth.
As consolidation continues, investors are looking at behavioral health as a long-term growth opportunity, given the industry’s potential for scalability and professionalization. “Behavioral health continues to be a sector where there are too few providers of scale and quality to really meet the need and partner with payers,” said Chauvet. With reimbursement rates improving and a growing focus on outcomes tracking, the behavioral health space presents a significant opportunity for investors to capitalize on Behavioral Health M&A Opportunities.
A Long-Term Investment in Behavioral Health M&A Opportunities
The evolution of the reimbursement structure and the continued demand for services mean that many investors are eyeing behavioral health as a long-term investment. Farrow believes that the right teams with proven clinical models will be key to future success. “We think the tailwinds are strong when you have the right team with the right clinical models,” he said. As the industry matures, the right Behavioral Health M&A Opportunity will help drive growth and build world-class organizations for years to come.
