Private equity investment in behavioral health experienced a slowdown in 2022, breaking a streak of annual increases in deal counts. According to PitchBook’s latest healthcare services report, the total deal count fell to 73, down from 104 deals in 2021—a 30% decline that ties the 2018 level. This slowdown reflects staffing shortages, market competition, and broader economic pressures that impacted provider growth and investor confidence in Private Equity in Mental Health.
Despite this slowdown, behavioral health continues to attract investor interest, and the sector is expected to see continued engagement from private equity in 2023. Economic pressures may actually create opportunities for investment. Lowered deal multiples, which may have been inflated during periods of rapid expansion, could make acquisitions more appealing, while tight market conditions may encourage the creation of new platforms—key areas for Private Equity in Mental Health.
Shifting Investment Strategies
Rebecca Springer, PitchBook Senior Analyst and Healthcare Lead, noted that the makeup of behavioral health investment is likely to shift in response to current market realities. Future deal activity is expected to focus heavily on new platform creations, minority equity infusions, and add-on transactions, all of which are critical strategies for Private Equity in Mental Health.
Springer explains, “There’s going to be an attraction to a new platform creation, meaning new backing for a group that hasn’t received institutional capital before, because, by definition, those groups are not going to be heavily leveraged. So they’re going to be perhaps a little bit better positioned to operate in a very tight margin environment.”
Smaller or less sophisticated organizations may struggle in challenging economic conditions, creating opportunities for larger platform operators and investors to deploy capital through strategic add-on deals. Similarly, minority equity infusions could help stabilize struggling operations, providing a solid foundation for future Private Equity in Mental Health deals.
The 2022 Behavioral Health Deal Landscape
Staffing challenges played a major role in limiting growth for behavioral health providers in 2022. Competition for qualified professionals—particularly therapists, behavior analysts, and other clinical staff—squeezed profit margins and slowed expansion. Autism therapy providers were especially impacted, with some traditional organizations scaling back workforce size and market presence. Digital Applied Behavior Analysis (ABA) provider Elemy, for example, shifted from home-based services to a virtual platform while laying off staff.
Despite these workforce challenges, ABA and pediatric therapy deals actually increased from the previous year, with 21 recorded in 2022. Springer emphasized, “The demand dynamics in the space are so compelling that platforms are still able to grow; margins are tighter, but not unsustainable.” Compared to other behavioral health sectors, the projected supply of new board-certified behavior analysts is relatively stable, giving ABA and autism-focused platforms a head start in addressing workforce challenges and leveraging growing investor interest—key areas for Private Equity in Mental Health.
Subsector Insights and Regulatory Developments
PitchBook’s data combines substance use disorder (SUD) and mental health deals. Of the 73 behavioral health deals in 2022, 49 were in the SUD or mental health space. Regulatory and reimbursement developments also created opportunities for investors. Notably, the federal government now allows Medicare to reimburse licensed marriage and family therapists (LMFTs) for mental health services.
“This should increase the supply of mental health providers, primarily by expanding the pool of mental health professionals available for established groups to hire, since many independent LMFTs do not accept insurance,” the report notes. Expansion of insurance coverage through commercial payers, which often follow Medicare policy, further supports the potential growth of mental health platforms—an important factor for Private Equity in Mental Health.
Private Equity Activity: Key Players
Some private equity firms have consistently remained active in behavioral health. Chicago-based Shore Capital Partners leads the pack, completing 23 deals since 2020, including investments in Dallas-based Behavioral Innovations, Cincinnati-based BrightView Health, and Boston-based Transformations Care Network. Other active firms include Revelstoke Capital Partners (8 deals), Webster Equity Partners (7 deals), and Vistria Group (7 deals).
These firms have focused not only on traditional behavioral health services but also on specialized subsectors like ABA, pediatric therapy, and mental health services, capitalizing on favorable demand dynamics and emerging reimbursement opportunities—critical drivers for Private Equity in Mental Health.
Broader Market Forces and Economic Context
The wider healthcare investment environment in 2022 presented significant challenges. The U.S. Federal Reserve raised interest rates eight times since March 2022 to combat inflation, with a target range of 4.5% to 4.75%, the highest since October 2007. This effectively closed syndicated loan markets, while private credit lenders became more selective, making large-scale acquisitions more difficult.
Economists also estimate a 61% probability of a recession in the next 12 months, according to a Wall Street Journal survey. PitchBook anticipates two potential scenarios: either the Fed successfully curtails inflation but triggers a recession, or it prematurely eases, requiring renewed tightening and ultimately leading to a recession. Both scenarios indicate economic contraction, though the timing and severity remain uncertain.
Springer highlighted that while recessions might theoretically increase workforce participation, they are unlikely to meaningfully resolve behavioral health staffing shortages in the near term. For private equity investors, leveraging economies of scale and ensuring platforms are sophisticated in workforce acquisition and retention will be critical for Private Equity in Mental Health success in the coming years.
Outlook for Behavioral Health Investment
While 2022 marked a slowdown in deal activity, the long-term prospects for Private Equity in Mental Health remain strong. Key trends shaping investment include:
- New platform creation: Backing previously undercapitalized groups for growth in a tight-margin environment.
- Minority equity infusions: Supporting larger or struggling operators to stabilize operations.
- Add-on acquisitions: Driving inorganic growth and consolidating market share.
Subsectors like ABA and pediatric therapy continue to attract attention due to favorable demand, regulatory support, and a relatively resilient workforce pipeline. Broader economic pressures may even create opportunities to acquire assets at more reasonable valuations, making strategic investments more attractive.
Overall, investors entering behavioral health in 2023 will need to carefully navigate staffing challenges, regulatory shifts, and economic headwinds. Those who successfully leverage operational scale, workforce management, and strategic investment structures are likely to see strong long-term returns in a sector that remains critical to the U.S. healthcare system and a top target for Private Equity in Mental Health.
