Mergers and acquisitions activity in the Behavioral Health Care (BHC) sector declined 14% last year compared to the record level of deals recorded in 2021.
One industry expert expects a continuation of that trend.
“We expect behavioral health deal volume to slow slightly in 2023,” said Steven Grassa, vice president at Provident Healthcare Partners. “Rising interest rates and tight lending markets will likely impact larger transactions [$300 million and higher] more than most lower middle market deals.”
According to data captured in the LevinPro HC database, BHC transactions totaled 108 in 2022 after the total reached 125 in 2021. The numbers were 72 in 2020 and 76 in 2019. Only 11 BHC deals have been posted so far this year through February 16.
“Most independent business owners view a transaction as an opportunity to take some chips off the table, diversify wealth and ultimately align with a partner to take their business to the next level,” Grassa said. “Private equity [PE] firms that have exited their investment have likely done so to cash in on a good investment, taking advantage of a very frothy market. Even in the face of recessionary pressures and rising interest rates, the market continues to be seller-friendly.”
PE acquisitions of BHC companies have tracked the overall trend for the sector in recent years.
PE entities purchased 65 BHC companies in 2022 after there were 71 transactions in 2021. The totals were 55 and 50 in 2019 and 2020, respectively.
“The broader macroeconomic environment has already had and will continue to have an impact on deal activity in 2023,” said Rush Brady, associate vice president, development at Odyssey Behavioral Healthcare.
Analysts expect the Federal Reserve to continue raising borrowing costs and to announce quarter-point, interest-rate increases at meetings in March and May with a 4.75% to 5% year-end projection.
The substance use disorder (SUD) subsector, which was the most active specialty within the BHC sector during 2020, 2021 and 2022, has tracked the overall data within the BHC M&A landscape.
There were 27 and 26 SUD deals in 2019 and 2020, respectively. The total nearly doubled to 50 in 2021 before dropping to 44 last year.
So far this year, however, there has only been one such transaction.
“There is a tremendous need for quality, evidence-based SUD providers,” Brady said. “That subsector is starting to fall behind pure mental health services in terms of M&A activity.”
Despite the challenges facing industry professionals and their efforts to bring deals to fruition, the consensus appears to be that there is inherent strength in the BHC sector that would prevent a freefall in deal activity.
“While the behavioral health of the country has been declining steadily for many years, the COVID-19 pandemic really emphasized the need for accessible, affordable and quality mental health services,” Brady said. “The pandemic has also led to significant de-stigmatization of mental health conditions which has empowered more individuals to seek care where they might not have done so historically.
“Any program that aims to treat a client through all stages of their care journey will have the best outcomes, which will ultimately lead to stronger negotiating leverage and higher investor interest.”
Grassa emphasized that there is upside potential for BHC investors.
“There are significant value creation opportunities within the behavioral health space,” Grassa said. “Given how fragmented and immature the market is, investors see an opportunity to add value through payor strategy, contracting, digital marketing, organic growth as well as through acquisitions.”
