In October, private equity firm Lee Equity Partners bought substance use disorder provider Bradford Health. A few months earlier, Charlesbank Capital Partners – another physical education player – acquired autism provider Action Behavior Centers. And in July, Revelstoke Capital Partners bought eating disorder giant Monte Nido & Associates.
These three deals and others like them reflect how private equity is rapidly expanding its reach into behavioral healthcare. Over the past decade, private equity investors have invested billions of dollars in behavioral health. In recent years, they have been attracted by the surge in demand for services in the wake of the COVID-19 pandemic and the opportunity to consolidate a fragmented industry.
“COVID has driven us all crazy,” explained Dexter Braff, president of mergers and acquisitions advisory firm The Braff Group, at the Behavioral Health Business INVEST conference. “The expectations of the investment community, when COVID really hit its hooks in the market, had them saying, ‘We really need to get into this market; we knew it was long before.
As PE takes a more active role in healthcare, companies are increasingly finding themselves in the crosshairs of consumer advocates.
Proponents of private equity claim that the injection of cash gives behavioral health operators the opportunity to grow and invest in their business. Critics, however, argue that PE buyers are prioritizing profit over patients and are tearing up companies.
At the recent HLTH event, a panel of private equity investors said companies generally don’t deserve the “big bad wolf stereotype” that is often associated with them.
“Quite frankly, it’s hard to think about innovation and expansion or growth without private capital,” Adaeze Enekwechi, operating partner at Welsh, Carson, Anderson & Stowe (WCAS), told HLTH. “The government will not fund everything we want to see happen in health care.”
WCAS is headquartered in New York and San Francisco. She specializes in healthcare and technology investments. In 2021 WCAS sold Springstone to Medical Properties Trust.
In 2021, there were more than 200 behavioral health private equity deals, according to data from The Braff Group. While deal flow in the first half of 2022 lagged last year, it was on track to be slightly ahead of 2020.
“While down, sponsored deals are only 11.4% behind last year,” Braff wrote in a mid-year update on mergers and acquisitions. “But if we break it down between market-entry platform deals and follow-ups, the data tells us a bit more. While platform volume is down 28.6%, follow-ups are just 5.6% behind 2021.”
Private equity firms held responsible
Despite some negative perceptions about the EP, it’s not quite the Wild West, the HLTH panelists said. Private equity firms must prove their liability to limited partners who invest in the company.
“Every industry is judged by the worst examples in that industry. Were there any bad actors? The answer is that there definitely are,” KKR chief executive Christopher McFadden said during the panel. “But I think the main thing sponsors want to know is that they’re not the bad actors. But [their investments] are with people they can trust and trust.
New York-based investment firm KKR has closed private equity deals with a total enterprise value of $692 billion. In 2021, he created mental health provider Geode Health.
He also acquired Therapy Brands for $1.2 billion and led telebehavioral health company Brightline’s $105 million Series C funding round.
Private equity firms have three main responsibilities, according to Fadden.
First, they are responsible to their investors and must prove that they can make smart and sustainable investments. Second, they must manage the companies and management teams in which they have invested. The company’s ultimate responsibility is to successfully exit in three to five years.
In turn, private equity firms invest a lot of time and money in their due diligence process. Although private equity has a reputation for breaking up companies, the majority of private equity investors are looking to buy good companies and build their business.
This helps promote their endgame of a lucrative exit, according to WCAS’ Enekwechi.
“There’s a reflection on how we think about any business, what it contributes to the ecosystem, the healthcare ecosystem,” Enekwechi said. “It has to be something that we think we can take from good to even better and awesome. So we’re not looking for a business that you have to completely tear down and rebuild. »
While private equity firms may not be looking to break up a business, change is inevitable, panelists said.
Private equity firms are responsible for successful leadership. And what a business needs can change over time.
“The team that took a company from 0 to $500 million may not be the right team to take it from $500 million to $1.5 billion. That’s just a fact,” Enekwechi said, “That’s not to say there’s necessarily anything wrong with this team. But if you look at a CEO who’s managed and led a business that’s a single-site business, and you now have the vision to grow this business from a single site to multiple sites, … it’s a different skill set.”
It’s not uncommon to see changes in leadership in growing behavioral health companies.
Private equity-backed Aware Recovery recently underwent a C-suite revamp, which its CEO, Brian Holzer, attributed to the organization’s changing needs.
“Some people go all the way,” said Ron Williams, operations consultant at Clayton, Dubilier & Rice. “They can run the business at one level, put in another $100 million, add $1 billion. They just keep going. Some people don’t. They hit a wall. The leader’s job is to deal with that. The leader’s job is also to make sure that when you make changes, people understand why you are making those changes.
Based in New York and London, Clayton, Dubilier & Rice is a private equity firm that has invested more than $35 billion in businesses. Its healthcare portfolio includes Vera Whole Health, which helps manage chronic disease and behavioral health issues.
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