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Private equity behavioral M&A dips

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Illustration: Sarah Grillo/Axios

Although private equity-led behavioral health M&A dipped this year, patient demand and interest from diversified strategics will likely ratchet activity higher going into 2023, according to a PitchBook report on Q3 M&A in health care.

Why it matters: More than a few sponsor-backed behavioral companies are due for a trade — but ideal timing and pricing are murky.

Driving the news: The behavioral health sector is plagued with reimbursement woes and staffing shortages, driving down dealmaking, PitchBook reports.

  • For example, ABA treatment for autism — once red-hot in the sponsor world, with Blackstone paying $600 million for CARD in 2018 — has seen flat reimbursement rates as staffing costs increase.

By the numbers: Sixteen autism and pediatric therapy deals have been made year-to-date, primarily marked by add-on activity, per PitchBook data.

  • Only one deal was made in the intellectual and developmental disabilities (IDD) space, but 36 deals closed in the substance abuse disorder and general mental health space — though just three were platform acquisitions.

Yes, but: Notable PE-led deals in behavioral health were still made this year.

  • Revelstoke’s $700 million-plus acquisition of eating disorder treatment business Monte Nido & Affiliates in August.
  • Lee Equity’s acquisition of substance abuse treatment company Bradford Health Services in October.
  • Charlesbanks’ $840 million acquisition of ABA provider Action Behavior Centers in August.

Plus, Optum closed a high-profile behavioral deal this year with its acquisition of Refresh Mental Health from Kelso Private Equity in March.

  • Kelso bought Refresh for around $700 million in 2020, holding the asset less than two years before exiting.

What they’re saying: Behavioral businesses are still fetching frothy multiples, but the math is a little different, one health care banker says.

  • Buyers are less willing to bid on highly adjusted pro-forma EBITDA figures, and EBITDA-cash conversion is very important.

Between the lines: Primary care has been the major focus of strategics like Walgreens, Amazon and CVS looking to play in value-based care.

  • Increased incorporation of specialty care could mean behavioral gets folded into those platforms.
  • PitchBook analyst Rebecca Springer notes that behavioral has become a popular primary care add-on, describing Clayton, Dubilier & Rice-backed Vera Whole Health and Everside Health as examples.

What we’re watching: A second health care banker cited Ideal Options, backed by Varsity Healthcare since 2018, and venture-backed Spero Health as targets to watch for on the block early next year.

  • If and when Linden Capital-backed Pinnacle Treatment trades, the price tag should help set some expectations for next year.

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