From Villain to Vanguard: Exploring the Role of Private Equity in Behavioral Health Care

In October, private equity firm Lee Equity Partners bought substance abuse disorder provider Bradford Health. A few months ago, CharlesBank Capital Partners — another PE player — acquired autism provider Action Behavior Centers. And in July, Revelstoke Capital Partners bought eating disorder veteran Monte Nido & Associates.

These three deals and others like them show how private equity is rapidly expanding its reach in behavioral health care. Over the past decade, PE investors have poured billions of dollars into the space, attracted by skyrocketing demand for services following the COVID-19 pandemic and the opportunity to consolidate a fragmented industry.

“Covid has made us all crazy,” Dexter Braff, president of M&A advisory firm The Braff Group, explained at the Behavioral Health Business Investment Conference. “The expectations of the investment community, when COVID really took hold in the market, they said, ‘We really need to get into this market; We knew it was good before.’”

As PEs have taken a more active role in health care, firms have found themselves in the crosshairs of consumer advocates.

Proponents of private equity say that cash flow gives behavioral health operators the opportunity to grow and invest in their businesses. However, critics argue that PE buyers prioritize profit over sick and defunct companies.

During a recently held HLTH event, a panel of PE investors said that companies generally do not fit the “Big Bad Wolf stereotype” that is often attached to them.

“It is hard enough to think about innovation and expansion or growth without private capital,” said Adage Nkwechchi, operating partner at Welch, Carson, Anderson & Stowe (WCAS) at HLTH. “Government won’t do everything we want to see happen in health care.”

WCAS is headquartered in New York and San Francisco. It specializes in health care and technology investments. In 2021, WCAS sold Springston to Medical Properties Trust.

According to data from The Braff Group, there were more than 200 private equity deals in behavioral health in 2021. While deal flow in the first half of 2022 lagged from last year, it was on track to slightly outpace 2020.

“While down, sponsored transactions are running only 11.4% over last year,” Braff wrote in the mid-year M&A update. “But if we break it down between market-entry platform deals versus follow-ons, the data tells us something else. While platform volumes are down 28.6%, follow-ons are running behind 2021 down 5.6%.

PE firms held accountable

Despite some negative perceptions about PE, it’s not quite the Wild West, said panelists at HLTH. PE firms need to prove their liability towards the limited partners investing in the firm.

“Every industry is judged by the worst examples from that industry. Were there bad actors? The answer is definitely yes,” KKR Managing Director Christopher McFadden said during the panel. “But I think the important thing is that limited partners want to know that they’re not bad actors. But [their investments] They are with people they can trust and confide in.”

New York-based investment firm KKR has completed a private equity transaction with $692 billion in total enterprise value. In 2021, it created Geode Health, a mental health provider.

It has also acquired Therapy Brands for $1.2 billion and led a $105 million Series C round of telebehavioral health company Brightline.

According to Fadden, private equity firms have three main responsibilities.

First, they are responsible to their investors, and they must prove that they can make smart and sustainable investments. Second, they have to manage the companies and leadership teams in which they have invested. The company’s ultimate responsibility is to make a successful exit in three to five years.

In turn, PE firms invest a lot of time and money in their due diligence process. Although PE has a reputation for eliminating companies, the vast majority of PE investors are looking to buy good companies and strengthen their businesses.

According to WCAS’ Enekwechi, it helped fuel their end game of an attractive exit.

“How we think about any company is a thoughtfulness about what it contributes to the ecosystem, the health care ecosystem,” Nquechi said. “It has to be something that we think we can take from good to better and great. That’s why we’re not looking for a company that you need to completely tear apart and rebuild.”

growing pains

While the private equity firms are not looking to spin off a company, change is inevitable, according to the panelists.

Private equity firms are responsible for successful leadership. And what needs of a company may change over time.

“The team that got a company from $0 to $500 million may not be the right team to bring it from $500 million to $1.5 billion. That’s just a fact,” said Ennecchi. Not that there’s anything wrong with that team. But if you’re looking at a CEO who’s been managing and operating a company that’s been a single-site company, and now you have a vision of moving this company from single to multi-site, it’s Have a different set of skills. ,

It is not unusual to see leadership changes at growing behavioral health companies.

Private equity-backed Aware Recovery recently underwent a C-suite shakeup, which its CEO, Brian Holzer, attributed to the changing needs of the organization.

“Some people measure up all the way,” said Ron Williams, operations consultant at Clayton, Dubilier & Rice. “They can handle the business at one level, put in another couple of $100 million, add $1 billion. They just keep going. Some people don’t. They hit a wall. It’s the leader’s job to face it.” The leader’s job is also to make sure that when you make change, people understand why you’re making change.”

Based in New York and London, Clayton, Dubilier & Rice is a private equity firm that has invested over $35 billion in companies. Its health care portfolio includes Vera Whole Health, which helps manage chronic conditions and behavioral health problems.

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