2024 could see an increase in behavioral health transactions, but a significant decline in initial public offerings (IPOs).
Private markets, particularly private equity investors and their platforms, have more than enough capital and incentive to make deals, making this year an attractive time for exits and deals. Still, experts told Behavioral Health Business it's doubtful any platform will IPO in 2024.
Paul Kasich, Managing Director and Head of Healthcare Investment Banking at Hexagon Capital Alliance, LLC “It needs to have great size and scale.” BHB. “I don't think there are a huge number of pure behavioral health companies that can claim to have this size and scale, with perhaps very few exceptions.”
Hexagon Capital is a multi-specialty investment bank based in Corona del Mar, California.
The behavioral health market remains highly fragmented. It is also still considered a “mom and pop” industry, lacking the sophistication found in other industries. This makes behavioral health an attractive investment, but it doesn't fit the profile of what the public market is looking for and won't do well as a public company.
The latest examples of behavioral health public market exits are Lifestance Health Group Inc. (Nasdaq: LFST) and Talkspace Inc. (Nasdaq: TALK). Both companies went public in June 2021. Each company's stock price is a fraction of its IPO price and is subject to intense scrutiny.
To varying degrees, each company's experience highlights the challenges of public markets. Their example contrasts with the benefits of private investment.
Still, an IPO in 2024 is not impossible. IPOs may be appropriate for models that require large amounts of capital to sustain the company before reaching sustainable cash flow. This can be an advantage for digitally focused companies.
“It's all about getting cash and getting more investors,” Hannah Zeitlin, a partner and healthcare transactions attorney at national law firm Foley & Lardner LLP, told BHB. “I think there are some [investors] Businesses want to earn a return on their investments, and businesses want to obtain growth capital. IPO is always an option and can be a good option depending on the development of the company. ”
What will a positive exit look like in 2024?
Kasich points out that private equity firms have raised a lot of money over the past few years and need to take advantage of it. The amount of untapped capital, known as dry powder, continues to grow, according to consulting and research firm McKinsey & Co.
According to S&P Global Market Intelligence, some of the largest holders of dry powder are Leonard Green & Partners (MindPath Health and The Stepping Stones Group), Warburg Pincus (Eleanor Health), TPG Capital (Banyan Treatment Center, formerly Lifestance Health) ) and KKR & Co. (BlueSprig Pediatrics, Geode Health, and BrightSpring Health Services).
“If you're an entrepreneur and you've been growing your business for the last 10 or 15 years and you've built a really solid business in behavioral health, you have a good chance of exiting successfully,” Kasich said. . BHB.
Even with deep pockets, the private equity industry is more sensible about the obstacles in the behavioral health industry. Blackstone's previous investment in the Center for Autism and Related Disorders (CARD) provides a warning.
This means that companies need to be at their best when it comes to exits and other transactions.
Richard Langen, co-founder and general partner of HC9 Partners, said, “The recent exit of behavioral health companies can be attributed to several attributes. Some of these attributes are important factors.” told BHB. “Effectiveness and operational outcomes will be successfully demonstrated. The other is the fundamentals of the path to profitability and growth.
“Before coronavirus, there may have been some nice-to-haves, but those nice-to-haves are no longer there.”
Lungen added that companies that demonstrate results and profitability stand out in the market.
While the success of an exit is highly subjective, important considerations include return on capital to investors and the platform, impact on the company's employees, and increased access to behavioral health services, Zeitlin said. he said.
Record levels of investment in behavioral health companies, particularly telehealth companies, just before and during the pandemic will require some action in 2024, leading to increased volumes.
“There is capital available to deploy, and behavioral health platforms that have grown rapidly during the pandemic have reached a point where they need to exit or do some kind of strategic combination to continue to grow and stay viable.” said Zeitlin.
For some companies, this could push the digital space toward the wave of consolidation that many experts have long predicted.
“There's not a lot of appetite among the entities that are acquiring or implementing mental and behavioral health businesses — employers, health plans, Medicaid plans, state governments, etc.,” Rugen said. . “From their perspective, these companies need to come together to serve the same patients or the same members.”
This approach makes the plethora of behavioral health point solutions more “easier to digest,” Rugen said.
From an investor perspective, private equity firms already in the space will need to raise additional capital to prove their acumen and exit platform companies, Kasich said. told BHB.
pressure to exit
IPOs come with some trade-offs to consider. This includes increased compliance costs and transparency mandates.
“I think it's just a tall order,” Zeitlin said. “Compliance must be a top priority for any healthcare company. But if you are a publicly traded company and are under constant regulatory scrutiny, it is even more acute, and perhaps even more demanding. ”
In no small part, this intense scrutiny has haunted LifeStance Health and Talkspace. The former has been the subject of lawsuits, harsh criticism and pressure to curb growth. Talkspace fired its founder after posting a lower-than-expected loss. It also turned its attention to the possibility that it could have the negative effect of being delisted. Currently, no delisting notice has been issued.
“Why take a company public and accept shorter decision-making timelines, operating under greater scrutiny, and just the costs of being a public company?” Kasich said. “You'd probably be much better off doing a deal with a private equity group.”
On the other hand, investors may continue to hold on to their assets, especially if they acquired them at a time when multiples were at historic highs. Still, the behavioral health multiple remains “stubbornly” elevated compared to pre-COVID-19 levels.
Still, you have more opportunities to acquire smaller additional targets. Private equity firms may be willing to make deals that expand the scale or expertise of their platform companies, Kasich said. He added that while the multiple is higher than usual, it is not on par with recent historic highs.
Historically, when inflation and interest rates are high, investors and platforms are likely to be more dispassionate when it comes to trading. But sources say it's not enough to cause a similar stagnation in 2023. There is also a view in the market that interest rates are expected to fall in 2024.
“The lending environment will become more favorable to closing deals,” Kasich said. “There are probably a lot of potential platforms looking to close deals. We think we'll see an increase in activity throughout 2024.”
