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Venture Capital Firms’ Interest Piqued by Mental Healthcare, but Analysts Doubt Long-Term Prospects
Venture capital firms showed unprecedented interest in mental healthcare in the final months of 2022, but analysts at the mergers and acquisitions firm Mertz Taggart said the development is more likely to be a product of circumstance and not the start of a new long-term trend.
In its latest behavioral healthcare M&A report, released earlier this week, Mertz Taggart said 49 behavioral healthcare deals were announced in the fourth quarter of 2022, a figure in line with the 50 transactions reported in Q3. Mental health saw the most activity of any subsector within the broader behavioral healthcare space, accounting for 33 announced deals. Unlike previous quarters, though, VC firms were highly active in the space. Venture capital firms were involved with 16 deals for mental healthcare organizations.
“A combination of an already red-hot mental health sector, technology, and the ability to scale quickly make venture capital firms’ interest in mental health somewhat unique,” Mertz Taggart managing partner Kevin Taggart said in the report. “I don’t see this phenomenon spreading to other areas of behavioral health because those don’t lend themselves to technology quite as easily, which is what VC typically invests in.”
While private equity firms, which have been involved with a high volume of behavioral health transactions in recent years, tend to invest in more established (and possibly struggling) companies, often buying a majority ownership stake, venture capital firms take a different approach. VC firms are known to spread their funds across multiple smaller investments in up-and-coming organizations.
It’s a more high risk/high reward approach that lends itself to the nature of the current mental healthcare market, but Taggart said it should ultimately be a short-term phenomenon.
“How short-term is yet to be decided, but the current pace is unsustainable, and we’re already seeing a number of these high fliers scale back, close, or struggle with public perception because of some of their business practices,” he said in the report.
The 33 mental health organization transactions announced in Q4 were the second-most of any quarter dating back to 2019, trailing only Q3 2022, according to Mertz Taggart. Addiction treatment and autism services and intellectual/developmental disabilities (I/DD) M&A activity showed similar stability. A total of 12 deals involving addiction treatment companies were announced, down slightly from the 14 reported in Q3, while autism and I/DD saw 5 deals announced, matching the prior quarter.
Aside from expecting venture capital firms’ interest in emerging mental healthcare companies to cool, Mertz Taggart analysts said M&A activity in behavioral healthcare overall could depend on debt markets, which have been “a little shaky,” Taggart said, adding that his firm has gotten word from several debt providers and PE groups that they are beginning to see signs of recovery regarding the debt market.
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