Welcome to the "Lessons from the C-suite" series, featuring Advisory Board President Eric Larsen's conversations with the most influential leaders in health care.

In this edition, Jeff Rhodes, partner at TPG Capital, talks with Eric about living with a business through cycles, the rise of the private markets, and how a frigid afternoon in Norway changed his life.

[Edited by Ben Umansky, Managing Director at Advisory Board.]

Jeff Rhodes, partner at TPG Capital

Question: Jeff, you are our inaugural private equity (PE) interview, and I'm excited about this for multiple reasons. First, I think we can agree that PE, as an industry, is highly complex and often opaque to the layperson. In health care specifically, I find a lot of very smart and very senior people may know anecdotally that PE is increasingly active in our space ($75 billion a year invested each of the past two years), and they may know some of the big names like KKR, Carlyle and Blackstone, but the knowledge gets thin after that. Would you mind sharing with our readers an overview of what exactly goes on in your world?

Jeff Rhodes: Of course, Eric, happy to. I'll first note that private equity has evolved a lot over the last 15 or 20 years. But the basic crux of it is that you form a partnership and you seek out investors. Those investors tend to be folks such as university endowments, public pension funds, sovereign wealth funds, and wealthy individuals. And with that group of folks, you form a pool of capital. So, they make a commitment to you that they're going to invest a certain amount of money into your fund. So, if someone has a $1 billion fund, what that means is they have commitments from investors—what we call limited partners (LPs)—that add up to $1 billion. It doesn't mean that you have $1 billion sitting in the bank. It just means you have commitments from these folks to fund your deals when you find them. But the really critical thing about this model is that it's a blind pool of capital. Investors aren't saying, "I like this deal. I don't like that deal." They're trusting the fund to find the right deals.

So, you try to find deals that are consistent with what you told your LPs you'd be doing with their money. Everyone has a different strategy. Maybe you're focused on a sector, or a geography, or a deal type, or different combinations of those. But you're going out and trying to accomplish that in a competitive marketplace. So you go and find companies that fit that strategy. Of course, the difficult thing is then convincing the current management team and shareholders of those companies that they should want to work with you and that there's a price that you'd be willing to buy and they'd be willing to sell. When that happens, you call your investors' capital commitments. Sometimes, but not always, you add a bit of third-party debt to make the total funding work, and then you own the company. And once you own the company, you need to have a clear vision of what you're going to try to do to make the company more strategic, more valuable, and on a slightly different path than when you bought it. If you do that well, then four, five, six, seven years down the line, hopefully, the business is worth more than when you bought it, and you find a buyer, and then you have the proceeds.

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Q: That's a great primer. But you mentioned that a lot has changed and evolved recently. What's different now? And how is this manifesting in health care?

Rhodes: When I got involved in private equity about 17 years ago, as long as you had a general sense for the way things worked, you could go out and do a deal and buy a company or a business that was in a good market, you thought it was well-positioned, and you kind of just ride it out. And you could have almost all your deals be just riding out things that you found and you liked and generate really good returns.

These days it's really hard to do that. It's become so competitive. The private markets have become so liquid that if you just go out and buy something with no game plan as to how you're going to support the management team to make it better, it's hard to generate consistently attractive returns. People think of private equity as deal doers, but really it's what happens in between the buy and the sell where most of the value is created. We are very focused on how we support management teams to grow businesses and become more strategic over time. If you don't have a strategy and capability to be a "partner of choice" for management teams and corporate partners, you are unlikely to generate attractive returns over time.

Q: I'm curious how the macroeconomic and market context affects all this. You mentioned the rising liquidity in the private markets—including an estimated $1.5 trillion in uncalled capital for PE, waiting to be deployed. On the other hand, there's a well-documented "de-equitization" trend with the number of publicly listed companies dropping by half—from 7,500 to 3,600—over 20 years. Then comes the chaos of 2020—a novel pathogen, massive unemployment, an historic stock market collapse, aggressive monetary and fiscal stimulus in response, a record equities recovery, a suddenly resurgent IPO market with $100 billion raised, the proliferation of special-purpose acquisition companies (SPACS)…a year for the history books by any measure, and health care very much at the center. How do you make sense of all these variables, and how is it affecting PE?

Rhodes: It's a good and complex question. I'll start to disentangle that by first highlighting the incredible rise of the private markets. Large companies can really scale and grow their businesses while remaining in the private market. It used to be that if you got to a certain scale, to continue to grow, you need to think about going public. But in areas like technology, where TPG has had investments from early on in Uber and Airbnb, for example, these businesses scaled to very significant levels staying in the private markets. That's possible because the private markets have developed this depth of liquidity.

Looking at health care, what you're seeing there is the same thing: Companies that in the past may have ultimately gone public or sold to a corporate owner to generate liquidity for their investors have been able to stay in the private market for a lot longer. So the rise of the efficiencies and liquidity of the private markets is something that's had a big impact on the M&A market over the last five to 10 years.

At the same time, we have had this incredibly extended period of very, very low-interest rates, which is pushing people to seek out ways to generate returns in a world where the risk-free rate is close to zero. One thing that's interesting about that dynamic is that while interest rates and the public market returns have varied, what investors expect from private equity hasn't really changed that much. Theoretically, there should be some private market illiquidity discount and there should be some risk premium for private equity versus public equity as people think about how they allocate their capital. But the truth is that whether we're in an environment where interest rates are 5% or close to 0, a lot of private equity seeks to deliver gross IRR of around 20%. That means net IRR is around the mid to high teens. It doesn't actually make sense from a finance theory perspective, but the target returns within private equity don't change that much even when the public market reference points do.

Q: How does TPG think about where to invest in a market like that?

Rhodes: We spend years in a sub-sector before making an investment, getting to know all the players, meeting the management teams. We develop deeper insights into the way that an industry really works and how value is really created over time. People can be deceived about the health of a business based on the P&L…the health of a business and its relevance to its ecosystem over time is not revealed on the P&L. It's revealed through living with a business through cycles.

We also think about heavy investments in organic growth. We'll get together with a management team and we'll say, "If you're going to own this business in your family indefinitely, what investments would you be making now to make it the most important player in this ecosystem over time? Forget about EBITDA. Forget about earnings growth. What would you be doing?" And people say, "Well, here's all these things, but, you know, the payoff is outside of your five-year investment horizon." Well, we might be involved a lot longer than five years. It doesn't really matter because if we're making the business more important to its ecosystem, more valuable to its customers, we're going to get paid one way or the other.

We also more than double R&D in our product companies, on average. Despite cost pressures in the system, we remain big supporters of true innovation to address unmet needs in health care products and services. And then we typically support management to be very active in M&A, although it's not M&A in the sense of making a simple financial play to buy something at ten times and synergizing it down to seven times. The M&A tends to be very capability-driven. That's actually something you're seeing more broadly as a major trend in health care M&A right now, which is that people are realizing in this new world they need to have capabilities that they didn't have in the past. Look at some of the major M&A that's between corporate and private equity. It's capability-adding to a large extent, not just financially driven. So, Humana partnered with us and Welsh Carson to acquire the nation's largest home care and hospice business. That's capability building. Right? A lot of the work that Optum has done, it's capability building. It's not just financially and synergy-driven. [Editor's note: The Daily Briefing is published by Advisory Board, a division of Optum.]

Q: Exactly right. So how has the overall investment thesis for private equity, and TPG specifically, into health care changed?

Rhodes: It's changed a lot during the 15 years I've been doing exclusively health care private equity, in much the same way as private equity has overall. What was originally a deal business is now a business-building business. Just figuring out how to do a discounted cash flow analysis or to set up a capital structure or to put a deal together doesn't create a lot of value. Where value gets created is in partnering with management teams to build businesses. And where real value is created is doing that in periods of change where you can be a catalyst for improving an ecosystem.

When I was originally doing health care private equity, there were really only five or six firms who were active, for a few reasons. First, early on, there was a perception that health care is such a regulated industry that it's very hard in a private, illiquid, setting to deal with stroke-of-the-pen risk. The second thing was that health care works in such non-intuitive, non-economic incentives that it wasn't necessarily something that people thought they could understand. And at that time, since people weren't dedicating all their resources, generally, on one sector, people were just putting it in the too hard category. The third thing was that health care was viewed as stable, steady-eddy, kind of boring, not that much change, not that much differential growth potential. Sure, you might go invest in a short-term acute care hospital company and there might be an opportunity to consolidate with another one, but there weren't going to be breakout growth opportunities. So there wasn't that much interest.

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Q: That's not health care today.

Rhodes: Right. In general, private equity and private capital tend to gravitate to areas where there's change happening. When the pot is getting stirred, that means that there's an opportunity to take a different view on the way things ought to be in the future and to invest in facilitating that. That's been happening in a huge fashion in the U.S. health care system in particular. That change opportunity, and the fact that the early firms who did a lot in health care private equity tended to do well, has attracted a ton of capital to the sector. You've seen that with deal volumes. For a long time, health care private equity deal volumes were $10, $15 billion globally. Over the last couple of years, it's $65 to $75 billion. It might be $100 billion depending on what you count. And the nature of the investments has been pretty different. It hasn't been just about seeking out a steady-eddy business that's growing at 3% and that one day might grow at 4% or 5%. It's been about people trying to take a view of how the U.S. health care system is going to evolve.

We have a U.S. health care system that's $3.6 trillion—one sector that's the size of the German economy, going through this incredible change. We are seeing fundamental change in a big way. From our perspective, the reasons are less to do with some of the things that captured the big headlines. It's less to do with the Affordable Care Act. It's less to do with whatever case is in front of the Supreme Court. It's more to do with forces on the ground that have been in place over time and are being accelerated. This $3.6 trillion sector continues to grow above the rate of the rest of the GDP. It's stressing the federal government, the state government, employers, households, and with benefit designs changing more and more, it's particularly stressing households. That sort of ineluctable force is putting a ton of pressure on the system where people are no longer willing to deal with 6%, 7%, 8% trend and just push it to somewhere else in the chain.

The other things that have been really interesting are the rise of physician employment, which has nothing to do with the Affordable Care Act, and the rise of consumerization when, for the first time ever, consumers are actually having to think about the financial implications of their care to a much greater extent than just having a $5 copay. These forces make people think about innovation in a different way. That's created all this massive change, and it's attracted capital to facilitate the change.

If I have a hangnail, maybe that doesn't need to be a $300 or $400 ER visit. Maybe there are different models. So lower-cost sites of care, whether it's home care, hospice, telemedicine, home infusion—those are areas that have attracted a lot of private equity interest.

Meanwhile, growth in more integrated care delivery models has attracted a lot of private equity capital that's related to the rise of physician aggregation. It's become a lot harder for a small physician group or an independent practitioner to make their goals these days in terms of the demands being placed on them by managed care, what's expected of them from their patients, or the level of technology investment they need to have. Those groups oftentimes need capital to grow and keep up with the changing demands on them, so that's attracted a lot of private equity.

A clear example, in my view, of private equity being a big positive in the ecosystem is in models that are seeking to think about where risk should reside, or how reimbursement can be based on something which is a win-win for the system tied more to outcomes as opposed to just the quantity of care. Those models are oftentimes capital-intensive or difficult for people to start up. It's very difficult to start up something like that without having a partner who can maybe help you to navigate it and also have capital to get you through bumpy years. Some of the most exciting models that are thinking about how reimbursements should change for providers, where risks should live, or how outcomes should be rewarded, are being backed by private equity. Those types of investments are all integrated across this nexus of this $3.6 trillion sector going through lots of change and needing some outside catalysts to support it.

Q: Jeff, that's fascinating—and there's a lot to unpack there. Let's home in on the physician side for a moment. So we have about 900,000 physicians in the country, give or take, of whom roughly 220,000 are primary care doctors. Traditionally, private equity in the physician space aggregated fee-for-service practices in dermatology, ophthalmology, dentistry, and eventually moved into gastroenterology, urology, women's health, etc. The consensus had been to buy at a 6x to 8x EBITDA multiple, acquire and integrate additional practices, and sell it for an 8x to 12x multiple. How valid is that model today? Especially with the recent sharp rise in valuations, most spectacularly evidenced by some of the recent IPO performances (Oak Street) and SPAC acquisitions (Cano Health) of physician companies where the multiples have shot up to 20x, 30x, even 40x?

Rhodes: Historically, the prototypical private equity physician practice roll up would have been exactly what you said, Eric. You start off with a business that has some level of regional scale, and you then buy that for some high single-digits multiple. You try to professionalize the back office, maybe you do a little bit better on managed care contracting, and then you go out and roll up other practices for mid-single digits (after synergies) and you try to sell the whole thing to someone else. It's largely a financial play, with little focus on true capability building. We've never done any investments like that. Those investments are making the business better by partnering with the physicians and creating the opportunity for physicians to have equity value in what they do, but that is probably the extent that people thought about the role of private equity or outside capital in physician groups. The downside is that when those models didn't deliver on the operational side and there wasn't really a strategic rationale to the system for the physician aggregation, the deal was just financial in nature. That's PhyCor, that's Med Partners—we've seen that cycle.

More recently we've started to see folks who are deeper in health care saying, "Hey, listen, if we're going to be involved with physician investments, we're going do it in a way that is positive for the ecosystem and accomplishes something." Better access. Cost containment. Better care and better outcomes, not just more care.

Q: Has Covid-19 accelerated that shift?

Rhodes: No question. Folks who had been reluctant to embrace value-based models are going to be more and more open to them. A lot of those folks who were most reluctant were in parts of the country that didn't have a big value-based framework of delivery models, or didn't have payers who were accustomed to providing that type of a model, or were large specialist groups that felt like they didn't need such models so why deal with them? But large specialist groups like that have been some that have been hit the hardest by Covid-19. So at Kelsey-Seybold and places like it, the phone is ringing off the hook with people who would like to have the stability of practicing in a framework that's being paid for value and outcomes as opposed to just doing more procedures. While the pandemic is obviously an immense human tragedy, there are silver linings that will come out of it in a push towards efficiency, whether it's around the site of care, whether it's around greater penetration of virtual care, whether it's around reimbursement models that focus on aligning incentives.

Q: Everybody's talked about risk—but the rhetoric around risk has never matched the reality. Very few payers have given it. Very few providers have managed it responsibly. But I think the consequences of well-capitalized primary care groups that now receive delegated risk will reverberate through the ecosystem and the effect on fee-for-service-dependent acute care will be serious.

Rhodes: What you're saying is absolutely right. And it will accelerate a challenge that already exists already for some incumbent players. Some of the areas that are attracting a lot of capital—lower cost site of care, models that push risk towards more value-based or outcomes-based approaches—those are all, in some senses, code words for keeping patients out of short-term acute care hospitals. Where do they create value? They create value by keeping post-acute patients out of nursing homes. They create value by either shortening length of stays or keeping patients out of short-term acute care hospitals altogether. There's always going to be a role for short-term acute care hospitals, but that role is going to evolve.

It's also true that people are realizing that the resilience of our delivery system has been challenged and found wanting through this time of Covid-19. Further de-bedding our short-term acute care hospital infrastructure may be the right thing in times of calm, but not in times of storm. How are we going to deal with that as a country? What incentives are we going to create to be prepared for the next storm, not just the calm times? That's a really interesting public policy question. But from a commercial perspective, where the investment capital is flowing is certainly pushing on institutions that, unfortunately, are going to come out of Covid-19 quite challenged.

The locations of where patients are treated will shift around a lot, and incumbents are going to have to adjust. This isn't something just against short-term acute care hospitals, who play an incredibly important part of our health care delivery system, but other incumbent players too. If you are an air ambulance company, a dialysis company, and you have had a business model that's been predicated upon having 5% to 10% of your patients constitute 110% of your EBITDA, you know, because through either commercial contracting or out of network they're paying 600%, 700%, 800%, 900% of Medicare, that model isn't going to work. As this pressure on the system continues, as risk-bearing models seek out the inefficiencies in a way that fee for service didn't, those models are not going to work. People reflexively look at this and say, "Wow, it could be some lean years for nursing homes and short-term acute care hospitals." But really what's happening is that inefficiencies in the system that had been allowed to persist because trend was 7% or 8% and no one cared that much are now getting pushed out much more rapidly than ever used to be the case.

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Q: It's interesting, Jeff, to hear you describe this PE "invisible hand" that is relentlessly looking for inefficiencies and asymmetries in the market. But it's not perfect—and I get the sense that collectively, the PE industry has had second thoughts about three big moves it's made in health care: air ambulance, emergency medicine, and some of the platform roll-ups in dermatology. Is that fair to say?

Rhodes: Well before the Affordable Care Act, TPG had always anchored itself around cost reduction and innovation. We've avoided those big three you mention because none of them struck us as having anything to do with cost-reduction or innovation. Now, emergency medicine as a private equity play worked for many, many sponsors in a row, but then the music changed, and what works now is not the same. Same with air ambulance—air ambulance could raise prices every six months and leverage balanced billing for out of network things at $60,000, $70,000 per transport, and it worked until it didn't.

So you have to step back to the first principles. A $3.6 trillion system growing in an unsustainable fashion, putting pressures that spider-vein all throughout the system. That's driving people to think about innovation in care delivery payment models and taking cost out of the system. So whether people are doing it from an altruistic perspective or it's just the invisible hand of the market, the clear signal is that if you want to be a successful investor in health care, you need to be aligning your investment theses with things that are taking cost out of the system. It's no longer possible to be making money in the inefficiencies.

Look at the way that Oak Street is valued in the public markets versus the way that a legacy business is valued. I'm not commenting on where valuation should ultimately land, but you don't need regulation to push people to allocate their capital towards more innovative models that are helpful to the system. The markets are driving people to do that. The vast majority of the $75 to $80 billion in health care private equity is being allocated around the themes that we're talking about because that's where opportunity is. Unfortunately, a significant majority of the stories written about health care private equity is around the dermatology roll-ups. I think they probably have some points on what happened in dermatology, but I don't think that's emblematic more broadly of where investment capital for private equity is going and the goals of it within the health care system.

Q: How do you see this playing out? What's your read-through of the incumbents and how they shift? Who wins? Who loses?

Rhodes: There are two forces that we need to think about. The more important one is the competitive force at work, like the way that plan sponsors and patients think about where they want to get care and what that means for patient flow and for incumbents. But the other is the public policy questions like is it valuable for rural communities to have a hospital there? Because I do think that in the aftermath of Covid-19, even with some of the policies in place around critical access and so forth, you're going to see just hundreds of rural hospitals closing. If you replace it with a hub and spoke system, is the spoke going to be enough? There's a big public policy decision around that.

But in the absence of that, what's very clear to me is that all the capital going into the system right now is arrayed around taking people to the lowest cost site of care that is appropriate for what they're doing and for the patient's situation. It doesn't always mean not in an institution. If you're a stroke patient, it might be an inpatient rehab facility. If you're an ICU patient, it might be an LTAC. But if you can be at home, there's going to be a lot of forces at work to keep you out of a SNF. And if you can be treated at an outpatient center, we have a lot of forces that work to keep you out of a short-term acute care hospital.

It's going to be particularly tricky for some of the best-run incumbents, because the best-run ones, over time, have developed market positions in their local communities that make them must-haves for any network. It has given them managed care contracting power to get really attractive in-network rates. They've developed a really good referral flow network. And so there haven't always had to be a lot of efficiencies. They haven't always had to drive innovation in their business model, although some have. And I think that's going to change. It's going to change in terms of the payment models that they're going to need to be willing to accept. The access points for care will be quite different and generally lower cost. It's hard for a health system to be really involved in moving patients from their highest cost, highest margin site of care in the hospital at $3,000 a day to having them at home at $50 a day. As much as that might be the right thing strategically to be part of that move, it's just going to be hard for short term acute care hospitals to pull that off. They're going to need to figure out how to be more efficient, investing in technology, figuring out what they're excellent at that can't happen anywhere else, like ICUs, and getting paid appropriately for that. Many of the leading systems are also looking at how partnerships can leverage their areas of excellence and local market presence and extend their business models into new areas, and there's an interesting role for private equity in those partnerships. We've had several very productive dialogues along those lines.

Q: One of the benefits of TPG is that you've got this expansive, panoramic view of other industries. You guys did Petco, Neiman Marcus earlier in its evolution, etc. So let me ask you this: Have you seen another industry where incumbents are getting disintermediated and commoditized and niched to death and then, with agility, were able to pivot to safer ground? Or where certain actors within it pivoted sufficiently to survive and thrive?

Rhodes: Well, you mentioned retail which, obviously, has been as disrupted as any. So, here's an interesting example. Why did Walmart become Walmart and Sears become Sears? Why did Walmart not just get smoked by Amazon? It's incredibly efficient. You've never seen a lower-cost approach to delivering for its customers. Walmart has been hugely focused on efficiencies to take cost out of their system, which is a lesson for the acute care hospitals, but also more willing to think about different channels for ways to deliver that efficiency, including e-commerce.

At one point when I was growing up, we went to Sears for everything. Now, I don't even know if Sears exists anymore. It didn't have the efficiencies of Walmart, and it didn't have the e-commerce platform to kind of keep up with it. At some level, there can be a big role for incumbents. But I do worry that too many hospitals are headed down the Sears path and not th Walmart path.

Q: I want to go back to your core thesis and talk a little bit about TPG and how your portfolio illustrates some of the themes we've been talking about—enabling and capitalizing this site-of-care shift, top-of-license practice, home as epicenter, etc.

By the math, TPG has $85 billion assets under management (AUM), and you've deployed $23 billion over 25 platforms across the last few years. Your most recent fund is $14.2 billion, including a health care sidecar fund of $2.7 billion. Talk about how these broad, high-conviction themes manifest in your portfolio.

Rhodes: We're a multi-sector firm, but health care has been one of our most active sectors, or perhaps the most active, for a long period of time, really, since the get-go. As we reflected back on how the opportunity set in health care private equity is expanding because of all these changes you and I have been discussing, we saw that there was this huge opportunity. Curiously, there have been a lot of middle-market firms focused on health care, but there haven't been more large-cap efforts the way there have been in some other sectors, like technology. So it just seemed to us to be a big opportunity. We also have done well in health care within TPG over time, so we're getting a lot of interest from our LPs in having more of their assets put against health care. But we didn't want our overall sector fund to get too weighted towards health care.

So, we had this idea to create a lot of flexibility for our LPs. If you like the historical sector mix that has existed, you can just invest in our main fund. If you want more exposure to health care, we're also creating this dedicated health care vehicle that will be side by side with the main fund. And that's TPG Health care Partners. That's the sidecar vehicle. We had demand to make it quite a bit bigger, but we wanted to make sure the first one we did really well and capped the sizing. It ended up being $2.7 billion, as you mentioned Eric, though the way to think about that is we have the flexibility to invest about $6 billion in health care because we generally invest dollar for dollar out of that fund with our main fund. So, through the course of this fund, we'll probably invest around $6 billion of equity into health care over four or five years. The last three years or so we've been investing around $1.5-2 billion of equity a year into health care deals. And so that's the backdrop.

Despite the pandemic, 2020 ended up being an incredibly active year for us because it was a culmination of many years of laying this groundwork around thinking about these core themes, developing relationships, and putting lines in the water. We returned around $3.5 billion of proceeds to our investors from sales of four or five different companies. And then we invested around $2.25 billion in new investments this year despite the choppy waters of the pandemic.

We have five investments in TPG Healthcare Partners. The average EBITDA growth of those investments this year is around 45% or 50%. So, these are businesses that are trying to drive change and are benefiting from the ability to be catalysts to stir the pot towards site of care, towards integrated care, towards value-based care.

Q: Your investments in WellSky, Kelsey-Seybold, and LifeStance are great illustrations of those shifts. Can you talk about your investments in those companies?

Rhodes: WellSky is a leading health care IT business that's providing technology solutions and data-driven services to the post-acute and related end markets. Now, post-acute is a relatively small percentage of total spend for the delivery systems, but it's a really big portion of the variance in spend and variance in outcomes. And the level of penetration of health care IT into post-acute has historically been pretty low. So we're bringing efficiencies to these markets that are enabling these providers to operate more efficiently, deliver better quality care, start to think about new payment models around risk and outcomes-based models, and just drive efficiency in that part of the market.

As for Kelsey-Seybold, investing behind physicians that are working together to deliver better solutions for patients and payers as opposed to just do most procedures or drive out of network contracting is a big theme we've already talked about. And Kelsey has been very forward-thinking. They've been doing this for six decades now. But you're seeing all these other physician groups with different models start to think about the Houston market. The physicians at Kelsey wanted to build on their heritage and leadership in the community. They know how to deliver high-quality care at a lower cost but wanted a business partner for the next step in their journey. So that's how we got involved in Kelsey.

And then there's LifeStance. LifeStance was the first deal that was done of any scale after the pandemic. We made that investment in LifeStance in April. It felt pretty edgy at the time. There were basically no financing markets; the world was falling apart. We paid a big multiple at the time. But one of the insights we developed was that the area of the greatest supply-demand imbalance in all of health care is outpatient mental health. And the supply there is just woefully inadequate for the demand that existed before Covid and the demand that's unfortunately going to surge after Covid.

LifeStance is the nation's largest outpatient mental health business. It is entirely focused on providing a wide range of outpatient mental health services across different types of clinicians, therapists, psychiatrists, psychologists, both prescribers and non-prescribers, and doing that, and this is a critical thing, doing that on an in-network commercial basis.

Unlike many other parts of health care, it is a business whose success is encouraged by almost all parts of the ecosystem. Payers want LifeStance to be successful because payers know that they have huge network adequacy issues around outpatient mental health because they've driven so many of these providers over time to cash pay because the rates were so inadequate. Patients wanted to see the business succeed and have more access. Even other providers wanted to see Lifestance succeed because they know that if you're a diabetes patient with mental health, the cost of treatment for that patient is much higher than without that mental health comorbidity. So, when you find an investment that's participating in the system in a way that causes the whole system to want you to succeed, you know, it can really take off. And LifeStance is growing at tremendous levels as a result of those factors and a world class management team. It's an example of how if you study health care long enough and you know where capital is needed to facilitate growth that will be encouraged by the broader ecosystem as opposed to growth that's just taking advantage of a short-term inefficiency or arbitrage, then you can have the conviction even in a difficult time like in the middle of a pandemic to wade in at a high multiple. And so that's how we got involved with LifeStance.

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Q: Jeff, 2020 as we noted was a very active year for TPG. As I look more broadly, I see tons of activity despite the pandemic, and multiples on the ambulatory side that are still at pre-pandemic levels, if not higher. In your estimation, what's going on here?

Rhodes: It's a broader question of the public markets. You see it also in medtech, where medtech companies that are levered to elective procedures haven't really traded off that much. I think that what's happened is that, even before the vaccine, there was some sense that people were just going to give a pass to 2020, and all valuations are being done off of some 2021 or 2022 future look, and we're just going to look past the current scenario. Obviously, people are more willing to do that in a bull market when the risk-free rate is zero and they're kind of struggling to find places to generate growth and returns.

Q: Last question, but an important one, is a reflection on your career thus far. So many of the executives I interview have divergent paths to their current roles, and your resume pre-TPG is in keeping with that trend of divergence. You didn't start off trying to be an investor—you were going to be a professional skier, right? How on earth did you make that leap, and is there some lesson there for the PE-curious?

Rhodes: My career walk was sort of a winding path, and I really feel like there's a lot gained in having a windy path in your career and seeing different things. And I think it's a little bit of a pity that younger people now who are going through college, perceive that they have to be on such a narrow path to achieve their career goals. I grew up in Minnesota where one of the most popular sports by participation is cross-country skiing. I went to an inner city public high school in St. Paul that happened to have a great cross-country ski team. We won the state meet three years in a row while I was there. We just had this group of kids who had a little bit of a chip on their shoulder and were really focused on the sport and who did well.

So, when I was looking at colleges, it wasn't that sophisticated of an approach. I basically looked at schools that had a Division I cross-country ski team and showed up anywhere in the U.S. News & World Report rankings. I ended up falling in love with Williams College. It's a spectacular setting and I just decided to go there. So, it wasn't a really analytical approach. But it's a great school. I did ski racing there all four years. And I didn't, at any time during those four years, do an investment banking internship or anything that would be remotely professional.

And then when I graduated from Williams, I wanted to continue with ski racing, so I moved to Norway. And I was living in a town there called Trondheim, which is just below the Arctic Circle. So, that's what I was doing after I graduated from college. My mother was horrified after taking out all these loans for college and everything. I was throwing it all away. But that's what I wanted to really do and that's what I was focused on.

I do remember the moment where I sort of pivoted with my career. Trondheim is a beautiful city, but in the winter, because it's so far north, it's basically dark. There's a period from around 10:00 a.m. to 2:00 p.m. that's sort of dusk-like, but otherwise, it's just totally dark. So I was skiing and it was 2:00 or 3:00 in the afternoon and it was totally dark, and it was cold, and I had a headlamp on to train. This was the early days of email, and I'd been getting emails from friends back home describing what they're doing job-wise, and I started comparing it to what I was doing, freezing, with a headlamp on, training in the artic circle. I remember thinking, ""What the hell am I doing with my life?"" So, I immediately sent off a bunch of emails to friends who had what I perceived to be real jobs. I got interviews with a handful of consulting firms in the Boston area. And I ultimately got a job with McKinsey in Boston. It's a great way, if you don't really know exactly where you want to go with your career, to just learn about business and study lots of different situations and work with smart people, had a really good culture, see a lot of different situations. And I went back there after I graduated from Harvard Business school in 2003.

But then, lo and behold, TPG raised TPG V where the fund size went from approximately $5 billion to approximately $15 billion. TPG historically had been kind of a smaller partnership. It had been very, very successful, but they needed to hire folks to invest the larger fund. And at that time, because private equity was such a cottage industry, there wasn't this whole array of folks who had private equity experience. And if they did, for the most part, they were sticking where they were. So TPG interviewed all kinds of different people, trying to find folks to hire as they were building out the team. They had all these criteria that they were seeking to meet, like a background in finance a background in private equity. I basically didn't meet any of them.

But after searching through a lot of other options that didn't work, they decided to give me a chance hoping that I could figure it out. I'd never really run a model, I didn't know how to look at a model, but I had spent a lot of time studying industries and businesses. If you think about what makes folks successful in private equity and what makes private equity firms successful, it's not really about financial engineering and swashbuckling deal-doers. It's really about being able to study industries and companies, identify areas that should be winners over time, and then being able to partner with folks to try to be helpful.

So, some of the skills that I developed early on in my career have been quite helpful in that sense, even though the path that I took to get here was different. Unfortunately, it's perceived to be the case that if you want to be in PE now, you need to get investment banking internships starting sophomore year in college and you need to study finance or something like it, and you need to go immediately to investment banking after college, and so on. As if there's only one on-ramp. And that's certainly the easiest on-ramp, but if you look at the senior people in private equity or some of the people who founded the private equity industry, very few had that path. There's a lot to be gained by the life experience of seeing different things and integrating that into how you approach the work.

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