TPG Reaps $13 Billion by Making Allies of Health-Care TargetsBy
Buyout firm completing seventh industry sale in five years
‘We consistently sacrifice cash flow’ to grow, Sisitsky says
In private equity, sometimes the nice guys finish first. Playing friendly has paid off for TPG’s health-care team, which has scored more than $13 billion in profit on a string of deals since 2007.
Seven of them were exited through sales to bigger health-care operators in the past five years. The trades included the $8 billion sale of Par Pharmaceutical Holdings Inc. to Endo International Plc in 2015, UnitedHealth Group Inc.’s $2.3 billion purchase of TPG-backed Surgical Care Affiliates Inc. in March, and TPG’s pending sale of Iasis Healthcare Corp. to Steward Health Care System LLC.
Credit for TPG’s strategy goes largely to managing partner Todd Sisitsky and a network of executives and advisers he’s assembled. There’s no mistaking the mild-mannered, 45-year-old dealmaker and his health-care partners, Jeff Rhodes and John Schilling, for barbarians at the gate, and that’s the secret of their success, say those who have worked with them.
“Management teams like them,” said Steve Frank, the chairman of global health-care investment banking at JPMorgan Chase & Co., who worked on selling Par to TPG in 2012. “They’re nice guys with no arrogance, which is rare. Word gets around that people enjoy dealing with them.”
With private equity firms sitting on a record $842 billion in dry-powder capital, dealmaking has only gotten more competitive. To stand out, many firms are becoming more specialized by focusing on a handful of industries and building deep expertise in them, said Andrea Auerbach, the head of global private investment research at Cambridge Associates.
Health care has become a “real bread-and-butter sector” for TPG, Sisitsky said in an interview at his office overlooking San Francisco Bay, the Golden Gate Bridge cloaked in morning fog. He often doesn’t wear a tie, a contrast to peers at firms on the opposite coast. “It’s a wildly competitive space that’s only gotten more competitive in recent years.”
Constantly cultivating top executives across the health-care sector is central to Sisitsky’s method. The years-long initiative, in addition to helping win over management teams at target companies, has yielded a cadre of exclusive advisers -- a dozen medical doctors, a half-dozen PhDs and a former head of the U.S. Food & Drug Administration -- to evaluate deals and serve as directors at TPG-owned businesses. The network creates a virtuous cycle, Sisitsky said, as the private equity firm’s rewards for executives and advisers in turn attract more of them.
One is Paul Campanelli, who was Par’s president and chief operating officer during the four years Sisitsky spent pursuing the drugmaker. After the buyout, TPG installed him as chief executive officer and he’s now the CEO of Endo, where TPG remains the largest shareholder.
“Getting the right CEO is so much of the battle -- when we find them we’re almost overly persistent in courting them,” Sisitsky said. “You have to look at your ecosystem as an asset that you nurture. You invest your time and you give them currency too: engagement, respect and interesting opportunities.”
Campanelli said TPG’s approach caught him off-guard. After helping Par’s management define its goals, Sisitsky and his team stepped back, promising future capital for product initiatives and strategic M&A.
“Right off the bat it didn’t feel like due diligence -- it felt like a collaboration,” Campanelli said. “They allowed us to focus on running our business, and as long as we continued to produce, there was going to be financial support.”
TPG stuck to its game plan on Par: Spend years researching a space, acquire an under-appreciated business, boost research and development, build out products by buying and integrating smaller companies, and then explore an initial public offering or sell to a bigger competitor.
TPG doubled Par’s R&D in the first year, according to regulatory filings. The company then filed 24 new-drug applications in the first six months of 2014, four times the number in the year before TPG’s acquisition. The buyout firm also put in more money to help fund a key acquisition of JHP Pharmaceuticals LLC in 2014, which immediately added difficult-to-make injectable drugs to Par’s product set.
“That’s our playbook: We find foundations that we think can grow, then we invest in growth,” said Sisitsky, who spent his childhood in Maryland before attending Dartmouth College and Stanford University’s business school. “We consistently sacrifice cash flow in order to invest in growth that will only pay off, in most cases, over years.”
Buy & Build
TPG’s knack for winning add-on transactions for its companies -- it’s done more than 100 of them in health care since 2011 -- has expanded with its expertise and portfolio size, said Paul Levy, founder of the private equity firm JLL Partners. JLL invested alongside TPG in hospital operator Iasis, which is expected to complete its $2 billion sale to larger peer Steward Health in the third quarter.
Building companies like Lego blocks allows TPG to act more like a strategic health-care operator rather than a financial buyer when striking deals. It also creates bigger, more diversified businesses that are more attractive to larger buyers and public equity markets, Sisitsky said. The $490 million purchase of JHP, for example, transformed Par, which had been picked up by TPG for $2 billion. The company was valued at $8 billion in the sale to Endo three years later.
TPG struck its latest add-on last week, scooping up hospice technology provider Kinnser Software Inc. through Mediware Information Systems Inc., which TPG acquired in February. The buyout firm preempted an auction process for Kinnser because it had already been studying the business for months, said Sisitsky, and TPG added capital to back the bolt-on deal.
Risks are only increasing in health care as uncertainties deepen, said JLL’s Levy. Physician and hospital reimbursement rates, for example, frequently shift and are difficult to model, he said. And the fate of the 7-year-old Affordable Care Act, or Obamacare, remains in doubt, making underwriting new investments more complicated. Some investors have stumbled because they see changes as opportunities to take big bets before understanding the intricacies, Levy said.
TPG hasn’t hit a home run on every deal. The firm and its investors will earn about a 50 percent gain on Iasis after 13 years, while private equity firms typically target more than double that return in half the time. And rivals have scored big victories of their own in the sector. Bain Capital and KKR & Co. reaped more than $6 billion in profit -- a more than 400 percent gain -- on hospital operator HCA Holdings Inc. after completing their exit in February.
JPMorgan’s Frank said Sisitsky’s team benefits from near-unwavering support from the top at TPG, which was founded in 1992 and now manages $72 billion. The health-care group moves quickly with support from TPG leaders such as billionaire co-founder and co-CEO Jim Coulter, Frank said. In 2015, a month before the agreement to sell Par to Endo, Sisitsky was promoted to head of North American and European private equity, on top of his health-care duties.
“It’s been competitive the whole time Todd has been in this business,” Frank said. “But they’ve spent lots of time developing relationships and knowledge, lots of money, they’re smart, and they’re nice to people -- and they’ve risen to the top as a result.”