Private equity starting to embrace employee ownership

Private equity’s playbook has long focused on giving financial incentives to management teams to ensure alignment. But what about a portfolio company’s workforce?

There are signs that workers are more often figuring into value creation plans as GPs explore shared ownership models.

KKR, a pioneer of employee ownership, is playing an outsized role in this regard. Early on, the firm developed a conviction that an owner mindset – created by giving workers a voice in decisions – is key to business optimization. It could, for example, address overlooked issues, such as high turnover rates.

The private equity giant has applied shared ownership principles to its investing since 2011. Beginning with deals in industrials, led by Pete Stavros, co-head of global private equity, activity has expanded to take in control investing in other sectors across the Americas platform.

KKR aims to eventually bring the practice to dealmaking on a global scale, though there are cultural and legal challenges to grapple with first.

Having so far introduced shared equity programs to 30-plus businesses, KKR’s influence is being felt more widely.

The firm recently agreed to sell audiobook publisher RBmedia to HIG Capital. This will result in a cash payout to workers based on their tenure, with long-term personnel earning up to 2x their annual salary. HIG reportedly said it would continue RBmedia’s program, possibly the first time this has happened in a sponsor-to-sponsor deal.

But KKR is not alone in advancing employee ownership. There are several private equity firms that have over time implemented their own schemes, while others have expressed an interest in doing so. GPs are also talking about it.

In a May interview with Buyouts, Matt Nord, co-head of private equity at Apollo Global Management, said, “If you’re protecting and investing in your employees, if you’re keeping them healthy and safe, if you’re allowing them to participate in the value creation, they’re going to be happy.

“And if they’re happier,” he said, “they’re going to stay and they’re going to be more productive.”

In another sign that employee ownership is catching on in private equity, sponsorship of non-profit advocate Ownership Works appears to be growing. This summer, Advent International and Sterling Group joined the organization, upping the number of GP founding partners to 24, Buyouts reported.

Founded in 2021 by Stavros, Ownership Works was initially backed by 19 private equity firms. Including Apollo, Ares Management, Goldman Sachs, KKR, Leonard Green & Partners, Silver Lake, TPG and Warburg Pincus, they pledged to carry out programs in at least three portfolio companies by 2023.

This effort is meeting with success, Ownership Works executive director Anna-Lisa Miller told Buyouts. She said the non-profit has 72 board-approved shared equity programs executed in businesses that are private equity-owned, impacting about 100,800 employees.