Employee ownership: Is it the future of private equity?

If you are looking for a shot of optimism, spend some time with Pete Stavros, partner and co-head of Americas private equity at KKR, who sister title Private Equity International named 2020 PEI Game Changer of the Year.

The work of Stavros’s team was flagged to me in 2018 by a specialist impact-investing consultant. Here was a conventional industrials-focused private equity investor making a big impact – by creating cleaner, safer workplaces and more engaged workforces – without being an “impact investor.”

Recently the private equity community has started to pay more attention to his work. Of particular interest is KKR’s habit of giving all employees an ownership stake in the company they work for.

A recent example involved manufacturing business Ingersoll Rand, formerly known as Gardner Denver. In September, 16,000 employees (excluding management) were granted stock options worth a combined $150 million. Taking into account an earlier equity grant and a rising share price, around $400 million of equity had been awarded.

It’s a simple idea, and one that builds on the private equity principle that has successfully aligned management teams with private equity shareholders for decades: ownership. Has it been a success for KKR? Stavros declines to discuss the performance of the deals, besides saying it has been a “win” for investors as well as employees. The market cap of NYSE-listed Ingersoll Rand was $18.6 billion at the time of writing. KKR originally delisted the business for $3.9 billion in 2013.

A year ago, Steffen Meister, executive chairman of private markets firm Partners Group, talked me through his firm’s thinking on stakeholder engagement. The next stage of private markets’ evolution will, he said, involve greater engagement with portfolio company employees.

“Unless there is more evidence available within the wider society that employees feel good about private-markets ownership, we will always have challenges,” Meister said.

Employee upside

Partners Group is working on a program that would see it channel some of its upside towards portfolio company employees.

Of course, while the idea of widening ownership is a simple one, it is not necessarily easy to execute. And there is a question of mindset: how many financial sponsors would give away a portion of the upside, when conventional wisdom says they don’t need to? It may not be an easy step to take, but forward-looking managers will see this as a competitive advantage and do exactly that.