Mergers & Acquisitions Magazine, March 3, 2021

The pioneering experience of global investment giant KKR & Co. and its Industrial Group, led by partner Peter Stavros, helped spur the trend. Starting in 2011, KKR began using a broad-based employee engagement model that seeks to make every worker in a U.S. manufacturer it acquires an owner.

As in the classic romantic comedy “When Harry Met Sally,” the attraction between private equity and employee-owned companies didn’t happen overnight. But as the parties got acquainted, the lure became irresistible. Over the past decade, PE firms’ interest in employee ownership has been rising gradually. Initially anecdotal, it has gone mainstream.

The pioneering experience of global investment giant KKR & Co. and its Industrial Group, led by partner Peter Stavros, helped spur the trend. Starting in 2011, KKR began using a broad-based employee engagement model that seeks to make every worker in a U.S. manufacturer it acquires an owner. Using this approach, KKR has awarded more than $500 million of stock to roughly 20,000 nonmanagement employees across eight of its industrial companies. Notably, motorcycle maker Harley-Davidson just announced that KKR’s model inspired it to give stock grants to 4,500 of its hourly and factory employees, aligning them with executives and shareholders.

A growing number of other PE firms are active in investing alongside employee ownership via an ESOP structure. Long Point Capital is considered the leading one, having made investments in six companies owned 100% by ESOPs. Also, the nonprofit Transform Finance has a PE fund model for employee ownership conversions.

Our firm, Verit Advisors, has seen a sharp uptick in consultations and transactions involving PE firms, especially since Covid-19 struck. We recently advised a PE-owned consumer products company on ESOP sale alternatives, providing expertise in ESOP structuring, valuation and debt capital markets. Outcome: an exit for the PE firm and an exciting opportunity for the company to become 100% employee-owned.

Among other benefits, PE firms are finding that an ESOP strategy which gives workers ownership benefits helps as a recruiting tool against start-ups and traditional PE-backed firms that can offer stock options and other related perks to just a select group of executives.
The impact of ESOP arrangements on factory and office workers’ morale and engagement can be enormous. At KKR’s C.H.I. Overhead Doors making garage doors, poor employee morale and safety and quality issues prevailed when KKR acquired it in June 2015. An initial employee performance survey found that 90% of respondents considered morale terrible.

After KKR made the 700 employees an owner via a widespread free option plan in a leveraged capital structure, it paid an early cash dividend to show ownership was real. The dividend ranged from $1,300 to $4,000 for hourly workers. It distributed actual stock certificates and opened up Fidelity Investment accounts for each to make the ownership benefits tangible. Improvements in improved operating and financial performance and in employee sentiment were noteworthy. A subsequent employee survey drew 80% participation vs. 30% in the first survey and found employee satisfaction 60% above the company’s benchmark vs. 90% below the benchmark earlier.

At another KKR firm, Capital Safety Products, bought in 2012 for $1.1 billion and sold to 3M in June 2015 for $2.5 billion, 204 employees made over $100,000 and 44 made more than a million in the sale under the employee-ownership plan.

With results like these, it seems clear that more and more PE firms will say – again borrowing from a now-iconic line from “When Harry Met Sally – that “I’ll have what she’s having” and think about employee ownership strategies to increase solid and successful deal flow.

For more, watch the video interview with Verit Advisors’ Mary Josephs – one of our 2021 Top 25 Most Influential Women in Mid-Market M&A – and Mergers & Acquisitions’ Mary Kathleen Flynn from M&A’s Most Influential Women Speak.

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