The Private Equity Paradox: Unlocking Growth by Sharing the Wealth

The always excellent Jamie Broderick, posted an interesting article on Private equity firms who are starting to change the way they engage with the employees of their portfolio companies - focusing on employee ownership as a way to enfranchise workers, especially those from underrepresented groups, while simultaneously enhancing the value of their portfolio companies through improved productivity. Whilst take up of Employment Share Ownership as part of PE strategies is not quite large enough to call it ‘a movement’ per se, neither is it a singular occurrence.

Private equity giant KKR set up a non-profit called Ownership Works in 2022 to challenge other PE firms to generate $20 billion in wealth for workers over ten years. More than twenty peer PE firms signed up.

Blackstone did not, but already had its own programme, Career Pathways, which helps its portfolio companies broaden their talent pipelines and implement more inclusive workplace practices, and now includes employee ownership. Blackstone says it will apply the ownership strategy to all portfolio companies in which it has a controlling interest, starting with climate tech company Copeland, set to be “the largest shared ownership initiative at a PE-backed company in history.”

Private equity critics will doubtless remain sceptical, but PE employee ownership strategies are attracting support from committed impact advocates, including impact media platform ImpactAlpha and The Predistribution Initiative, which calls it "a step in the right direction."

hashtag#impactinvesting hashtag#employeeownership hashtag#workplace hashtag#employeeengagement hashtag#smes Valloop Valloop Exchange Stephen Greenwood

Here's a breakdown of the potential impacts if all private equity investments had a clause mandating employee ownership:

Potential Benefits:

• Increased Employee Engagement and Productivity: Employees with a stake in the company's success are more likely to be engaged and motivated. This could lead to increased productivity and profitability.

• Improved Retention: When employees own a piece of the company, they're more invested in its long-term success. This could lead to lower employee turnover and a more stable workforce.

• Alignment of Interests: Employee ownership aligns the interests of employees and investors. This could lead to more sustainable business practices and a focus on long-term value creation.

• Attracting and Retaining Talent: Companies offering employee ownership might be more attractive to top talent who value a sense of ownership and shared success.

• Wealth Creation for Employees: Employee ownership can lead to significant wealth creation for workers, particularly if the company experiences significant growth.

Potential Challenges:

• Implementation Complexity: Structuring employee ownership plans can be complex, especially for large or geographically dispersed companies.

• Exit Strategies for Investors: Private equity firms typically have a set investment horizon and need clear exit strategies. Employee ownership could complicate these exits.

• Short-Term vs. Long-Term Focus: Employee ownership might incentivize short-term decision-making to maximize immediate profits, potentially conflicting with long-term goals.

• Distribution of Ownership: Deciding how much ownership to allocate to employees and how to distribute it fairly across different employee levels could be challenging.

• Company Performance Dependence: The value of employee ownership is directly tied to the company's performance. This could lead to financial insecurity for employees if the company struggles.

Overall Impact:

The overall impact of mandatory employee ownership in private equity investments would likely be mixed. There are clear potential benefits for employee engagement, retention, and wealth creation. However, significant challenges exist regarding implementation complexity, exit strategies for investors, and potential conflicts between short-term and long-term goals.

Additional Points:

• This is a complex issue with ongoing debate. There's no guarantee that mandatory employee ownership would be universally successful.

• A more nuanced approach, allowing for variations in employee ownership structures based on company size and industry, might be more practical.

• The long-term effects of mandatory employee ownership in private equity haven't been extensively studied, making it difficult to predict the full range of consequences.

• pen_spark