The club of investment firms financing business transitions to employee ownership has grown from a small handful of funds to a roster of more than three dozen active managers.
Across employee stock ownership plans, employee-ownership trusts and the “shared ownership” approach increasingly being adopted by large private-equity firms such as KKR, employee ownership is gaining traction as a strategy for both wealth-creation for workers and value-creation for businesses.
“I’ve been studying employee ownership for 30 years and this is the most momentum I’ve ever seen it have, in terms of interest among the business community, among corporate leaders and politicians,” says Pete Stavros, KKR’s co-head of global private equity and the firm’s champion for broad-based employee ownership (for background, read Stavros’ Q&A in ImpactAlpha, “Employee ownership is a competitive advantage in private equity”).
“There’s new interest in co-ops. There’s new interest in employee ownership trusts. There’s interest in the Ownership Works model. There’s really renewed interest in ESOPs,” he told ImpactAlpha.
“I’m supportive of all forms of employee ownership,” he said, adding, “I think they all have pros and cons.”
Ownership Works, the nonprofit promoting shared ownership strategies among private equity firms, said member firms had reached a combined $1 billion in payouts to workers, toward a 2030 goal of distributing $20 billion in wealth. Some $8 billion in employee wealth is currently held in still-active shared ownership plans, according to Stravros.
Stavros’ attempt to mobilize PE firms around shared ownership, widely applauded, also has drawn criticism. In a post last month, Brian and Katie Boland of the Delta Fund, which has invested in employee ownership strategies like Common Trust, Torana Group’s Essential Owners Fund and Obran Cooperative, took aim at the KKR and Ownership Works model (for background see, “As private equity firms start to share the wealth, low-income workers get just a little bit”).
The Bolands dissected KKR’s $3 billion sale in 2022 of CHI Overheard Doors to Nucor Corp., in which it paid out $360 million to the company’s 800 employees, or about 15% of the $2.3 billion in profits they helped create for the PE investor and its limited partners. Their verdict: “equity washing.”
“There’s no ownership involved. They’re not actually giving equity in the company when they purchase it. The workers are not actually equity holders [and] they’re not actually able to vote or have board representation in the company,” Brian Boland told ImpactAlpha.
“We’ve been concerned about the way they have sucked up the oxygen in the room and gotten all the press, and that everybody’s holding them up as the ‘We can do good while doing well.’ We just don’t believe that what they’re doing is ownership,” added Katie Boland.
On LinkedIn, some commenters pointed out the often-considerable financial benefits to workers from even limited shared ownership strategies. In response, the Bolands said that although payouts in the PE ownership deals can be a meaningful sum for workers and their families, the amount employees ultimately take home after taxes pale in comparison to the returns of the private equity firms.
The pair favor what they call “truly equitable models” of employee ownership, such as those adopted by firms like Common Trust, which offers financing to business owners to sell to employee ownership trusts, and Essential Owners Fund, which acquires and transitions to employee ownership middle-market companies in healthcare, transportation and other essential industries.
Stavros challenged many elements of the Bolands’ analysis. Employee stock ownership plans typically add 5% to 8% of worker’s salaries per year, or 25-40% over five years. KKR’s goal is to add 100% of one year’s pay over five years. The CHI exit provided more than six times the annual salary of some senior workers, Stavros said.
Stavros said a negative of the shared ownership model employed by KKR and other private equity firms is the duration of the employee ownership plans. Private equity firms hold their portfolio companies for an average of about 6.5 years; if the new owner doesn’t continue the employee-ownership program, that short timeframe limits the potential upside for workers (Nucor, the acquirer of CHI, for example, replaced the shared ownership plan with a less comprehensive profit-sharing plan). ESOPs, in contrast, typically last from 15 to 20 years.
“So that’s not as good,” Stavros said. “I understand that critique.”
Employee buyout funds
New York-based Transform Finance, which is scanning the market for new funds that are raising capital to finance alternative ownership enterprises, estimates $1 trillion is needed to meet demand for financing for employee-ownership transitions in the US. Research from Rutgers University’s Institute for the Study of Employee Ownership and Profit Sharing counts roughly 140,000 businesses with 33 million employees with a combined total of $25 trillion in revenue that are eligible to become employee-owned through ESOPs.
Among the new set of employee ownership-focused strategies is Liquidus Partners, a San Francisco-headquartered private credit investment firm raising a $300 million fund to finance business sales to ESOPs. “We’re in multiple discussions with institutional LPs and family offices as potential anchor tenants in the fund,” says Liquidus’ Brendan Richardson.
The total number of ESOP-owned companies in the US has hovered around 6,000 as some companies exit and new ESOPs are created. A key barrier to the formation of new ESOPs is lack of financing to help selling owners get their cash upfront. Liquidus plans to help owners exit more quickly by acquiring the seller’s note, alongside other ESOP-friendly financial products to free up liquidity for exiting ESOP worker-owners approaching retirement.
The goal “is to, over time, significantly expand the creation of ESOPs and open this market to significant institutional capital,” Richardson told ImpactAlpha. “Capital that understands the value and the potential of ESOPs is limited. It shouldn’t be. These are companies which consistently outperform their non-ESOP peers.”
Chicago-based Monarch Investment Partners, another newly-launched private credit firm, plans to offer flexible capital to meet up to 100% of the liquidity needs of sellers in ESOP transactions.
Apis & Heritage Capital Partners closed on $85 million in commitments towards its second second employee-led buyout fund. The Washington, DC-based manager is eyeing a $250 million final close in October later this year, with a goal of creating 3,000 new worker-owners over five years.
In Philadelphia, Allivate Impact Capital is raising a $10 million fund to finance the conversions of small businesses to employee ownership. In Baltimore, the Cannabis Employee Ownership Fund is seeking up to $25 million to form employee-owned cannabis businesses (see ImpactAlpha’s database of Ownership Economy funds).
Lafayette Square, a lender to middle-market companies with a focus on quality jobs, in June provided debt and equity capital to help Mosaic Capital Partners finance an employee-ownership transition at Ickler Electric in San Diego.
Bipartisan appeal
Helping hardworking Americans gain an ownership stake in the companies they are helping to build is one of the rare policy ideas to enjoy bipartisan support in an otherwise divided US Congress. Sen. Bill Cassidy, Republican from Louisiana, earlier this year referred to ESOPs as the intersection “where Karl Marx and Adam Smith meet in warm embrace.”
Cassidy has introduced two ESOP-related bills in Congress. The Employee Ownership Fairness Act would amend the 1974 Employee Retirement Income Security Act, or ERISA, and the Internal Revenue Code to remove the cap on retirement savings for ESOP worker-owners. His other bill, the Employee Ownership Representation Act, would enable employee ownership organizations to represent ESOP-owned businesses on the DOL’s ERISA Advisory Council, a federal body that advises the US Secretary of Labor on employee benefit plans.
“Workers who are also owners should have a seat at the table in shaping policies that affect the combination of a worker and an owner,” Cassidy said at a recent congressional hearing, “Empowering Workers by Expanding Employee Ownership,” before the Senate’s committee on health, education, labor and pensions, or HELP.
The hearing featured leaders of worker-owned US companies, including Brock Barton of King Arthur Baking Company, Acadian Ambulance’s Eddy Dupuis and Bill Roark of Starfish Holdings, as well as longtime researcher and professor Joseph Blasi of Rutgers University.
Sen. Bernie Sanders, Independent of Vermont spotlighted employee ownership as a way to build wealth and shift economic power to America’s working class.
“At a time when the gap between the the very rich and everyone else in our country is growing wider, when millions of Americans are falling further and further behind, and when the economy continues to struggle to create jobs that pay a livable wage with good benefits, we need to expand economic models that broadly benefit the middle class, not just the 1%,” Sanders said.
Other potential ESOP reforms focused on potential ESOP reforms to address key barriers, such as valuation complexity and legal liability and federal government financing for ESOP transactions. Sanders reintroduced the Employee Ownership Financing Act, a bill that would create a $500 million loan program at the Department of Labor to provide financing for ESOP transactions.
“I strongly believe that employee ownership is one of those models which has enormous economic potential and the potential to improve the lives of millions of workers,” he said, citing former President Ronald Reagan’s support for employee ownership. “Reagan was right 38 years ago,” Sanders said.
Sanders’ bill is one of about a half-dozen employee ownership legislations that have been introduced in Congress. Sen. Roger Marshall, Republican from Kansas, and Sen. Tim Kaine, Democrat of Virginia, have introduced the Retire Through Ownership Act to remove legal and regulatory barriers for new ESOPs, with a focus on how company shares are valued in ESOP transactions.
Such technical considerations are only part of the challenge.
“The problem with employee ownership is it’s really hard,” Stavros said. “It takes years, and it’s all about driving employee engagement, teaching financial literacy, teaching people about the business, giving them financial information, giving them more voice in their work.” He said such challenges persist, whether companies are owned through ESOPs, employee ownership trusts, co-ops and shared ownership models.
“If this were so easy, just giving people stock, this would have been figured out long, long, long time ago,” Stavros said. “Unfortunately, this is incredibly difficult. It takes years and years and years of work. And by the way, it doesn’t always work in terms of the culture changing.”
