Private Equity’s New Playbook: Profits with a Stake in Worker Ownership
In recent years, private equity has undergone a notable shift in strategy, as several major firms now experiment with employee ownership. Known for aggressive, profit-driven tactics, private equity historically prioritized financial engineering and often engaged in leveraged buyouts that led to significant job cuts. However, firms like KKR are pioneering a different model—one that includes sharing equity with employees at companies in their portfolios. This approach, while potentially at odds with the industry’s reputation, aligns with growing efforts to demonstrate corporate responsibility and address public skepticism.
A prominent advocate of this shift is Pete Stavros, KKR’s co-head of global private equity. Observing high turnover rates and lack of employee motivation in manufacturing sectors, Stavros experimented with giving workers a stake in the company. His thesis was simple: more engaged employees would boost productivity, reduce turnover, and, ultimately, drive higher returns. An early trial of this model involved GeoStabilization International (GSI), a company specializing in landslide prevention. Before the program, GSI saw employee turnover rates as high as 50%. By offering equity, KKR observed a sharp reduction in turnover to 17%, signaling that ownership could play a powerful role in employee retention, even in challenging work environments.
The financial rewards of this program came full circle in 2023, when KKR sold GSI, resulting in a significant $1 billion payout. Of that, $75 million was allocated to GSI’s workforce, many of whom received six-figure sums. For some employees, this was a transformative opportunity to save, purchase homes, or retire earlier than planned. Notably, KKR itself saw strong returns, reportedly achieving a fivefold increase on its investment. The model has now expanded across nearly 50 KKR portfolio companies, with similar payout opportunities on exits, totaling over $1.6 billion for employees.
This trend is gaining traction in private equity. Stavros’s nonprofit, Ownership Works, has advocated for employee equity models and gained the support of major private equity players, including Apollo and Advent. Even Blackstone, a prominent name in private equity, has adopted its own form of employee equity incentives, signaling a broader industry shift.
However, this model has limits and risks. The payoff for employees depends on the success of each deal, and not all investments yield returns. Stavros himself acknowledges this, explaining that while KKR has seen success so far, not all companies will perform well enough for substantial employee payouts.
This experiment with employee equity isn’t just about improving workplace culture—it may also serve as a strategic response to recent challenges in the private equity sector. Rising interest rates and slower exits have impacted the flow of capital and returns to investors. By sharing ownership, private equity firms are banking on motivated employees to drive higher productivity and, ultimately, better performance. Importantly, this approach doesn’t require immediate cash outlay from private equity firms; stock options and restricted stock units vest over time, which can align employee incentives with long-term performance.
While some critics see these initiatives as an attempt to rehabilitate private equity’s public image, others view it as practical business sense. Employee ownership programs have long been used in the tech sector to compensate and retain talent without large upfront costs. If this approach sustains value through higher returns and lower turnover, it could become a mainstay in private equity strategies, transforming the industry from within.
The future of private equity’s experiment with employee ownership is uncertain, yet promising. For now, it marks a noteworthy shift toward an ownership economy, suggesting that firms can balance profit with employee incentives to build more resilient companies—and foster a more engaged workforce.