This Private Equity Leader Wants Employees To Own The Companies They Work For

hi I'm Jenna McGregor senior editor at Forbes I'm here at the milking Global Institute conference with Pete Stavros who is the newly named since February right co-head of global private Equity at KKR did they get that right right you got it right that's right congratulations thank you okay but most people I think who have heard your name also identify you with your efforts around employee ownership you've really been very vocal very involved you've even founded and our chairman of a non-profit aimed at trying to get the employees of your private Equity firms the portfolio companies um you know giving them Equity right so that is not something that I think the typical person identifies with private Equity giving Equity away giving giving money away really um to employees tell me a little bit about how that's helped to shape you know reshape the the reputation of private Equity I don't know what it's done or will do for the reputation of the industry it's honestly not why we're doing it we're doing it because it's the right thing to do it's good for workers and by the way it happens to be good for companies and shareholders too and so when we say employee ownership what we're talking about just to be clear is giving workers free a free incremental benefit which is stock in their company not a trade for wages not a trade for benefits we're not asking them to invest out of pocket it's free and the payoff to the company is when it's done well enhanced culture meaning people are less likely to quit they're more engaged on on the job and when I say when it's done well it's about way more than just giving out ownership it's got to be paired with a really robust effort around Employee Engagement financial literacy information sharing bringing people into the business as partners sharing the business plan where are we headed and how is what you're doing every day as a worker contributing to our overall uh trajectory as a company so when all of that's done well we have found it's good for everybody good for companies investors and workers alike so but the amounts of money we're talking amounts of equity that we're talking about are not small I mean in some cases they are life-changing amounts right I mean one of the things I remember recently Bank of America actually gave out some Equity to tellers and like broad-based employees and I remember asking a lot of people why don't we see this more from the public from public companies and one of the things you hear is you know it's it's they don't want it they want more money they want more base pay they want more salary it does it's is that because it's not big enough to make an impact we do find that so we've done this for been working on this for 14 years we've done this 30 times every time we learn we're still learning but our our belief is that if you're not showing someone a path to earning 100 of their income over a period of five years it isn't enough to really move the needle it's not enough to capture and keep their attention over our typical investment Horizon so I do think it's hard if a company I don't know the specifics of Bank of America but if a company were to say hey we want to make everyone an owner want to give everyone a thousand dollars to stock I don't think that's probably worth all the administrative burden communication and effort I think ownership has to be significant and it's got to be a really a philosophy again much more than just here's a here's a thousand dollars of stock it's changing the way you operate it's a lot of work and give it so get break it down like an example I mean we're not just talking CEOs and managers we're talking about Factory floor workers truck drivers you know anybody in the company that's right so to give you an example a company that we invested in it's called Chi Overhead Doors manufactures garage doors when we bought the business there were about a thousand people in the company 18 had stock ownership most of it was in the hands of two people and that's typically what we see stock ownership in the range of one percent to two percent of employees and that's it when we bought the business safety was poor morale was terrible we did an engagement survey only 30 percent of people bothered to respond to the survey because they thought no one's going to listen to me anyway and 90 of results were below the The Benchmark level fast forward eight years so this does not happen overnight but had a new leadership team a new strategy uh changed a lot of things in the business taught financial literacy uh taught basic Financial education shared information give gave people decision-making rights more control over their work lots of things happen but over eight years quit rate went down engagement scores went up productivity went up the company found all sorts of ways to win market share investors had a huge gain and kind of to your point what did it mean for workers we did have truck drivers make almost eight hundred thousand dollars eight hundred thousand eight hundred thousand dollars we had Factory workers who had been with us uh had been with the company for the longest period of time make six and a half times their annual income even people who had just joined the prior year made forty thousand dollars so it was it was to your point a meaningful amount of money full amount of money yeah so when you come into a company and you tell them they're going to do this are some of the first questions a little bit of doubtful like why don't you just you know pay us more income why don't you you know give us more base pay I mean is it is it a hard sell at all this idea when you are first working with a new company there's a lot of Confusion And there's definitely some skepticism or cynicism yeah hey I've I've read about private Equity I've seen this before sometimes the company might have been owned by private Equity beforehand yep so there is a multi-year process of earning trust and there's specific ways we do that so you know we get a lot of input what's not good about the job we act on that end but when I say we the leadership team does all the hard work so the CEO and the leadership team will make a commitment on hey we heard in the engagement surveys these are the top three issues they're going to be fixed in six months and people say yeah right yeah and then they're fixed and then there's the next three issues and they're fixed and then the next three issues and the CEO says you're going to see us investing in this plant manufacturing plant like you've never seen before and yeah right and then he does it or she does it and so over time that trust is built and then people start to say maybe I should look at this stock thing maybe this is real yeah and then dividends start to get paid out on the stock and then and then there's a snowball and so over the course of time that's what really that's the Magic in moving the culture now one of the things you're trying to do with this nonprofit opportunity Works ownership Works ownership works thank you is um get your peers to follow the same model to get more private Equity more investment firms to do the same thing how how has it been a hard sell are you you know getting a good response what kind of commitment are you getting so we have uh about 25 private Equity firms already signed up some major firms like tpg uh Leonard green Berkshire Partners Silver Lake warberg Pincus some of the biggest names lots of Middle Market firms as well in there and what are they actually committing to what they're committing to is to roll this model out in at least three companies over the first 18 months of their membership in ownership works and there's a contract that ownership works and they sign and there's standards so you're not going to ask workers to invest out of pocket you're not going to ask them to sacrifice wages or benefits you're going to share specific data back to ownership Works around demographics of your Workforce engagement scores you know what's going on inside inside the company so that we can then do academic research on what's being effective uh what's not working and overall impact that we're measuring so we want to know where the stock is going what levels of the organization when payouts happen Okay so that's what they're agreeing to we have a wait list of um I believe it's something like 240 firms that have expressed interest in joining and are in a wait list we only have 25 people at ownership works okay and we have already 25 members each of whom are yep you know putting at least three companies on the program you know for us it's many more for Leonard green and others it's many more books or Partners okay so the team's drowning and work right it's good that's good so then we will be figuring out who else is serious about joining really committed to this yeah and understands how hard this is this is it sounds so easy you just give ownership and good things happen that's a good point is different the idea of like true long-term employee ownership versus here's some here's some Equity yeah it's so different okay okay so what are you doing is this long-term employee ownership or is it just here's the benefit here's here's an equity grant that you know yeah that would still be a nice thing to do yep but it would not make people feel respected and trusted and like they have a voice in their work and it wouldn't lead to higher productivity and better corporate outcomes so as fiduciaries of capital it would be dilutive to our shareholders our investors yeah so and you know we have to yes we want to do good but we also have to be good stewards of capital so it is complicated as we were talking about earlier day one there's a lot of yeah yeah right right but then beyond that okay you get an employee engagement survey back and the results are bad what do you do how do you how do you deal with 40 of Americans quit their job every year that's an insane statistic that means companies are are rehiring their whole Workforce every two and a half years that's crazy so when you talk to a CEO and you say how are you going to stop that that's what we're trying to help with so what we are trying to do is take traditional problem-solving skills which are tried and true like if you have a scrap or a productivity problem in a plant there's a very clear way to fix that a lot of those same skills can be applied to why people are quitting and we're trying to work with and I can take you through the details of that if you're interested we're trying to work with CEOs to apply those skills to issues around culture now we're obviously heading into what we're all dealing with a lot of more uncertain Economic Times I'm sure that it depends on the company what kind of Labor Market you're seeing but what kind of impact is this having right now with you know continued labor shortages and some of the the companies that you're investing in tell me tell me what you're seeing in terms of the the way this impacts like labor shortage problems you're having yeah well as we know there have been millions of people who have left the workforce so labor force participation is is a real challenge and I would argue in our our data and experience would indicate if people are given a stake in the outcome and a voice in their work and some decision making rights and they're treated with trust and respect they're gonna want to participate yeah in the labor market so give you one example Ingersoll Rand a public company amazing leadership team they shared ownership when we bought the business 86 people had ownership today 16 000 people in 80 countries have ownership and it's a meaningful amount of ownership so those 16 000 colleagues exclusive of management I believe it's worth seven or eight hundred million dollars today the quit rate this took 10 years okay so I always want to spend a lot of time this took 10 years the leadership team got the quit rate down almost 90 percent so that meant hiring 3 000 fewer people every year so to your point on in a tight labor market that's a win-win yes with so many places great for workers that's great for the company okay let's talk about your your day job tell us a little bit you know the second half of 22 significant slowdown in private Equity deals what's your outlook for the year ahead give it give us just a little bit of a what you're looking for what's the environment like as we as we look at the rest of the year so deal flow is down from the perspective of people selling assets you have a situation where a firm might have thought this investment is worth three and a half times our money and suddenly now it's worth two times the money so how much time has to pass before the firm says you know what two times our money is good too right so there are fewer assets coming to Market and then on the on the buy side there's a lot of uncertainty in the world people are cautious there's less debt available there's less financing available interest rates are higher so that's compressing what they can pay so you've got a little bit of a stalemate where sellers remember the prices of a year ago buyers are living in the reality of today and looking at an uncertain future so the Market's going to be slow for a bit I'm not I'm not good at predicting the future I would not expect 2023 from here to be very strong you know maybe the deal Market picks up in the spring of next year and you have a global role now whereas you are running America's before where are are there bright spots anywhere where are you seeing the best Outlook right now we see like we see opportunity everywhere we're continuing to be active in Europe Asia and the us across our traditional Flagship private Equity our larger bio business and growth Equity we have a mid-market business we have a core vehicle so and we're finding ways to deploy it all you know in Asia we've had a lot of success in Japan there's been a lot of carve out activity where large conglomerates have disposed of non-core assets we've been a big beneficiary of that we have a fantastic team we're the clear market share leader there and deep deep relationships because we've been in Japan a long time now um but we also have done great in Korea we still see a lot in in China I mean yes there are regulatory challenges and geopolitical concerns but over half the market is still very investable from our perspective we've got a big business in Australia New Zealand India southeast Asia so we see a lot of opportunity across Asia and same with Europe there's still a lot to do again globally the market is a little slower but we're still finding ways to deploy and you're sharing this role you're a co-head um that is a model that I know Works in some cases but has failed many leaders too to kind of try to share leadership um what why does it work at KKR well the reason as you note I'm co-head of global private Equity with neat Taylor so Nate and I joined within a week or two of each other in 2005. so we've been at the firm a long time we're way back we go way back he's one of my closest friends period put aside business okay that helps and when you have total trust in someone and there's no politics between you which is easy to say it's rare to have no kind of angling with each other and there's no competition that's when it works because if it makes sense for Nate to go lead something without me no problem I'm not saying they're worried what does this mean for me is Nathan to get the spotlight we just totally trust each other we divide up the world in a super efficient way and we love working together and also have a ton of fun doing it we laugh all the time so that that no ego and the trust knowing like it's okay for him to go do that but for the people who are not 20-year friends and are dressed into a position like that what advice do you have the advice I would have and I don't know how you would do this without being as close as Nate and I are is um there just can't be daylight between the two of you you just have to be aligned you have to trust one another I don't know how you maybe go to a trust building Camp quickly or something you'd have to somehow to build that build that yeah um and that takes that takes a long time I think I think it's tough if you haven't worked together so it is is it a setup a leadership setup that you recommend when that does not exist already I wouldn't you wouldn't I wouldn't I would highly recommend it when you have what Nate and I have yeah yeah because it's truly synergistic it is truly additive