Ownership 2.0: Rethinking Employee Equity in Private Equity
By: Alyssa Choi
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Equity for All? Rethinking PE’s Playbook
Private equity (PE) is at a crossroads. While celebrated for its ability to drive operational efficiency and generate outsized returns, the industry faces mounting criticism for its short-term focus and lack of alignment with employee interests. Critics argue that PE’s traditional model—acquiring businesses, streamlining operations (often through aggressive cost-cutting), and selling them at a profit within a few years—prioritizes investor gains while neglecting long-term business health and workforce stability.
The discontent surrounding private equity has only intensified in recent years, as institutional investors and regulators demand greater accountability and governance. In addition to this, two pressing business realities underscore the urgent need for change. Firstly, heightened competition has saturated the traditional private equity market. With hundreds of funds chasing a limited number of high-quality assets, entry prices have soared and returns have shrunk. Secondly, a persistent high-interest-rate environment—exacerbated by inflationary fiscal policies and economic uncertainty—presents additional challenges. Private equity portfolio companies, typically highly leveraged, face significant pressure under higher financing costs. Historically, PE firms relied heavily on multiple expansions to generate returns. In such a competitive and challenging landscape, this strategy is increasingly untenable, making operational value creation essential for differentiating PE strategies and ensuring their continued profitability.
Employee ownership offers an innovative solution to these challenges. By making workers direct stakeholders in the financial success of their companies, PE firms can generate superior financial performance while promoting more equitable wealth distribution. The adoption of broad-based employee ownership has the potential to redefine the industry’s relationship with its workforce and stakeholders.
Beyond the Paycheck: How Employees Can Cash In on Ownership
Employee ownership refers to structures that provide workers with equity stakes in their companies, enabling them to benefit directly from their company's success. There are three primary models of employee ownership:
Employee Stock Ownership Plans (ESOPs): A trust-based system where shares are held on behalf of employees, typically financed through company profits or loans. ESOPs offer tax benefits, making them an attractive option for transitioning ownership without requiring workers to buy shares out of pocket.
Employee Ownership Trusts (EOTs): A structure commonly used in the UK, where a trust owns a majority stake in the company on behalf of employees. Unlike ESOPs, EOTs focus on long-term ownership rather than financialized incentives like stock sales.
Equity Grants and Stock Options: A more flexible form of employee ownership where shares are directly allocated to workers, often as part of compensation packages. While this model fosters some alignment, it lacks the structural stability of ESOPs or EOTs.
For PE-backed companies, ESOPs offer the most strategic benefits. They allow for partial ownership transfers while retaining managerial control, provide tax advantages that make them financially viable, and are well-suited to the industry’s goal of maximizing enterprise value at exit. ESOPs also enable PE firms to balance financial incentives for employees without fundamentally altering their investment approach.
Buy-In or Bye-Bye? The Case for Employee Ownership
Employee ownership is not merely a social good but a strategic imperative for PE. By aligning the interests of workers and investors, it creates a virtuous cycle of engagement, productivity, and profitability. Companies with employee ownership consistently outperform their peers, and this outperformance translates directly into higher valuations and better exit opportunities for PE firms. According to the National Center for Employee Ownership (NCEO)’s 2023 report, employee-owned companies generate 2.5 times more wealth for low- and moderate-income workers compared to traditional firms. Additionally, companies with ESOPs reported 25 percent lower turnover rates and 14 percent higher productivity. These metrics translate into tangible financial benefits for investors, as engaged employees directly impact EBITDA growth and overall company valuation.
Moreover, employee ownership can significantly mitigate the reputational risks associated with private equity. Recently, public scrutiny intensified as a record 110 private equity and venture capital-backed companies filed for bankruptcy in 2024 alone, marking a notable increase from previous years and underscoring growing concerns over the industry's aggressive cost-cutting practices. Prominent media coverage, including articles from The Guardian, has criticized these practices as "slash-and-burn" tactics, highlighting broader concerns about employment stability and corporate sustainability. Such criticism has eroded public trust and challenged PE's social license to operate. By embracing employee ownership, private equity firms can demonstrate a genuine commitment to inclusive growth and financial stability, proactively addressing these criticisms through concrete and equitable measures.
The Missing Piece in PE: Why Employee Ownership Deserves a Second Look
Due to several structural and strategic factors, employee ownership has historically failed to gain widespread adoption in PE-backed firms. According to research conducted by Carta, a software utilized to manage equity and ownership for PE firms, fewer than 30 percent of PE-backed companies have no employee stakeholders with only 20 percent having over 100 employee stakeholders. Any employee stock ownership is primarily handed to key executives of the PE-backed company. The most significant barrier is the perceived complexity of implementation. Establishing broad-based employee ownership plans requires careful structuring to ensure tax efficiency and compliance with labour laws.
Additionally, employee stock allocations often require firms to dilute existing equity stakes, which may be unappealing to General Partners and institutional investors seeking to maximize their returns. Many PE firms lack the internal expertise or incentive to navigate these consequences, and institutional inertia increases barriers to challenging the status quo.
Finally, historical skepticism regarding the viability of employee ownership continues to shape PE decision-making. Many in the industry still perceive the model as a niche strategy rather than a mainstream financial tool. However, changing economic conditions and advocacy by industry leaders—such as the Ownership Works initiative founded by Pete Stavros, KKR’s Global Head of Private Equity—increasingly highlight the strategic value of employee ownership. As a non-profit organization, Ownership Works partners with companies and investors to expand the adoption of shared ownership, shifting industry perceptions and encouraging wider adoption.
Clear risks and concerns exist for increasing the utilization of employee ownership, including barriers in implementation, dilution of equity stakes, and historical skepticism of the idea. However, as detailed above, clear benefits of employee ownership exist through mitigation of reputational risks and superior financial returns, which can justify the additional cost and labour of implementation.
From Pilot to Profit: Scaling Employee Ownership in PE
To successfully integrate employee ownership, private equity firms should adopt a structured, phased approach emphasizing sustainability and scalability:
Pilot Program Selection: Initially implement ESOPs in one or two companies. Target companies reliant on skilled labour, such as manufacturing, technology, or specialized services sectors. Clearly define ownership structures, financing arrangements, tax implications, and governance frameworks early.
Partnering with Experts: Collaborate with specialized organizations such as Ownership Works and NCEO. These organizations offer advisory services, equity design expertise, workforce engagement strategies, and tailored employee training, which can significantly reduce implementation risks and drive the optimal structure for compliance and efficiency.
Defining KPIs: Establish measurable KPIs to assess employee ownership impacts, including productivity, retention rates, job satisfaction, operational efficiency, EBITDA growth, and valuation changes. Regular KPI tracking validates effectiveness and supports broader adoption.
Employee Engagement and Education: Develop comprehensive communication strategies to educate employees on equity stakes, such as financial literacy training and clear explanations of equity benefits, responsibilities, and practical implications to ensure active employee participation.8
Continuous Monitoring: Regularly monitor progress and adapt based on employee feedback and KPI results. Ongoing evaluations will inform necessary adjustments to governance, equity allocations, and employee engagement practices.
Scaling and Institutionalizing: Scale successful employee ownership models across the portfolio, embedding equity assessment criteria into due diligence for new acquisitions. Establish dedicated teams or strategic partnerships specifically focused on managing employee ownership initiatives.
The Door to Success: C.H.I.’s Ownership Transformation
KKR's acquisition of C.H.I. Overhead Doors (C.H.I.), a leading garage door manufacturer, exemplifies the transformative potential of employee ownership within private equity. In 2015, KKR purchased C.H.I. for $685 million and introduced a broad-based employee equity program, granting all 800 employees—from factory workers and truck drivers to corporate staff—ownership stakes in the company's success.
During KKR's ownership, C.H.I. underwent a significant operational transformation. The company's revenue nearly doubled, and EBITDA margins improved from 21 percent to over 30 percent. In 2022, KKR exited its investment in a sale to Nucor Corporation, achieving around a tenfold return on its initial equity investment. C.H.I. employees collectively received $360 million in payouts. On average, hourly employees and truck drivers received ~$175,000 each, and drivers with three or more years of tenure getting $1 million.
A critical element of this success was KKR's introduction of new employee involvement initiatives. Monthly meetings were established to discuss operational issues openly, and employees were empowered with greater autonomy, including participating in decisions on capital expenditure allocations. These initiatives significantly improved employee engagement, with a 20 percent increase in employees feeling their voices were heard.
C.H.I.'s employee ownership program underscores the potential benefits of such models in private equity. It demonstrates that aligning employees' interests with company performance can lead to exceptional financial outcomes and operational improvements, suggesting that other private equity firms could achieve similar success by integrating employee ownership into their portfolio strategies.
Beyond the Exit: Crafting Employee Ownership That Sticks
While employee ownership presents numerous advantages, ensuring long-term sustainability requires thoughtful planning. Pete Stavros highlights that sustaining employee ownership after a PE firm's exit can depend heavily on the type of buyer. For example, transitioning employee ownership models to large corporations with established benefit systems can present compatibility challenges.
Additionally, developing an effective ownership culture within a typical PE holding period requires intentional and focused effort. Transitioning to high-involvement employee cultures is typically a multi-year journey, often requiring experimentation and adjustments in leadership styles.
PE firms can address these considerations by carefully selecting exit strategies that favor continuity of employee ownership, such as public offerings or sales to investors committed to maintaining these structures. Investing early in developing strong ownership cultures and leveraging expert organizations for training and guidance can further enhance sustainability, embedding employee ownership rapidly and deeply enough to thrive beyond the initial PE investment.
Shared Equity, Shared Success: The PE Path to Prosperity
Private equity has a unique opportunity to transform its business model by adopting broad-based employee ownership. This shift is not just about addressing criticism or improving firms’ reputations; it is a pathway to unlocking untapped value for employees and investors. As the industry evolves, the firms that embrace shared prosperity will secure more substantial returns and redefine what it means to lead in the modern financial landscape. The question is no longer whether private equity can afford to adopt employee ownership, but whether it can afford not to.
