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The Experiment of Shared Ownership

Middle-market PE firms are increasingly willing to dilute equity for the sake of employee experience

The Experiment of Shared Ownership

As the competitive labor market continues to place pressure on employers, companies of all sizes across industries are in search of methods to recruit and retain talent. Amid the variety of incentives available, companies are increasingly extending equity to their employees.

According to a survey conducted on behalf of Morgan Stanley at Work that was released earlier this year, more than one-third of global public companies offer some kind of employee equity ownership program, often in the form of discounted stock offerings.

This section of the report originally appeared in Middle Market Executive’s Summer 2022 issue. Read the full story in the archive.

But as these employee ownership initiatives evolve, they are no longer reserved for large public companies, nor are they limited to stock purchases.

A new initiative launched by KKR partner Pete Stavros is forging a path for companies of all sizes and industries, both private and public, to introduce tailored employee owner-hip models, often with programs that extend equity at no cost to employees. Now, the effort has caught the attention of private equity investors in the middle market.

Launching Ownership Works

In 2021, The Wall Street Journal reported that Stavros and his wife, Lindsay, would personally contribute $10 million to launch the Center for Shared Ownership, resulting in the creation of Ownership Works to help both public and private companies structure and implement tailored employee equity plans.

“Right now, ownership tends to be concentrated among senior management, and there’s a sense that they are the value creators,” Ownership Works Executive Director Anna-Lisa Miller told the Journal. “This is about shifting that mindset to see employees as true value creators.”

In operation since April 2022, the nonprofit organization collaborates with businesses and their investor partners with a mission of increasing wealth creation opportunities and financial literacy, particularly for employees of low- and moderate-income households and employees of color. Its goal is to generate $20 billion for employees by 2030.

Related content: Why Positive Employee Experience is Key for Business Success

Backing this mission with Ownership Works are more than 60 investors, corporations, foundations, labor advocates and pension funds—including 19 private equity firms like Blue Wolf Capital Partners and Altamont Capital Partners, which have each committed to implementing a shared ownership model within their portfolio companies.

Tailwind Capital, a middle-market private equity firm targeting the industrials and technology services sectors, is another one of Ownership Works’ original PE backers.

Jeff Calhoun, Tailwind’s managing partner, says he first took steps to deploy a shared equity model following the firm’s investment in National Trench Safety.

“The company, before we invested in it, had a great workforce, but struggled—as a lot of industrial service businesses do—with employee turnover, hiring and recruiting,” he tells Middle Market Executive. Calhoun adds that National Trench Safety, which provides infrastructure safety solutions, has a distributed business model with locations across the globe, making it challenging to foster a common culture among employees. “I had been intrigued by a shared ownership model for a while, and a lightbulb went off,” he says.

At National Trench Safety, Tailwind’s shared ownership program extends $10,000 in equity annually to each employee, supplementing existing wage and benefits packages at no cost to workers. It’s a voluntary program whose only requirement, Calhoun explains, is that the employee must remain at the organization to retain their stake in the company. Tailwind has implemented similar employee ownership programs within two additional portfolio companies.

Putting It into Practice

The concept of extending equity to rank-and-file employees within companies is nothing new. According to Deloitte, as of 2019 there were nearly 7,000 active employee stock ownership programs, impacting an estimated 14 million employees and totaling about $1.4 trillion in assets.

Such programs are most prevalent in the engineering and construction, manufacturing and building materials industries, which can struggle to forge positive employee cultures with a motivated workforce, according to Calhoun.

Yet the model is relatively new to the middle market. It can be difficult for business owners and PE partners to implement equity-sharing programs independently, particularly for smaller businesses or those backed by private equity firms with fewer resources. After all, a shared ownership model requires owners of a business to give up some of their equity.

“At the end of the day, if you look at it on a spreadsheet, it’s dilutive to your ownership,” says Calhoun. “At National Trench Safety, we grant about $9 million a year in stock to the employee population annually. Perhaps for a large-cap private equity firm, that’s not an enormous number. But for a middle-market, lower middle-market business, it’s a very big piece of the equity pie. You have to believe that the other benefits of a shared ownership model will create more value for your investment.”

An Investor Experiment

It was a little bit of an experiment for us. But we’re now fully bought in and huge believers.

Jeff Calhoun

Tailwind Capital

There is some data to support the claim that shared ownership models improve company performance. Research by Douglas Kruse from Rutgers University published in 2016 found a positive correlation between employee ownership and improved company performance, greater stability, higher survival rates and fewer layoffs during recessions.

But there is limited historical evidence for these programs’ success within middle-market businesses. Calhoun acknowledges that while he’s so far seen anecdotal success with implementing this model at Tailwind portfolio companies, it’s still early days.

At National Trench Safety, for example, Tailwind has seen a significant reduction in employee turnover. The shared ownership model is likely one of several reasons employees are staying on—other initiatives, such as a wage evaluation and safety improvements, could be contributing to the positive development.

Related content: How Private Equity Funds May Positively Impact EBITDA with the Employee Retention Credit

Another plus of employee ownership programs is the need for constant communication between employees, business leaders and PE partners to make them work—which tends to foster a healthier, more engaged company culture, according to Calhoun.

For investors willing to dilute ownership, a shared ownership model may be an effective hedge against a tight labor pool, and could insulate a company from the impact of a market downturn.

“It was a little bit of an experiment for us,” Calhoun says. “But we’re now fully bought in and huge believers.”

Carolyn Vallejo is the digital editor for ACG Media.