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ESOP

KKR

Private equity

Industrials

KKR’s program involves options, not employee stock ownership plans. However, the end results of the equity sharing — enhanced business performance and greater employee satisfaction and productivity — are identical to those produced by ESOPs, which we’ll be discussing at our upcoming IndEx 2020 conference. In doing research about these plans, I came across some interesting developments.

First, there was a news item about a bill making its way to the Pennsylvania Senate that would allow business owners who sell their stock to an ESOP to indefinitely defer and potentially eliminate their capital gains tax obligations. If passed, the law would bring Pennsylvania in line with 48 other states, further encouraging ESOPs. In all, there are roughly 10,000 ESOP companies nationwide, of which some 3,000 are ESOP-owned S Corporations. In addition to being good for employees — an ESOP advocacy group notes that workers’ ESOP account balances are three to five times higher than the U.S. average for 401(k) plan participants. Also, ESOP-owned companies outperform the S&P in terms of growth and are better credit risks. This is spurring interest among private equity firms. 

A report by Greenberg Traurig noted that the recent trend of implementing a 100% buyout of the selling shareholders by the ESOP, driven by the fact that an S Corp wholly owned by an ESOP is exempt from federal income tax, requires a greater need for new sources of capital. The report found that private equity firms are becoming more interested in ESOP transactions and are providing mezzanine capital for larger transactions. In some of these deals, according to a report on bizjournals.com, PE firms are issuing warrants, which allow them to invest indirectly in the future growth of an ESOP-controlled firm without disrupting the employee-led productivity advances or threatening the company’s tax-exempt S Corp status that boosts cash flow.

In this video, Pete Stavros, co-head of Americas private equity at KKR, explains how his firm also has seen remarkable gains by sharing some of the growing wealth that the company’s equity-sharing program has helped fuel. He discusses how the more-engaged employees now contribute a myriad of suggestions and incremental improvements that have surpassed expectations. As an example, Stavros notes that the value of having a workforce of motivated delivery drivers at KKR’s garage-door manufacturing company is so great — the drivers gather and share informal intelligence on customers and act as a kind of auxiliary sales team — that even if automated trucks ever were to be employed, the company would retain the “drivers” for their other functions.

The Frank Capra-like part of the video comes about 20 minutes into the video when we see one of the increasingly prosperous KKR companies announcing the annual payments it will make to its employee options-holders. There are whoops and screams of joy as well as workers reaching for tissues to wipe away tears. As one choked-up worker describes, the amounts received translated into such life-altering events as a worker in her forties being able to buy her first new car and a honeymoon for a worker married for several years who never could afford one. 

It’s a George Bailey moment that’s worthy of emulation.