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KKR’s top dealmakers landed in Denver on Wednesday for a presentation revealing the $1bn payout they had earned on the sale of an engineering firm.
But the audience wasn’t the usual assortment of well-heeled partners from institutional investors. It was the company’s blue-collar employees, who collectively will receive $75mn of the proceeds.
The payouts and evolving incentive plans are part of a growing, industry-wide effort to help the private equity industry soften its image as a bastion of elite privilege, which regularly draws the scorn of many policymakers in Washington given the country’s high levels of income inequality.
The sale of GeoStabilization International, which does emergency landslide repairs and provides services to prevent rockfalls, will provide a windfall to most of its 900 employees. GSI employees are set to receive between $10,000 and $325,000, with the median employee who has been with the firm for three years drawing a payout of $110,000. The payouts are taken from the pot of stock awards that are usually set aside for senior management during a buyout.
For GSI workers, the payouts could be enough for a downpayment on a new home. KKR will offer financial advisory services to the employees through Ernst & Young and has hired tax accountants to handle the windfall. Still, the worker payout represents less than 10 per cent of the overall value of the deal, underscoring that KKR investors have done better.
On Wednesday, Democratic presidential nominee Kamala Harris appeared to champion these efforts.
“[We] will reform our tax laws to make it easier for businesses to let workers share in their companies’ success. And I will challenge the private sector to do more, and lift up workers through equity, profits and benefits, so more people can share in America’s success and prosperity,” she said in a speech outlining her economic agenda.
KKR’s private equity head, Pete Stavros, has spent the past decade creating worker equity incentive awards inside the firm. He has spearheaded the creation of Ownership Works, a private equity industry push to create $20bn in wealth for workers by 2030 and has drawn backing from the industry’s biggest players including Apollo Global Management, TPG and Silver Lake.
The payout to employees is part of a broader push at KKR that has been used to incentivise line workers, while not eating into the returns of their deals. The awards are taken from a management equity pool, or are structured as options and restricted units, which only pay out if a company grows substantially in value. Some KKR deals have generated hundreds of millions in cash for workers. However, if a deal fails or ends up in bankruptcy, workers will see no value from the incentives.
Currently, KKR has nearly 50 deals where it has offered similar equity awards to workers and it has sold 10 investments, generating $1.6bn for 33,000 non-management staff.
GeoStabilization International, known as GSI, is part of a growing list of private equity-backed companies in which employees receive stock as part of their compensation plans, setting them up for lucrative payouts if the business meets its growth targets and is sold.
The windfall from GeoStabilization’s sale, to another private equity firm, amounts to five times KKR’s 2018 investment — a boon for investors who have been largely waiting empty-handed as buyout shops struggle to sell investments and return cash.
Leonard Green, the buyer of GSI, plans to issue a whole new set of equity awards for the company’s workers.
“This tremendous outcome recognises the work GSI’s employees have done to create value, not just for the company but for themselves,” Stavros said.
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