Private equity’s experiment with worker ownership

**Michela Tindera** (0:03)
Private equity has long held a reputation for being ruthless, a no holds barred industry.

**Antoine Gara** (0:10)
These were very scrappy mercenary deal makers, and with their really iconic investments of that era, like RJR Nabisco, they had no real compulsion about breaking up a company and selling off different parts, which really struck a nerve in the mainstream of America.

**Michela Tindera** (0:29)
My colleague Antoine Gara says that in the 1980s, the private equity industry relied on deals that used lots of debt. That kind of strategy often led to collateral damage for workers, while PE executives took home massive windfalls.

**Antoine Gara** (0:45)
In the mid 1980s, the private equity firm KKR did a leveraged buyout of grocery store chain Safeway, and they used a very small sliver of equity to buy what was one of America's biggest companies. And after they acquired the supermarket, the company went through brutal layoffs and salary cuts, and it became hugely controversial.

**Michela Tindera** (1:08)
But now, a new strategy is gaining some ground that has some firms deciding to share a bit of that wealth with their workers. But why are firms doing this? And what's in it for them? I'm Michela Tindera, from the Financial Times. Today on Behind the Money, how private equity realized playing nice could be good for business.
This particular attempt by private equity to have a softer image begins with a guy named Pete.

**Pete Stavros** (2:02)
I'm Pete Stavras, co-head of global private equity at KKR.

**Michela Tindera** (2:07)
About 15 years ago, Pete took over running KKR's investments in the industrial sector. That's like manufacturing businesses. And in that role, he noticed a problem.

**Pete Stavros** (2:19)
In manufacturing, you often come up against the following situation. The workforce, they tend to not like their jobs, but at the same time, are responsible for much of your success or failure as a company because they are determining the quality of the product, whether the product is delivered on time, things that determine your efficiency as a manufacturer.

**Michela Tindera** (2:41)
So Pete started to think about how he could get workers from different kinds of industries more motivated.

**Pete Stavros** (2:47)
That led to experimenting with, are there different ways to engage with all colleagues, not just the senior folks, but could you engage with the entirety of a workforce, get them more engaged on the job, get them less likely to quit, and have the company benefit as well. So could you come up with a program that was both good for workers and good for companies?

**Michela Tindera** (3:06)
Pete found what he believes is a way to solve this problem. Let me explain. Take for example, one company called Geostabilization International, or GSI for short. KKR invested in the company in 2018

**Pete Stavros** (3:21)
Geostabilization at one point had a 50% worker turnover rate.

**Michela Tindera** (3:25)
Now, GSI is an interesting company. It basically works on preventing landslides from happening, or cleaning up after them if they do.

**Pete Stavros** (3:33)
It's hard work. People sometimes have to be away from home for weeks at a time because it's an emergency, and they have to stay until it's done. That's tough. If you're not an owner, and you don't really have much of an incentive, you know, maybe you find something easier.

**Michela Tindera** (3:46)
And this is where Pete's strategy comes into play. To encourage workers to stay, KKR offered GSI's employees equity in the business as part of their compensation. And Pete says that more employees started to stick around despite the tough work.

**Pete Stavros** (4:03)
Once you have, you know, more information being shared with you about the business and where we're headed, and why we're headed there, and how you can help, and by the way, you're going to participate in all the value that you're helping to create. That quit rate went from 50% to 17%.

**Michela Tindera** (4:18)
Flash forward to today, and many of GSI's employees are recipients of a sizable payday. In September, KKR announced that it was going to be selling GSI. The sale meant a $1 billion payout. And $75 million of that was going to the company's blue collar employees.
That meant that a lot of GSI employees would be receiving six-figure sums. For many of these employees, this is life-changing money. It's the chance to put a down payment on a house, or to set themselves up for early retirement. And for Pete, it's been good for KKR, too.

**Pete Stavros** (4:58)
We made five times our money. There aren't a lot of 5X returns in private equity period, but certainly not being exited right now. You can unleash a lot of growth when you suddenly stop losing half your workforce every year. And so when we look at our performance in the deals where we've done this, not only has it been the right thing to do and allowed us to deliver wealth for workers and have more engaged people who are happier on the job less likely to quit, but also delivers better investment outcomes and build stronger companies.