In New Twist, Private Equity Shares Its Windfall With Hourly Employees

It looks like the opposite of corporate raiding, the antithesis of asset stripping.

Yes, KKR & Co. made a roughly $4 billion profit from its eight-year investment in manufacturer Ingersoll Rand, which it exited this month. But in a new twist for the private-equity firm, it gave the Davidson, North Carolina-based company’s 16,000 workers a heaping taste of the windfall -- $500 million.

To Pete Stavros, KKR’s co-head of Americas private equity, it’s a validation of the model he helped champion within the alternative asset manager. He’s the architect of the firm’s employee engagement strategy, which gives workers -- many of whom receive an hourly wage -- an ownership stake in their company.

“This would be among the more profitable deals we’ve done,” Stavros, 47, said in a telephone interview. “Especially when you take it in totality -- not just dollar gains -- but what it has meant for employee ownership, safety, engagement, diversity and the environment.”

For outside observers, it’s yet another way that powerhouse private-equity firms have softened their approach. Apollo Global Management Inc. is fundraising for its first-ever social responsibility fund, while General Atlantic and TPG are bringing in billions of dollars to make investments that combat climate change. KKR’s employee engagement initiative is separate from its own burgeoning impact strategy.

KKR sold its remaining 7% stake in Ingersoll Rand, or 29.8 million shares of common stock, on the secondary market on Aug. 4, according to a filing. Stavros sees it as a test case for the strategy he implemented. Its initial investment in 2013 amounted to about $1.2 billion without debt and loans and more than quadrupled to $5 billion.

Eight years ago, when New York-based KKR bought the company then known as Gardner Denver Holdings Inc., it set aside ownership shares for employees. When it went public in 2017, those stakes were converted into exchange-traded stock for 6,000 workers, worth $100 million at the time. Before that, employee ownership at the company was less than 2%.

When Gardner Denver merged with Ingersoll Rand in 2020, the company again granted thousands of incoming employees -- excluding senior management -- $150 million of stock ownership. The shares have risen 162% since its initial public offering, compared with an 86% gain for the S&P 500. They’re also outpacing the broader market’s rally since the merger was announced in 2019.

Combined, the granted stock is now worth about $500 million.

“Hourly workers oftentimes own fewer, if any, assets and don’t have many opportunities for wealth creation, and equity is a primary way people can create wealth,” Stavros said. “Secondarily, it happens to be smart business -- of course the company is better off with employees who are less likely to quit and are more engaged.”

For Stavros, the spark for the idea goes back to his father, who operated a road grader for a construction company in Chicago for more than four decades and had always wanted profit-sharing at his union. Stavros wrote a paper on the topic in business school and is starting a charity to focus on employee ownership by funding research and providing other resources for companies to help with plans.

KKR has rolled out the approach to 11 businesses across its U.S. industrials portfolio over the past decade, including packaging maker Charter Next Generation and Flow Control Group, a distributor of industrial automation products. It has been particularly successful for manufacturers because many workers earn an hourly wage and thus engagement and income tends to be lower.

KKR is looking at potentially broadening the initiative, said Stavros, who first had the opportunity to implement the strategy when he was head of industrials at the firm.

“We’re talking about bringing this to other industries, other private-equity firms are starting to look at this as well as public companies,” he said. “It’s where the world is headed.”

©2021 Bloomberg L.P.

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