Dec 13, 2021 - Economy

LPs speak out on employee equity

An illustration of a massive suitcase and people.

Illustration: Aïda Amer/Axios

Private equity funds should incentivize larger numbers of portfolio company employees, because it will better align interests and improve investment performance.

  • I've been writing that for years, but now it's also being said by limited partners in private equity funds.

Driving the news: Coller Capital this morning released its biannual "Private Equity Barometer" survey of more than 100 global LPs. Its lead finding was that 46% of respondents believe the likely effect of incentivizing more portfolio company employees would be to increase returns.

  • Only 6% said they believe it would decrease returns. The rest didn't know.
  • It's worth emphasizing that these LPs are true believers in the private equity model, with a whopping 89% saying that small and mid-cap companies would benefit from at least a period of PE ownership.

This isn't a novel idea. KKR, for example, for several years has provided equity incentives to rank-and-file in some of its industrials companies (and has sought to expand the practice). Other firms have begun to selectivity follow in its footsteps.

  • The basic argument is that it's good business, because it improves employee morale and reduces turnover. It's also good PR in an ESG-obsessed world, and could help seal new deals with company founders who are interested in their employees' future wellbeing.

The bottom line: Limited partners pay the private equity bills. If they truly believe employees are vital stakeholders, and should be treated as such, it's time to share those convictions directly with general partners during the fundraising process. Surveys are a start, but not an end.

Quasi-related breaking news: Coller Capital is on the block, per Reuters.

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