No, KKR is not “equity washing”

Contra Katie Boland on the private equity company’s employee-ownership model.

This essay is research for my book We Should Own The Economy, which I am publishing live for subscribers. Readers can still get ownership in the project and earn a share of profits when it sells. 👇🏻

Is private equity company KKR “equity washing”?

I’ve written about KKR before—the private equity firm buys up companies, makes them partially employee-owned, then sells them a decade later with employees earning upside as “owners.” They’ve even started a nonprofit organization, Ownership Works, that gets other PE companies to do the same.

But Katie Boland, co-founder of the Delta Fund, recently wrote an article and LinkedIn post, arguing that KKR isn’t providing employee-ownership, but is “equity washing.”

She uses the example of garage door manufacturing company CHI to illustrate: KKR purchased the company in 2015 for $685 million, then sold it seven years later for $3 billion—10x their investment. KKR made headlines for distributing $360 million to the company's 800 employees.

Boland said this wasn’t enough, arguing that CHI employees earned only 15.5% of the value they helped create, while most employee-owned companies give employees a 30% stake. KKR also earned (roughly) a 5.7x return on equity and only had to pay capital gains taxes on their upside (around 20%), while employees received only 15.5% of the upside and had to pay income taxes on their earnings (up to 37%).

A baseline employee ownership deal (known as an ESOP) would be much better, Boland says. Employees would earn 30% of the company and KKR would only see a 4.7x gain.

I think it’s a mistake to compare a private equity company like KKR to traditional employee-owned companies—we should compare them to other private equity companies. Is KKR’s model better than what other employee-owned companies are doing? Probably not! Is KKR’s model better than what other PE companies are doing? ABSOLUTELY!

I also don’t think every company has to be a “true employee-owned” business, per Boland’s critique. It’s true, for instance, that KKR only makes a company employee-owned during the period they own it—once it sells, the company is no longer employee-owned. KKR’s model creates a temporary incentive for employees who work there during PE ownership, not a long-term investment for those who spend decades building the company. And unlike most employee-owned companies, KKR doesn’t give workers board representation, voting rights, or shared control.

That makes sense to me. I love that there are employee-owned companies where workers spend decades building the business and become millionaires for their labor. I love that they get board representation and voting rights and participate in the company’s growth. These kinds of companies should be a staple of the US economy! But that only works for companies with strong financials. Most companies purchased by PE are not—they are failing! The company couldn’t transition to an employee-owned company on its own and succeed. And it doesn’t have the framework—or timeline—to elect a board and set up voting rights.

The KKR model, to me, seems like a great alternative—not for successful companies with long-term employee ownership—but for failing businesses that haven’t been governed well. Why shouldn’t PE companies buy them up and give employees upside, while creating a more successful business. If Boland argues they should be even better, sure. But KKR’s model is already a vast improvement over what every other PE is doing, and they are even converting those other PEs to their model!

Though KKR’s employee-ownership model is temporary, one of my central critiques about employee ownership, at least of the ESOP variety, is that equity comes in the form of a retirement plan. CHI could have been an employee-owned company from the start, and employees could have spent decades accumulating equity in their company and seeing that equity gain value. Maybe then their company would have been successful enough to not be acquired by PE—that’s great! But employees wouldn’t have access to those funds unless they retired, left the company, or purchased a primary residence.

The KKR model at least gives employees a 10-year opportunity to increase the company’s value and see a quick payout for their work. Many CHI employees pointed out how helpful that money has been—that they were able to put that money into funds that would provide for their children’s education. After all, it’s not more retirement accounts that employees need—90% of employees with an employee-ownership plan also have a retirement account—it's equity. The same kind of equity Silicon Valley investors have access to. The kind that employees can grow and even cash out, and use to start or invest in more employee-owned companies.

We want more employees to have more corporate equity—there Boland and I agree. But creating more ESOPs is only one way to do that, and we only create 284 more of those each year. That’s 40,195 more employee owners annually, on average, or 59,395 including those created from acquisitions. Meanwhile, KKR’s Ownership Works has created 129 employee-owned companies and 217,000 employee-owners in their first two years, and they’ve already convinced 32 PE firms to join them.

Their portfolios collectively employ 12 million people. That’s massive potential to create a lot of employee-owned companies, quickly, and transfer millions in wealth to workers. Ownership Works aims to generate $20 billion in wealth for workers by 2030.

I’m all for giving 60,000 workers 30% equity in their companies through ESOPs each year, but why shouldn’t we also give 72,000 workers a 15% share through a temporary ownership structure? The companies that will take advantage of the former are not the same ones that will take advantage of the latter.

It’s not equity washing to do this, it’s just coming up with every possible way we can give more equity to more workers as quickly as we can. Something we absolutely need all hands on deck to do.

We can’t let the perfect be the enemy of the good here.

Are there things we could do better? Yes! Boland takes issue with the policies and tax breaks that reward private equity and leveraged buyouts and wishes there were better incentives—I agree with her. She also mentions three organizations she believes do it better than KKR: Apis & Heritage, Common Trust's Groundwork Fund, and Torana's Essential Owners Fund. These are great organizations, providing case studies we should absolutely emulate. But combined, they only convert up to 50 companies per year, and create about 3,000 more employee owners.

We should absolutely learn from these organizations, and we should reshape our policies and tax breaks to encourage better employee ownership models. But we shouldn’t discourage the creation of more of them, and we shouldn’t discourage options that can scale.

KKR’s “Expanding ESOPS,” after all, has plans to make nearly every company an ESOP, at least partially. “Imagine if workers owned 10% of every company in the country through an ESOP,” their website says. “With an estimated aggregate value of all corporate equities of $75 trillion, this would imply $7.5 trillion of wealth creation potential for working Americans.”

Boland would probably say this isn’t “true” employee ownership. She might say 10% isn’t enough, and that the company is “equity washing.”

But right now, most companies offer no employee ownership at all—if companies go from 0% employee-owned to 10%, that’s a big swing.

And we can’t deny the benefits of a $7.5 trillion wealth transfer.

ESOPs alone are not enough. We need organizations like KKR that can take what currently only works for small, altruistic companies and scale them to work for large companies with millions of employees and a profit motive.

Wealth inequality is on the rise, so is power inequality. We need to drastically shift wealth back into our hands, so we can democratize power too, and that requires a drastic fix. Every kind available to us, not just the one employee-ownership method we came up with in the 1970s.

But I’d love to know your thoughts. Join us in the comments for further debate 👇🏻