How to improve the reputation of private equity firms?
The reputation of private equity (PE) companies has not been good for some time. For years, they’ve been seen as parasitic (not my words!). In essence, they buy companies, saddle them with debt, and look for cost savings, often by cutting jobs or employee benefits, before selling them at a handsome profit. It’s all about buying, cost-saving, flipping, and profiteering, a very simple and aggressive playbook.
Yet, while it's a business model that delivers profit, often outperforming public-listed equities and other investment funds, the profits are for the few rather than the many, especially the employees who help build the company. For them, their reward is a monthly paycheck, and that is about it.
According to a 2022 study by People Management, 'a third of workers living payday to payday', while over two-thirds of Americans find themselves in this situation.
This business playbook not only damages the perception and reputation of the business community but also limits growth because it limits the return to employees who are living paycheck to paycheck but who could be investing or spending the return on their work.
Yet, there is another way.
Peter Stavros is a partner at private equity company KKR. Peter is focused on establishing an employee ownership model in companies in which his firm invests.
Stavros rightly believes that employee ownership is good business and makes sense.
What is employee ownership?
Employee ownership is not new here in the UK, where John Lewis & Partners, one of our leading retail stores, has operated in this manner for over 100 years and where each employee is a Partner.
Looking back over the last 25 years, during the rise of digital and tech companies, employee ownership models have been used to incentivise founders and employees to grow the company, often focusing on valuations and stock ownership. While founders retain control and wealth for the business they founded, employees get ownership and a return depending on the ownership and reward structure that is offered.
Employee ownership typically involves employees holding shares or equity in the business, aligning their interests with the company's overall success.
There are many different employee ownership models. These include:
Employee Stock Ownership Plan (ESOP):
An ESOP is a retirement plan that invests primarily in the company's stock and allocates shares to employees over time. These shares are held in a trust until the employee retires or leaves the company. At that point, they can sell their shares back to the company for their fair market value.
Employee Share Purchase Plan (ESPP):
An ESPP allows employees to purchase company shares from their salary, often at a discounted price. In certain countries, like the US, this process has tax benefits.
Worker Cooperatives:
In worker cooperatives, the company is entirely owned and democratically controlled by its employees. Employees are involved in strategic decisions and share profits based on their contributions to the cooperative.
A cooperative approach can help leaders gain insight from across the company and make decisions based on that insight.
Direct Share Ownership:
Employees directly purchase shares or receive them as part of their compensation. These include stock grants, stock options, or restricted stock units (RSUs).
Employee ownership offers a way for companies to engage their workforce more directly in their success. The structure chosen depends on the specific goals of the business and its employees. Examples like ESOPs, ESPPs, and cooperatives illustrate the various ways companies can structure employee ownership programs.
For certain businesses, employee ownership is the right approach if they want to better distribute the benefits of any productivity and growth secured.
How can private equity improve its reputation?
Firstly, do private equity companies care about their reputation and how they are perceived? Yes, they do. They care what their critical stakeholders think of them, especially their clients, investors and regulators and while above anything else it is the balance sheet that might matter most, in an era of activist investors and regulatory scrutiny, reputation does matter.
Private equity firms need to take a strategic and multifaceted approach in their business strategy and how they present themselves.
They need to be able to listen and engage with each of the varied stakeholder groups and use tailored messaging while emphasising shared values, positive impact, and ethical practices.
Here's one approach:
Define Core Messaging
Develop a set of core messages that emphasises value creation, long-term partnerships, positive economic Impact and responsible investment practices.
Tailor Messaging to Stakeholders
Private equity companies need to be transparent in their communications, outlining how PE involvement will benefit the company, employees, and stakeholders. While negative stories get headlines and confirm the established negative narrative, they need to share positive case studies where PE investment led to growth, innovation, and improved working conditions.
The leadership of private equity companies needs to be open and accountable, like KKR's Pete Stavros. Transparency can lead to trust.
Meanwhile, for investors, PEs need to present consistent and compelling data showing long-term returns and resilience through market cycles. They should also highlight risks and strategies to mitigate these. Again, they must be transparent in how they communicate.
Regulators are a stakeholder group that needs to be reassured that regulatory standards are being adhered to and that risk is being managed and mitigated where possible. Yes, there might be a difference in opinion in policy, but open dialogue, whether it's open or private, helps improve reputation and trust.
Changing the general public's perception will take time and will require a cultural change within many private equity companies, which will be a challenge. For some, it will also require a change in business and investment strategy. But as a rule, it is also better to take your current and future audience with you on your journey rather than creating enemies for the future.
Digital Strategy
Reputations and trust today can be broken online and on social media. Conversations take place on multiple channels, and influencers are created to secure an audience that can both promote and protect as well as attack.
A digital strategy needs to be designed around the audiences of the now and the future. Thought leaders need to be leveraged, and their relevant positive views and opinions shared, highlighting a narrative that supports not just the company, but also the wider industry.
Media Relations
Investors and private equity companies rely on the confidence business journalists lend their investment counterparts. These relationships are critical if a reputation is going to be transformed. Of course, as with any journalist, background, backs and transparency, where possible and adhering to market sensitivities, can help them better present the value and return that these companies give the economy and their backers.
Be able to tell a story, a view, an opinion. Very much like what KKR are doing with their increased support of employee ownership.
Industry Partnerships
The importance and value of strength in numbers are critical. Working with industry bodies can change how controversial industries are perceived.
Support and participate in cross-industry forums and panels, and share best practices and understand stakeholder concerns. This insight will help shape your overarching strategic communications strategy.
Repairing the perception of private equity requires consistent, transparent communication and tangible proof of positive impact. It requires a strategic approach that listens to and engages stakeholders and addresses their unique concerns. Private equity firms can reposition themselves, rebuild trust, and establish a reputation as responsible, value-creating investors.
Employee ownership is a strategy that, when employees see the benefit, can deliver a tangible value-add to everyone. While returns matter, reputation shares and establishes confidence for growth.
