“I think LBOs are very ugly. I think they are harmful to individual working people. I think they honestly stink,” Carl Adkins told the Wall Street Journal in 1990. Adkins was an employee of Safeway, the US grocer who, at the time, was owned by the private equity titan, KKR.
KKR’s 1986 buyout would become perhaps its finest deal ever after it turned a few hundred million dollars of equity invested into about $7bn in profits eventually split among investors in KKR funds, Safeway senior management and KKR executives.
For the grocer’s workers, the story turned out differently. That Wall Street Journal feature would go on to win the Pulitzer Prize for its searing portrait of how Safeway employees were treated by private equity; a business model that, while making fortunes for a select few, had led to mass lay-offs, family upheaval and, in some instances, suicide.
Last month, KKR announced it had sold an Illinois-based portfolio company, CHI Overhead Doors, for $3bn. That locked in a return of 10 times its 2015 investment, a stunning percentage return the firm had not seen since the go-go 1980s. But in this instance, the company’s employees appear to have met a much rosier fate under the firm’s ownership. For years, KKR has touted a programme under which it awarded equity, that supplements regular pay, to ordinary employees at its industrial portfolio companies.
Since taking over CHI, ordinary workers had received a few thousand dollars in dividends. However, upon the recent sale, KKR said that about 625 CHI line workers, including those who drive trucks and stand on the assembly line, would net $175,000 in average profits. Cameras for a subsequent publicity blitz were rolling at CHI’s rural Illinois plant when they were told of their windfalls, instantly changing the lives of working-class employees.
KKR itself has helped start an entire non-profit group to evangelise employee ownership. Its ranks include the likes of McKinsey, Apollo and others not previously celebrated for their humanity. KKR insists share grants are not about charity but rather have boosted employee engagement and then ultimately profits and cash flow.
The popular employer review website, Glassdoor, shows the poles of that ownership orientation. One anonymous poster wrote: “The [CHI] CEO does not care about anything but the EBITDA . . . He just wants to milk this place of every dime they can for the private equity owners.”
Another departed worker, however, missed the ownership benefits, writing, “great pay and profit sharing for plant employees. I randomly receive a check for a couple grand because of [CHI’s] performance and I never get that at my current plant. Never should have left these guys.”
The enormous operating leverage in private equity has created an enormous pot of wealth to share with labour. KKR itself has cited widening wealth inequality as a reason to encourage labour to share in the bounty of ownership. KKR has a market capitalisation of roughly $50bn but only about 3,000 employees. It reported 2021 median employee pay of $320,000, a figure twice that of median employee pay at Goldman Sachs.
KKR paid an aggregate price of about $700mn for CHI in 2015. Its equity investment of $250mn is now worth an estimated $2.5bn. Of the more than $2bn in gross deal profits, $115mn is flowing to 650 CHI hourly workers and drivers. A total of 800 employees will collectively net $350mn.
David Webber, a professor of law at Boston University, notes that private equity’s interest in wellbeing and fairness comes amid pressure over the industry’s labour policies, preferential tax treatment and business practices. He says the sector’s poor reputation over how it treats workers is finally catching up with it. “This new initiative is a response to changing demands of the marketplace and of at least some investors. It should be welcomed, though I think some vigilance is in order to make sure it persists,” he says.
At the very least, the shift in tone remains remarkable. The 1990 Wall Street Journal article concluded with KKR co-founder George Roberts saying that Safeway employees “are now being held accountable”. “They have to produce up to plan if they are going to be competitive with the rest of the world. It’s high time we did that,” he said.
Pete Stavros, the current KKR executive responsible for the CHI investment, has struck a more magnanimous tone. “It’s a huge collection of a lot of little things the workforce did; again they did it, they earned it, they made this company more than triple, almost four times their profits, and so shouldn’t everyone participate? That’s the simple philosophy,” he says.