News & Analysis

Data snapshot: LPs favour wider portco employee incentives

Sharing the financial upside with portfolio company employees is an emerging way to bolster private equity's license to operate. Plenty of LPs believe it is a returns driver too.

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Almost half of limited partners believe that offering performance-based incentives to a larger proportion of portfolio company employees would, over time, increase returns, according to a survey from Coller Capital. Of respondents, 46 percent thought this would be the outcome, compared to just 6 percent who thought it “would probably reduce returns”.

The finding comes from Coller’s Global Private Equity Barometer, which is based on a survey of 102 investors conducted during October this year. It suggests that a significant portion of the institutional investment community is onboard with an approach to private equity investing that is currently being explored and developed by a handful of firms. KKR’s industrials team, for example, has regularly awarded stock options to entire workforces, as we documented earlier this year. KKR partner and co-head of Americas private equity Pete Stavros told as at the time that buyout firm peers had been in touch to discuss his approach. Ardian has also been developing ways of sharing economic upside with portfolio companies (details here); it made its first cash distribution to portfolio company employees in 2008.

Coller’s survey also found that:

  • Around a quarter of North American LPs, and a third of Asia-Pacific LPs, have rejected potential fund commitments on ESG grounds – a picture that has remained fairly stable over the past five years. The proportion of European LPs rejecting commitments on ESG grounds has grown significantly over the same period – from a third of investors in the
    Barometer of winter 2016-17 to well over half of LPs today.
  • Two thirds of Asia-Pacific LPs (67 percent) and well over half (58 percent) of North American LPs think that new regulations will make it easier to distinguish true environment-related claims from ‘greenwashing’ (ie, false or misleading environmental claims) in the next three years. However, European investors are less optimistic that regulatory change will help within the same timeframe (44 percent).