TiLT Capital, which this week announced it had raised €250 million for its debut fund, is one of a growing number of managers to tie a portion of its carried interest to ESG-related KPIs. However, alongside the more common metrics around carbon emissions and gender diversity, the firm has also set itself a value creation target, namely the financial inclusion of all employees in a portfolio company’s equity story.
TiLT is not the only French private markets firm to be doing this. GP stakes investor Armen has tied part of its carried interest to a goal of having 50 percent of employees at its GPs’ portfolio companies involved in schemes that see them benefit from the proceeds of an exit.
That onus on tackling inequality has been gathering pace among French managers, to the extent that France Invest, the industry body for the country’s private markets firms, has set an objective for all its members to have profit-sharing schemes in their portfolios by 2030, with 85 percent having an employee shared ownership scheme.
There are obvious benefits to such schemes, for both worker and employer. For one thing, it is hard to imagine a more fruitful way of improving the lives of employees than by bringing them into the fold when it comes to the equity upside. ESG initiatives aimed at workers, while beneficial, often focus on improving an employee’s experience at work. Shared ownership is unique in its ability to transform an employee’s life beyond office hours.
Secondly, an employee that has skin in the value creation game is more likely to take an interest in the overall health of the business, thereby improving employee engagement and, in theory, the fortunes of the company.
“When employees understand they have real opportunity, not just a job, but something that can have differentiated impact for them financially… this will grow the value of the enterprise beyond the equity that is designated for those groups,” as Institutional Limited Partners Association managing director Greg Durst put it to us last year.
We can turn to KKR for evidence of this in action. The firm has been a champion of including portfolio company employees in the equity upside of PE buyouts, and last year committed to implementing employee ownership schemes across the Americas private equity platform for all majority control investments.
An oft-cited case study is CHI Overhead Doors. When the firm sold the business, a manufacturer of garage doors, to steel company Nucor after around seven years of ownership, employees in the business received an average payout of $175,000. KKR PE co-head Pete Stavros credited CHI staff with “thinking like owners” in its sustainability report released last week.
KKR is a founding member of Ownership Works, a non-profit that aids companies transitioning to shared ownership models. ILPA pledged its support for the initiative last year, suggesting that idea plays well with LPs, while the number of GP members is creeping upwards.
Inequality as a societal issue has increased in recent years, to the extent that it is now on some investors’ radars. “Some feel [inequality] will bite us harder and faster than climate change,” as Robert Eccles, chair of KKR’s Sustainability Expert Advisory Council, told us in 2022. A mechanism designed to chip away at that problem can only be a good thing.