KKR, Pete Stavros – Employee Ownership at C.H.I. Overhead Doors (PE Deals EP. 1)

(upbeat music) Hello, on TedSides, and this is Private Equity Deals. This show is an exploration of deals in the private markets. Through conversations with private equity managers, we'll dive into individual deals to learn about deal dynamics, companies, and ownership that make private equity a force in institutional portfolios and the global economy. You can keep up to date and join our mailing list at capitalallocators.com. (upbeat music) All opinions expressed by Ted and podcast guests are solely their own opinion and do not reflect the opinions of capital allocators or their respective firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Pass performance is not indicative of future results. Clients of capital allocators or guests may maintain positions in securities or managers discussed on this podcast. (upbeat music) On the first episode of private equity deals, Pete Stavros from KKR dives into CHI overhead doors. Pete is the co-head of America's private equity at KKR, the legendary firm founded in 1976 that today is a public company managing around $500 billion in assets. He previously led KKR's industrial team, where Pete pioneered an employee, engagement, and ownership model. CHI overhead doors, manufacturers, garage doors, and is a recent KKR portfolio company exit. Despite being the fourth private equity owner of CHI, KKR transformed the company through a series of operational improvements and perhaps most importantly, an employee ownership model. In fact, the firm's seven year holding ended up generating the highest return of a KKR deal in 30 years. Upon the sale, employees received $360 million in proceeds with a substantial majority going to those below the C-suite level. Our conversation starts with the deal dynamic at KKR's purchase in 2015, including sourcing, preempting the process, and pricing strategy. We turned to KKR's game plan to improve operations and employee engagement and details of the exit. We close with the discussion of the employee ownership structure at CHI and ownership works, a nonprofit consortium of business stakeholders initiated by Pete that's on a mission to increase prosperity through shared ownership at work. Please enjoy my conversation with Pete Stavros from KKR discussing CHI overhead doors. (upbeat music) - Thanks for doing this, thank you for having me. - Why don't we do the elevator version on KKR? Go through a little bit of history and what the firm is today. - The firm was founded by Henry Kravis and George Roberts who are first cousins. So there's a real family feeling inside of the firm, which from the outside people often are surprised by, 'cause you hear barbarians at the gate and then you come inside the firm and it's really quite different. From 1976 through the late '90s, it was really a US private equity firm. And then Henry and George went on a path of expanding geographically into Asia and Europe, so creating regional private equity businesses in Europe and Asia. And then they expanded by product category. So credit, real estate, infrastructure, and so on. And even within private equity, if you look at what we have in the United States, my partner and I oversee a flagship private equity fund, you know, regular way, $19 billion, mega cap, PE fund. We have two growth vehicles, one focused on healthcare, one focused on technology. We have a new middle market strategy and then we have a core vehicle for very long term holds 15 years. Really the firm over its 47 year history has expanded. I would say significantly in the last 25 years. And at the highest level, assets of the firm. Assets of the firm are about 500 billion. We've got about 2,000 people, more than 20 offices around the world. And quick experiences of public company? We went public some time ago. There was a lot of expectation that something about it was gonna be very different. You guys were gonna be subjected to the short term whims of the public markets. None of that has really come to pass. So I would say for an investor at the firm, being public really hasn't changed much other than giving the firm access to permanent capital that we can then go use to build out and seed new strategies. So in the private equity strategy, and we're gonna talk about CHI doors, what's the ethos of the strategy that this deal fits into? The ethos of our strategy in US private equity is around transformations. We're looking for good companies that we can inflect in a meaningful way and transform maybe operationally, maybe through acquisition or growth, maybe strategic repositioning, top grading talent. But the question at investment committee is always, why is it gonna be different in our hands? Not just, okay, it was growing. Last five years, 8% top line, it's gonna be 8% top line. Next five years, that's not our deal. Even if it's a great business, we're looking for something that we say, we've seen an opportunity to really inflect the growth or take the margins up massively. So CHI overhead doors, fits into that transformation program. We saw something that was good, but could be so much more. What's the history of the company? CHI overhead doors was founded sometime around 1990. It's a garage door manufacturer founded in Arthur Illinois. That's where the major manufacturing plant is. This is Amish country about quarter of the workforce is Amish. Real crafts people at this company, they build very high quality product. One of the reasons why CHI from the beginning had a unique competitive advantage is the incumbent competitors were created many decades prior. What happened from the time the competitors were started to when CHI was started is the market changed. Architect started to say, I want variety in the door. I don't want just a white door with no windows. I might want a wood overlay, I might want carriage house doors because so much of the curb appeal, visual square footage, a lot of it's the garage door. The garage door companies that were created many decades ago when there was less variety. If there's less variety, you want low unit costs. So you drive the heck out of production, few changeovers, you're happy to warehouse stuff. Decades later, things change and CHI was able to start its operating model from scratch and they built a really flexible operating system where they could deliver on very short lead times very high variety. It was just not possible for a competitor to adapt unless you were going to shut down your manufacturing plants, shut down your warehouses and start over. So CHI from the Gecko have a unique advantage. What did the rough economics of a business like that look like? The rough economics of CHI over head doors when we bought it were 20% or so EBITDA margins, I think they were 21%. Gross margins in the low 30s, solid mid single digit growth who had been a steady, slow market share gainer. They were always signing up new dealers who would look at CHI's value proposition and say, wow, I'll move away from the old line supplier 'cause I can get more variety on a shorter lead time and that allows me to take market share 'cause I can sell a faster install to my local customer. - I know this business had been owned previously by other private equity firms and would love to hear the dynamic of when you decided to buy it. What's different when you're at the fourth private equity owner in this case? - When we were looking to buy it, what we saw was that dynamic of good business but we thought could be so much more. Grow faster, be more profitable, be less capital intensive and networking capital intensive. We really felt like you could transform the economics of the company to a different stratosphere and part of the way we were planning on getting there was by engaging the workforce in a different kind of way. There were some signs turnover was higher than you would expect in a manufacturer like this. Engagement was not measured. That's always a dead giveaway. When you ask what the engagement scores are like and they're just not even measured so there was no input coming from the workforce and even walking through manufacturing plant when people don't make eye contact, subtle clues that people are not engaged and then the financial clues are too much inventory. When you talk to the Salesforce smart people but there's not much of a growth plan, it's just we got a better model. People are gonna come to us. So it wasn't as proactive as it could have been. There wasn't that much innovation. They weren't driving as much productivity on the shop floor as they could. So you saw the combination of some financial. Hey, this could be better. Some financial indications of that and then just interpersonal and Q&A. You can ask some questions and get a sense that there's more to do. - I'd love to hear a little bit about the process of this coming into your portfolio. - Not being the first private equity owner, why when you bought it this time, was this the right time as opposed to the one before or the one before that or the one before that? - It was just too small. We didn't even see it. Even when we bought this, this was really a mid cap deal for us and we had always had a thought we would start a mid cap strategy so we were happy to do it but this was a 250 million dollar equity check and our fund sizes are many, many billions. So prior to this shot at it, it just would have been too small. - So how did it find its way to you? - It was an auction process. We had heard good things about the business. I think Barclays sold it back to 2015. We were on a big list. They were gonna call the world on it and we jumped on it. Got an early shot to go study it, meet the people, walk the facility, had already done a fair bit of work on the market, decided early on. This was something we really wanted once we preempted the process. At first round bids, we had a final round type offer. Our price was certain. We submitted a term sheet on a contract and we said, "We'll sign this in 72 hours." The seller literally didn't believe it. There's just no way you're gonna do this. You guys have done so little work. So the founder of the seller actually spoke to George Roberts and was like, "Are you guys really gonna do this?" And George said, "Yeah, talk to Pete. We're ready to go." And then we signed it in 72 hours. - What was the diligence process like to get to the conviction that you wanted to preempt the steal? So there was some limited information in the data room. that point so you could do some financial analysis and there was things on the financial side of piecing together opportunity we could look at how his steel moved over a period of time and how have their steel purchases moved were they capturing all of the deflation that had been happening in the steel market the answer was no you're combining things like that with well who runs procurement we don't really have one there's really not really had a procurement tell us about your last three sales force effectiveness initiatives we don't really do that and then you look at the org structure of sales and there's one sales leader with literally every salesperson reporting into that person there's no structure when you think about time and territory management and how sales people are spending their time and dealers not having a growth plan tied to CHI it's a little bit stitching together pieces of information that tell you okay we know it's a good business we know we could do so much more the world's a competitive place people are going to figure this out just go and even if we have to pay a little more than we otherwise would want to these the assets we want to make sure we get without throwing darts at prior owners i'm curious why some of these things that you could see so quickly and clearly as professional business processes hadn't been installed previously by a series of private equity owners i don't want to make it sound like we're the only ones who do this but we have a really operationally oriented investment team i myself used to do four kaisen events every year a week of time working on a shop floor we would go to japan for ten days at a time and we would have the founders of the toyota production system take us around to a dozen of the world class lean plants in the world right they all exist in japan we've spent enough time and operations that with the right questions and some financial information we can find the opportunity wouldn't trust us to go run a business but we know enough to know where the opportunity lies and how to get it again i'm not saying we're the only ones who operate that way but relative to others who owned it they may not have had quite that orientation also keep in mind it was a good business people made money it's not like the prior owners had a bad deal on their hands somebody doubled their money somebody tripled their money these were good deals and it was a good company what was that deal dynamic you preempted the process but presumably in a business like that own successfully by three prior owners you can imagine a lot of your competitors would want to jump on that so how does that actually work it's a little bit the opposite where people say fourth-private well why are we going to do this and the investment committee would typically come to the table saying come on this is our strategy to buy the fourth time what could we possibly do with this thing good business but it's been owned by private equity for 20 years so it's going to get bid to a very low return everyone knows it's a good business so it's going to get bid to a 10% IRR that doesn't sound that interesting how did you figure out what price to put on the table to effectively preempt the rest of the competition we tried to triangulate around where high quality building products businesses had traded over time these were low double digit type multiple businesses I think the fact that was a garage door company also held it back a bit it wasn't something sexy in building products it was like garage doors like a masonite type business where people would say good business but not that exciting there's not some market penetration story there was a market share gain story but it's not like garage doors in totality had some big growth story behind it so we felt like that low double digit zone was where it was going to trade which is where we bid then we just kept going up trying to preempt but the whole process of preemption is a fascinating psychological game of how do you make the other side feel like it's worth not going through a process because speed and certainty are only worth so much particularly when you have a good asset so convincing someone to take it off the table early with your price it's a lot of psychology you're implying this was a multi stage preemptive process so walk me through how it went so we bid 625 million and said we could sign in 72 hours and they said that's great glad you love it we're not in that big of a hurry we suggest to keep playing out the process 650 670 680 I remember I sent an email the title of which was last gasp this is our last shot and we're not playing in a process in truth for small businesses like that it's not a good return on time to hang around to the bitter end to invest 250 million dollars in the grand scheme of a very large fund there was some truth to the threat of if we can't come to terms we can't spend the next 60 days on a small investment so we'd love to do it but if you are hell bent on running a full process I get it that's your right but it's not going to be with us I think we upped our price four times other times we have a different approach which is just this is our best shot and we really mean it and it kind of depends on the situation which route you go you just have to mean it because you're going to lose your credibility with the market so whenever you say this is it it's kind of got to be it in the scheme of everything you're looking at and get excited about what percentage of deals do you think you're trying to preempt hi and what percentage do you think you ultimately win versus the ones you have to walk away from I'm not sure about the second one the reason I said hi we know what we want when we find that situation of good business we could do more we want to own it we're not going to do something foolish we're not going to just bid all the return away but back to the return on time perspective once we know this what we want we want to take our best shot and if it's not going to work out it's not going to work out we'll go on to the next one we try and preempt frequently I couldn't give you a percentage I just don't know and then in terms of how frequently that works I would say it depends on the market if it's a super hot market sellers are like why would I do this who knows what's going to come out of the would work if it's a little shaky or in people see real value in speed and certainty it's more likely to work out which I had percentages on all this but that's qualitatively how I think it works and what was the process like from getting that preemptive agreement to close really fast to sign I think we literally signed in three days and then it was a fast closing because we had no HSR we had nothing remotely in the space we got early termination of HSR and we closed in 40 days some short period of time once you run through HSR for those who don't know it's just antitrust approval with the government so you can get early termination in 30 days effectively if there's no reason for any concern it could drag on for months if the government has a reason to issue what they call a second request which is give us more data we really need to study this we might ask the seller and you to agree on some covenants or asset divestitures or something of that sort we were nowhere near that which is why we got a quick close let's turn to what happened once you own the business there are a couple levers you mentioned why didn't you walk through what your game plan was at the time we didn't use a lot of leverage the percent equity in the deal would have been 40% or something top grading of the leadership team did happen we brought in a talented guy had known Dave Vanguard from Danher I had hired separately to run ingressor and Dave's old boss Vicente right now so knew a lot of people who knew Dave and Dave knew us so that was an easy hire and Dave lived in Indianapolis so it was a drive to Arthur Illinois which is by Urbana champagne University of Illinois so a little bit remote can be a difficult place to recruit people into so there was an opportunity to bring in some really operation oriented folks we did bring in some new environmental health and safety help the injury recordable incident rate which is OSHA's key metric of safety was 14 at the time so what that means is for every 100 people in the plant how many people per year were getting hurt and was 14 out of 100 per year so yeah that up over five years that's a lot of people she brought in new help there there was relatedly a big opportunity in scrap and rework and they made quality products but inconsistently and it's interesting how much you will find parallels between safety issues and quality problems because they both speak to the process in your plants so we brought in some operational help we brought in some marketing talent there was a good sales effort probably not as much around strategic marketing so we brought in people to help there filled out the board with a mix of people who brought operational skills functional skills and then some industry knowledge and then we went on this operational improvement journey everything from how you buy raw materials how much material goes in each door productivity in the plant safety process how we load the trucks route efficiencies soup to nuts everything that we do as would be typical we turn over every stone so you mentioned when you were doing your diligence on the company you walked into the plant and the eyes of the employees may not have lit up one thing to say you want to create all these operational improvements what did you do to get the culture changed in such a way that people would be engaged and be excited about the changes you wanted to make to drive financial performance so the first thing we always do is just to do a baseline survey so you just do an engagement survey and see how people are feeling and what their concerns are and then you do a Pareto analysis on the 80s 20 of what are the big issues and then you commit yourself to changing the way the company operates to address some of those issues and then you create a do loop of more feedback more action more feedback more action and over time people feel invested in they feel like they can trust the leadership team we're in this for the long run we're willing to invest in the business invest in them that's a big part of it if you talk to the CEO of Gallup Jim Clifton he would say the number one thing on engagement is people who supervise other people are they getting feedback and are they acting on it that's everything you can ask very sophisticated questions and long surveys that's all that matters so we spend a lot of time on that we brought in a culture change organization called lrn this brilliant guy dove sideman who wrote a book how the concept being how you do everything is really what matters dove brought in consultants who worked with us in little focus groups made up of supervisors hourly employees and worked through what's not working what makes you happy in your day what doesn't where we having challenges, what would make your work easier? Then we do a lot of Kaiser, and I mentioned this earlier. We participate in those. We expect a leadership team to participate in those, and that involves everything from, I spent time on the road riding with truck drivers, making deliveries of garage doors to work in the factory. One week on how we're loading doors, how can we do it more safely, more efficiently, make it easier for the driver on the other side when he or she is making a delivery to unload the doors, to how can we change our packaging to improve quality? I'm curious how you think about the resources that you bring to bear into these companies, in the sense that you've got a business that's been running, you're bringing in new management, now you're talking about outside advisors, different consultants. How do you think about where you and your team are spending time in these businesses compared to going off and looking for your next deal and just letting the management team run with it? Well, in terms of how we get engaged, we do a lot of work to try and identify the opportunities. So we will say we see x dollars or x percent opportunity in scrap. And the approach with the leadership team is often, you can't tell people what to do 'cause you can't hold them accountable. So what we try and say is here's the opportunity we see. All we care about is getting the opportunity, and we want to get it in the right way. We don't want to do a slash and burn thing or something that's not going to stick. So we want the capability to be embedded in the organization, but we do want the results. And if you want to do it yourself, or if you want to go hire McKinsey, or if you want to use Capstone, we have people internally, we're flexible. We just want to get the outcomes. And that way you get ownership while having people feel like they're accountable to an outcome. Then in terms of how directly involved we get, it's hard if it's all non-deal team resources. The deal team runs the board meetings. Everyone knows the investors are ultimately accountable, and therefore the leadership teams accountable to the investors. So I do think it's helpful if you have involvement from the people who have made the investment, who chair the board, who sit on the board, to also be in the business. By the way, it makes the board meetings way more productive when people are like, I know exactly what you're talking about. So we think it's important. And in terms of return on time, it depends on the magnitude of the opportunity. So in a situation like this where we were like, oh my gosh, if we could really unleash the full potential of the business, this could be an epic deal. If it was more on the margins, we can get a little bit, I'd probably up more towards an outside non-KKR resource. - Did most of the identification of those opportunities and data analytics come before you've made the acquisition? - Not really because you have to move so quickly to win in this world, so you have clues, but you don't have the access to data and the time if you're gonna be effective in winning these assets. To be like, well, I gotta get to the one decimal place. How much money is there in scrap? How much could we lower inventory? How much faster could we accelerate growth and market your gain in some of which is unknowable? The market share gains we drove in part were lead time reductions and knowing how much you could shrink lead times down relative to the competition. You could analyze that forever and you just need to get into it. Now you own it, you see all these operational improvements, you bring in some leaders. How do you decide what to do first and in what order? - There's a leadership tool that we borrowed also from Toyota. Ocean Connery is the official name, but it's now known more broadly as strategy deployment or policy deployment, people call it different things. That is a way of cascading priorities into an organization. How you prioritize and then if the priority, let's just say one of them scrap production, how does that cascade down to individual plants, leaders, shifts so that it all adds up to what you think you can get. There's a leadership tool we use to do that and it is as you would expect. You go after the biggest opportunities. It's constantly paradoing like how can we get 80% of the results without drowning the organization in priorities, because if you have 12 priorities, you're gonna achieve none of them. It's gotta be what are the critical few that you're gonna get this year. - So how did this go from 2015 when you bought it forward in terms of the progress you were making on these different initiatives? - It went really fast initially. We went from 60 of EBITDA in 15, 16 was great, 17 was great, 18 was great, 19 was great. We were, I don't know, 130 of EBITDA from 60, all organic, no acquisitions. And then COVID was a big setback. The plants in Douglas County, which I think on a per capita basis had the highest COVID rates in the Midwest. There was a real problem staffing the facility our entire leadership team got COVID. There was a lot of reluctance to masks and everything from a safety perspective that we were trying to install. That was hell on the company. So 20 and into 21 was really tough. And then we recovered. We should have been at 175 EBITDA, we went flat and then made it all up and by the end of this year, businesses on fire still. - How do you decide in a situation like that when you think about selling? You mentioned at the onset, you have the separate core fund where you're gonna own things for 15 years, things are going really well. This is a business that clearly does well in private equity hands in this whole world of continuation funds and all this. How do you think about the exit? - In deployment, making investments, we try not to call the market where it's like, well, now's a bad time to invest and now's a good time to invest and now's a time to go heavy and tech. But don't do industrials. No one knows how to do that is our belief. So we try and evenly deploy a fund over time, over four or five years and diversify by sector. Likewise, on the exit side, once we've achieved 80% of what we came to do, we start to head for the exits. As long as the markets are reasonable, we're not trying to say, well, now's the perfect time to sell. But as long as you look at the markets, you say it's a reasonable time to sell or take a company public and we've done 80% of what we came to do, we exit. That's as good of a philosophy as we've found on the exit side. - What was the multiple like on entry? You mentioned 250 of equity. I think we paid 13 times on entry and on exit, 14 times or something. There was not a huge uplift in multiple. - And yet through all of this that came out in the news that this has been one of the most successful deals that KKR has done in a long, long time in terms of rate return. There's one piece of this that we haven't talked about yet, which is this whole employee ownership and would love you to walk me through what you did with employee ownership and how all that worked and impacted the results. - Back in 2015, day one, we closed the deal, we show up and we announce we're gonna do a bunch of different things at this company. Invest in the facility, invest in you, and we start to lay out what these programs will look like and by the way, you're all gonna be owners in the business. The way we did it here was we set up a pool of options for all of the folks in the distribution centers and the factory through which they would participate. You might ask, well, why would you do that versus just giving everyone individual options? It's administratively more difficult to do the latter, although we do do it and the turnover was high. So if there's high turnover and we give you documents and you sign them and we sign them and then you leave and we gotta go chase you down and close out your account and then issue new ones. When you don't have a lot of stability, it's hard up front to do it that way. So roll out this program and as is always the case, after you roll it out, people say, I don't understand it and I don't believe it. You're the fourth product we've firm to show up, come on. We're gonna have this big payout at the end, I just don't believe it. We're very careful to under promise at the outset. So I think we told people they would make if we hit our base case and we said, on the one hand, it's not a guarantee. On the other hand, we really hope we could do much, much better than this. But if we do this, everyone here is gonna make at least $15,000. That would be our hope. Obviously we did much better than we ever. Thought we would do so the end payouts ended up being 175,000 on average and we had hourly workers and truck drivers make almost a million dollars. So we ended up being far beyond what anyone thought was gonna be possible. The work we've done with Gallup and all the data we have indicates that ownership can impact retention. People will be less likely to quit 'cause they'll say, this could be a meaningful payout. I wanna see how this goes. But it's all the other things added on to ownership the drive engagement. So it's the quarterly owner meetings that we do. And during COVID, we did monthly owner meetings. They saw our revenue, our earnings, our growth, which may not sound like a big deal, but when you show up and you say great news, revenue was up 12%. You're gonna get questions up, but why are my wages up five or seven? Why is it not 12? The more transparency you commit yourself to, and if you operate in that way, you just need to be prepared to answer questions. While I'm on that topic of wages, there are some core principles around how we do ownership. It cannot be in exchange for wages or benefits or wage increases. Last year, wages were up 12 and a half percent, the prior year, seven percent. So that wages were going up at a rapid clip. So this was not in exchange for that. And you can't ask people who make less than $100,000 to invest in the company. That needs to be an entirely free incremental benefit. This is not about shifting risk onto workers. Over the years, we paid four dividends. Those dividends amounted to about $9,000 per employee. That is just a signal of, this is real. You are actually going to participate in this. And you're not selling any stock. This is just a dividend. So this sale will be much more meaningful than this. But it's those moments of, wow, we're getting more information. We're having a voice in what's going on. We're getting these dividends. I'm seeing the investments being made. And we didn't talk about this, but there's a whole program. This was the first time we piloted it, where we turned over some rights to the workers to determine where we invested money. And what was really fascinating about that was they asked for investment that all related to health and wellness, which we did not anticipate and didn't even piece together until it was years of, first, we need air conditioning in the plant. Many manufacturing plants are not air conditioning in the country. And this was central Illinois, really hot in the summer. And that was contributing to safety and quality problems. So something we would have done anyway, but that was the first thing they wanted. Then it was build us a cafeteria with healthier food options. And then it was billis nonsense, medical clinic. It was all health and wellness related. Now we're working on making that more programmatic where we have a belief that employees, if they can direct their own health and wellness, they're going to engage with it more. It's opposed to a company saying, "Free gym membership, which people may not want." It's all of these things that create an ownership culture, which is an overuse term. But how do you get people to feel like? I own my outcome. I own the responsibility that the company has placed on my shoulders and together we own this company and where we're headed. It's all of that stuff together. It's not just a handout stark in people, all the sudden changebacks. behaviors. It's a lot of work, a lot of communication, financial education, financial literacy training with Operation Hope, and then it's over a multi-year effort that you see behaviors change. This is not a quick fix. This was a seven-year journey for us. Ingersoll ran another great story around engagement and ownership was a nine-year journey. What are some of the important but subtle aspects of the ownership that, from the outside, you might not appreciate are important in sharing this ownership with the employees? There's a few different success factors we've noticed for when does this go well. Number one, the leadership team has to be super passionate. If the leadership team is like, "I'll do it, just because you're telling me I gotta do it, Pete, I'll do it." Don't bother. It's not gonna work. You're not gonna change the culture. This is a second job for them to drive engagement and do all of this work. That's one, commitment to the leadership team. Two, you've really got to look at how do you make this a meaningful wealth creation opportunity for people. Sometimes you'll hear folks say, "We gave $500 a stock. I wouldn't bother. I would give a cash bonus." For this to work, people need to see a path to at least six months of their income with upside, hopefully a year of income on average. And then the third thing I do think you need some degree of stability in the workforce. It's hard if you got a retailer that is churning their employee base 100% a year and you show up sometime up five-year plans. That's a difficult dynamic. So we had an unbelievably committed leadership team, so passionate about this. When they were rolling out the programs, I'll never forget the sales leader talking to all of the sales people, including the most junior sales folks who would never have ownership. I'm getting emotional talking about it because he could see what this could be. We had a pretty favorable ratio of employees to equity check 800 employees wasn't thousands, so you could make the math work and show people a meaningful amount of upside. And the employee base, while the churn was higher than we wanted, wasn't out of control. Those are some key success factors that looking back over the many times we've done this, when has it gone better than others? Does it be some things we've noticed? We're trying to do the math in my head, 800 employees. You mentioned truck drivers making a million dollars. How much did this pool add up to that went to the employees? I think it was three and a half percent of the company and options. Of the 800 folks, maybe the top 200, got outright grants, made meaningful investments in the company, and were traditional management equity plan participants, as you would normally think of it. Then the other 600 would have been in this pool, which was around three, three and a half percent of the company. Something like that. Let's talk about the exit. You've had great success with this business. You've done 80 percent of what you want to do. How do you think about who the next owner should be? We had a lot of in-bounds from strategics, from financial sponsors, from family offices. You name it. We got a lot of in-bound interest on the business. Obviously, we're fiduciaries, so we have to seek out the best outcome for our investors. Having said that, given the culture that was built, it's not hard to believe that the people who value this culture are the ones who are going to pay the high price. Somebody who's maybe more of a slash and burned corporate buyer, I'm going to make this up. We didn't have one of those in the field, but they're not going to pay the winning price anyway. When a new core comes along, and you look at how new core operates, how they treat their people, their safety record is legendary. Their profit sharing program. If you look at their financials, I think their manufacturing plant employees made last year on top of their wages, like $35,000 in profit sharing, a lot of money. That was an epic year for steel, I can see, but still, that's a philosophy that you don't see everywhere. When new core came calling, at the same time, many others did. There was reason to believe this could be the best thing for our investors to engage with them on an exclusive basis, and we think they could pay a market clearing price and it'd be the right thing for the employees. I'd love to talk a bit about this ownership idea. Got a lot of press this time around, and when we were chatting, I'd learned that you've been doing it for a long time. Why don't you take me back to how this idea of extending ownership beyond just management ranks got started here? My dad was a construction worker. He operated a road grader at a small construction company in Chicago, and his dream was always profit sharing. There was a lot of conflict and incentive misalignment that he highlighted to me as a kid. If you make $15 an hour, all you want are more hours. That's all you care about, and ideally some over time, as long as it's scheduled in a fairway. The employer wants exactly the opposite, so it was non-stop fights over hours that led to strikes that we lived through and lots of just bad behavior. My dad always thought profit sharing was the answer, alignment. My dad would say, "Shouldn't I care about quality, cost, doing the job right on time, but I don't?" That was the early seed in my mind of why this could be important, and then if you fast forward to the first investment job I had, two things happened. Every first thing that this firm had me work on was a closing funds flow. They don't really do this anymore, but 20, whatever, years ago, funds flows were all manuals, so meaning a company sold, you need to disperse all of these funds. How does that get done? It used to be on the phone, and it was all voice confirmation of wires. That was my job for like two days. I did all these wire transfers, and so I'm on the phone with the bank, and then I'm on the phone with people receiving the wires in their bank, and we're confirming account numbers and amounts. When we were doing the confirmation, the assistant treasurer was just overcome with a motion of what this was going to mean for his life. Six hours earlier, I had gotten off the phone with the CEO, and it was like, "Yup, got the X million dollars, click." That was a moment of, "Wow, this is so impactful, the deeper it goes," and you just start to think about how motivating it is and how rewarding it is, the further you go into an organization. The second thing I worked on was an ESOP. An ESOP is this 1974 law, the government wanted to encourage broader ownership, so if you shared 100% of the common equity, which is one of the challenges with an ESOP. All other institutional investors can only be really in debt with warrants, because all the communites go to the employees. If you did that, you paid no income taxes as a company, and as a seller into an ESOP, you could basically avoid capital gains. I was totally fascinated with that. It spent a bunch of time studying it when I went to business school. This is what I spent my whole second year understanding. Fast forward to when I got into a leadership position at KKR, I started experimenting with broad forms of ownership, the first one being a manufacturing business where we were looking for different ideas of how to improve retention. It starts with obvious things, wages, benefits, scheduling, work conditions, safety, and then extended to. Let's try ownership. Once again, it's not like you did that, and overnight things change, but it gets people's attention. We started that about 12 years ago, extended that across our entire industrial portfolio over a period of time, so we've done it maybe 12 times with manufacturing businesses, and then in total, today have 25 live cases of this across all of our different verticals in the US, and this is now our new way of operating in the US, and I think soon to be in Europe as well. I'd love to hear about how you extended that outside of just what you're doing in the sector, and then we're broadly KKR to the industry. We started getting phone calls from public companies, families, other GPs saying, "We think this is a good idea. We've thought about it. Let's try to, how have you gotten past SEC regulations or tax accounting challenges? How are you administering these programs? How do you ever communicate it in a way people actually understand it and value it? Million questions coming in. We decided that there could be real benefits to collaborating, because this is very hard to do, and we don't have all the answers. There could be risks to not collaborating. One of our peers called and said, "Hey, we're going to do this. Take a worker in one of our factories who makes $40,000," I was like, "How much should that person invest?" As I mentioned earlier, one of our core beliefs is that should be zero. We don't want to be pushing risk onto people, and you can imagine how bad it could be for the private equity industry, the investment industry more broadly, if workers start risking capital and deals go bad. We saw opportunity for collaboration. We saw opportunity for massively scaling the impact. We have 900,000 employees. If we were to scale this across all of our businesses, that would be really impactful. What if the top 20 private equity firms did it? What if the whole private equity industry did it? That would be talking about transformational change. That was exciting, and then there was the risk side of, "Geez, if we don't collaborate, we've either stepped in potholes that we'd rather other people don't, or very nearly stepped in potholes that could have really been bad." That was how our thinking went. As we engage on that idea with other organizations, whether it was nonprofits like Ford Foundation, Rockefeller Foundation, banks, Goldman, Morgan Stanley, really all the banks were excited about this. Like Kinsey, E&Y, Deloitte, unions, labor officials, pensions, everyone seemed to say, "If we could really make this work, this could be something." Why don't we all work on it together? That was the formation of ownership works. What's been the impact from that formation to today? We've got about 20 private equity firms signed up, and by signed up, they're committed to doing this at least a few times in their portfolio, following our standards and then sharing some data back to the nonprofits so we can track, where's the money going, who's being impacted, what's happening to turn over an engagement. We've worked with some public companies on this, continued to work with some public companies on this, some family owned businesses, some restaurant chains. The most heartening thing is you've actually got people talking who largely have just been throwing grenades at each other. We've actually got labor talking to capital with employees at the center of the discussion of, "Yes, how do we move business performance, but how do we help workers who have no access to ownership of any sort, and without access to ownership of any sort, it's hard to get anywhere." As Darren Walker at Fort Foundation says, "It's become normal in the US to work 50 hours a week and be on federal assistance. Somehow that's happened. A lot of these folks don't have savings to invest to get ahead, so how are they going to get ownership? This is one of the ways to put ownership in their hands and do it in a way that it could actually pay for itself through productivity and better performance. What if the results have been? results have been great. They are bifurcated between leadership teams who just believe and they are willing to put years of work into this and in those situations you see cultures transformed. And then there are some who rolled it out, they did it, but there wasn't the financial education, the information sharing all this effort around engagement and the results are more modest. Interestingly, there's not that much in the middle. We haven't had that many of what kind of worked. It was Ingersoll Rand where the quit rate went from 20% a year to 2% and the engagement scores went from the 19th percentile to the 90th. Total transformation took nine years. In our experience, you have those or the CHIs where you have ones that are kind of inside ways. I attribute that related leadership. I'd love to hear any key takeaways from your experience with CHI. Key takeaways would be be patient. It takes a long time and not only does it take a long time, but keep in mind how much water is under the bridge between management and worker. It's not like you're going to do this and trust is going to magically appear overnight. As an example, even after years of working hard on this, when the leadership team during COVID said, "Look, safety is a core value or it's not," and here it is. As a result, there's going to be hand-washing stations and temperature guns at the door and you're going to wear a mask. People flipped out over that. The CEO was like, "Gah, Lee, how much more could I have done for the workforce between ownership, air conditioning the plant, new break rooms, cafeteria? Haven't I earned some trust here?" It's those moments you just got to remember generations of conflict. It's not going to change overnight. That would be another takeaway for me. I think we've gotten it right on the back end in terms of when we sold the business, prepaying for financial coaching with Goldman Sachs, prepaying for tax help to make sure people appropriately and timely file their taxes. We did some of that work as I said along the way, but at exit, you really get people's attention because there's big dollars flowing and they're more likely to engage there. Those would be some of the takeaways. You shared a video with me of being there at the plant when the CEO and you started sharing what these economics were going to be that were flowing to the workers and we'd love to hear what that experience was like. That was the announcement of that pool I mentioned earlier for the 600 workers who weren't in the equity plan of what that would mean for each of the employees. What we did, first thing was we spent the first five or ten minutes recounting the journey and you might ask, well, why would you do that? We wanted to make sure it's sunk in that you earned this. These are folks who never had something like this and before we got into the numbers, we wanted to review revenue was up 120 percent. You took all this market share, lead time, advantage versus the competition gapped out massively. Despite the 120 percent revenue growth scrap only grew 7 percent. Look at what we did with working capital. Look what we did with safety, what you did with all of these things. We spent a good 10 minutes on that and people knew something was coming. So there was a little bit of can we get to the action, but I think that was important. The next thing was sharing that the company was sold. We'd signed a deal. This was a Wednesday. It wasn't going to be public till Monday. This is going to sound like a small thing. That's a big deal to people when you have hundreds of workers in a plant who never get told anything in a typical company. This is confidential. It's not going to be public. You need to stay out social media. You can't talk to anyone about this. That level of trust is a small example of what we try to create in these companies. I thought that was a cool moment and then when we got into it, obviously incredible excitement. Still a bit of disbelief, but tons of tears of joy, hugs. We had some food trucks brought in and we ended up staying in the parking lot for hours and hours and hours talking and all of the stories people who were going to get out of debt, pay off their home, be able to invest for the first time, help disabled grandchildren. What was also remarkable is within 24 hours, many of these folks had not had wealth before. We're turning to what can I do now? People were making commitments to help fund the drilling of fresh water wells in Africa and giving to their church very special group of people in this company. It's been this long history and private equity of aligning yourselves with the management team. We know there's a big income divide. How much do you think it impacts the performance of the company when it's the employees below those management ranks that are rewarded with equity? Number one, I think we as a society are massively misallocating resources in overpaying the top people. You can make that case about private equity, about investors like me, about CEOs. We are not achieving optimal aggregate outcomes. As comp goes up, I do think performance goes up. People are less likely to quit. It levels off faster than we think that they have enough because people don't really work for money. And then I think performance declines. People get risk averse. If somebody is looking at a huge path, they just don't want to screw it up. I think private equity is making a mistake by aggregating all the economics in such a sliver of the company. We would all be better off as investors put aside the good to society by more evenly distributing it because the senior people are going to quickly tap out in terms of the incremental motivation through more money and the people deep in the organization who have many times never felt respected, never felt recognized in their jobs. Just the active granting and opportunity can unleash an emotional response that is surprising. It's not going to solve all your problems overnight, but at least the third of the time, it's tears even just on the rollout of the program where people are shocked to be recognized. My opinion, no question. If we can get this right as an industry, it's going to be good for workers, good for society, and better for returns because I don't think we're allocating equity in a smart way. Pete, I have one closing question I want to ask you, which is what is your favorite aspect of private equity? My favorite aspect of private equity, which ties into why I'm optimistic about the asset class, is the governance structure. If we want to drive change through the business world, you could do it company by company. You could try and go convince one by one, do something different, whether that's for climate or labor or what have you, or in a more concentrated way, could you convince Blackstone, Carlyle, TPG, Apollo, Aries, Warburg, Pinkus, Bane, a handful of companies which each control half a million, million employees. That is what I think is exciting about the opportunity ahead of our industry in the next 10 years, is can we all get aligned on key climate and labor issues and drive real outcomes? Private equity is all about aligning incentives and driving change. That's what the industry was founded on. And if we could put that to work on some key societal problems, which, by the way, will also deliver better returns, that would be my favorite aspect of PE and what I'm most optimistic about. Pete, thanks so much for sharing this story and taking time. Thank you, get for having me. Thanks for listening to the show. If you like what you heard, hop on our website at capitalidelocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one, and see you next time. [BLANK_AUDIO]