Do Private Equity and Employee Ownership Mix?

At least one PE group thinks they do—so long as it means the PE guys make even more money.

Good Morning!

Here are today’s highlights:            

• Gene Marks offers a warning about Copilot, Microsoft’s new AI release.

• Suddenly, businesses are finding it’s getting easier to borrow.

• The rise of ecommerce has reinvigorated another business: train robbery.

• As more retailers compete for less space, landlords are ending discounts and seeing massive rent growth.

PRIVATE EQUITY

A KKR-backed nonprofit called Ownership Works is getting PE firms to experiment with giving employees equity: “The organization now has 25 employees working in a sleek New York office space a couple of blocks from KKR’s soaring headquarters at Hudson Yards. A couple of dozen private equity firms have signed on to give the idea a try. The model offers the potential to create the kind of wealth for rank-and-file workers that few can build just from saving up their paychecks.”

• “When all goes according to plan, KKR doesn’t give up a penny of profit, since newly motivated workers benefit the company’s bottom line, elevating the eventual sale price by more than what KKR gives up.”

• “[Pete] Stavros started experimenting with KKR’s industrial-sector firms around 2011, and he has rolled out employee equity plans at more than 30 portfolio companies. Eight of those companies have been sold, and Mr. Stavros said they earned higher returns than the average across KKR’s portfolio over a similar time frame.”

• “In one particularly successful and well publicized example, the Illinois-based manufacturer CHI Overhead Doors delivered an average payout of $175,000 to 800 employees when KKR sold it for $3 billion in 2022. KKR and its investors made 10 times their initial investment on the deal, which was its best return since the 1980s.”

• “At the end of 2023, Ownership Works had confirmed 88 employee-ownership plans, five of which have returned cash to workers through a sale or a dividend. Private equity firms are notoriously secretive, and Ownership Works is in the early stages of collecting data on what happens after plans are instituted.” READ MORE

21 HATS PODCAST: DASHBOARD

Is Microsoft Copilot Pro Ready for Prime Time? This week, Gene Marks says that while he’s excited about all of the great stuff we will eventually be able to do with artificial intelligence, business owners should stay away from Copilot for now. As with a lot of Microsoft products, Gene says, you don’t want to be an early adopter. Plus, Gene explains his not-completely-obvious fraud-prevention strategy: Make your people take vacations.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

FINANCE

Businesses—and not just big corporations—are finding it’s getting easier to borrow: “Across the country, credit is flowing freely again. U.S. Treasury yields, which set a floor on the cost of debt such as mortgages and corporate bonds, have retreated from their multi-year highs. Businesses and individuals are finding it easier to borrow, and many are forging ahead. Investors often watch credit markets as a gauge of economic health, so the rebound raises hopes that the U.S. can keep avoiding a long-feared recession.”

• “Even though the Federal Reserve hasn’t cut interest rates, investors are anticipating rate cuts later this year. That has driven the decline in Treasury yields. At the same time, investors are demanding less additional yield for the risk of holding corporate bonds instead of ultra-safe Treasurys, further bringing down borrowing costs for companies.”

• “New deals have been dominated by a wave of companies cutting the interest rates on their existing loans. But the volume of loans to raise new money has also been ticking up, including loans used to pay dividends to company owners.”

• “For a few months last year, investors feared that small and medium-size businesses would be starved of credit after the failure of Silicon Valley Bank sparked turmoil across the regional-banking sector. Recently, though, data have shown a decline in the share of banks that are tightening their lending standards.” READ MORE

RETAIL

Commercial landlords are finding they no longer need to offer discounts: “Retail property owners are shedding the discounts and other concessions they offered struggling tenants during the depths of the pandemic, the latest sign that competition for retail real estate is intensifying. Many landlords slashed rent prices as they struggled to fill empty storefronts during the first year of the pandemic. Some felt compelled to accept a portion of monthly sales instead of a fixed rent amount from tenants whose businesses collapsed because of government-mandated closures and social distancing. These arrangements helped retailers stay afloat, and prevented landlords from losing valued tenants.”

• “Now, landlords are having a much easier time filling prime retail space and are far less likely to agree to these concessions, said Ed Coury, senior managing director at retail-brokerage firm RCS Real Estate Advisors.”

• “Store openings outpaced closures for the second straight year in 2023 after years of net closures, according to research firm Coresight Research.”

• “This, coupled with scant new construction of retail real estate, leaves landlords optimistic that retailers will be vying for limited available space for the foreseeable future.”

• “‘We’re seeing our highest occupancy in the 17 years that I’ve been at Time Equities,’ said Ami Ziff, managing director for national retail at the private real-estate investment company, which owns retail space in 29 states ranging from open-air shopping centers to enclosed malls. ‘Massive, massive rent growth.’” READ MORE

THE ECONOMY

Consumer sentiment in the U.S. is based predominantly on the price of three things: “Since November, the University of Michigan's consumer sentiment index has jumped by 29 percent — the largest two-month gain in over 30 years. People are more convinced that inflation will keep falling, and their outlook on their personal finances has also improved. In other words, consumers finally feel less terrible about everything. There's been all sorts of hand-wringing over the past year about why Americans kept saying the economy was a disaster even if, on paper, things were actually pretty good. Was it partisanship? Did TikTok do it? Is America just uniquely broken in a way other countries are not?”

• “The answer, I think, is fairly simple. What improved America's economic vibes was basically three things: the soaring stock market, falling gas prices, and eggs.”

• “Even for people who aren't investors — though, contrary to popular belief, most Americans hold stocks — good market news tends to be a mood booster across the board.”

• “Then there's gas prices — the one price that's displayed prominently on giant signs all over the country. The current national average for a gallon is $3.096, per AAA, compared to $3.446 a year ago and down from a record high of over $5 in 2022.”

• “As anyone who watches ‘The Price Is Right’ can tell you, consumers can't really pinpoint the price of more than a handful of items they get on a regular basis. Eggs are one of those items.” READ MORE

HUMAN RESOURCES

Denver is cracking down on businesses it accuses of exploiting gig labor: “What comes to mind when you think of a mom-and-pop small business: A hardware store? A diner? A family-run clothing store or small-scale supermarket? Here’s one that’s probably never crossed your mind: a dishwashing business. By that, I mean a business of a single person — unincorporated, no business address or capital behind him, just one guy — working as a dishwasher for a restaurant, using the restaurant’s machinery to wash the restaurant’s dishes on the restaurant’s premises.”

• “Two explosive enforcement actions disclosed by the City and County of Denver this month expose the lengths to which some corporations will go in trying to exploit the gig business model. At issue is whether dishwashers and others like them, placed in their jobs by online temporary staffing agencies, are employees of the agencies or independent contractors running their own businesses.”

• “These two staffing companies place workers in a range of hospitality positions, including as servers, bartenders, line and prep cooks and, yes, dishwashers. The citations assert that the companies misclassified the workers as independent contractors and in doing so, violated the city’s minimum wage ordinance and state law on paid sick leave.”

• “San Francisco’s city attorney, David Chiu, sued Qwick, a hospitality staffing company, last year, succinctly summing up the gig business model: ‘Qwick is inequality disguised as innovation, a staffing company with an app that is in flagrant violation of labor and employment laws.’”

• “Another consequence is that law-abiding employers face unfair competition with businesses that don’t follow the rules, and critical safety-net programs like unemployment insurance lose badly needed funds.” READ MORE

MANAGEMENT

Remember that CEO who praised an employee for selling the family dog so she could return to the office back in 2021? “[James] Clarke announced that employees living within 50 miles of the digital marketing company’s Draper, Utah headquarters would now have to come into the office four days a week. When people pushed back, he held a town-hall meeting via Zoom to reinforce the policy shift in no uncertain terms. Said Clarke: ‘You’ve misinterpreted my kindness for weakness.’ But an edited video clip that was posted to Reddit made him look unkind, if not outright heartless. In it, Clarke praised his own work ethic while railing against employees taking care of kids during work hours. He even appeared to praise a colleague who ‘went out and sold their family dog’ upon getting the return-to-office mandate.”

• “In an interview with Forbes and follow-up exchanges, Clarke talked about the outcome of his actions, good and bad. The good part, he says, is that 100 percent of local workers are now coming into the office four days a week and tell him their mental health has been dramatically boosted in the process. Moreover, he noted in a recent email, ‘We finished 2023 with record earnings, nearly doubling what the company had done in 2021 prior to our turnaround efforts which started exactly two years ago.’”

• “But the blowback from the viral video was devastating, putting his company and even his family in the spotlight for all the wrong reasons. He faced threats of violence and worried about his children’s safety. It also forced him to look in the mirror to recognize how badly he’d conveyed his message.”

• “His convoluted commentary about the pressure on primary caregivers, for example, made him sound like a fool who didn’t support working parents. ‘No one should have to make a choice of having children or having a job ... that was not my intention at all. I failed.’” READ MORE

ECOMMERCE

The rise of ecommerce has brought back freight-train robberies: “Some 20 million containers move through the ports of Los Angeles and Long Beach every year, including about 35 percent of all the imports into the United States from Asia. Once these steel boxes leave the relative security of a ship at port, they are loaded onto trains and trucks — and then things start disappearing. The Los Angeles basin is the country’s undisputed capital of cargo theft, the region with the most reported incidents of stuff stolen from trains and trucks and those interstitial spaces in the supply chain, like rail yards, warehouses, truck stops, and parking lots.”

• “Cases of reported cargo theft in the United States have nearly doubled since 2019, according to CargoNet, a theft-focused subsidiary of Verisk, a multinational company that analyzes business risks, primarily for the insurance sector. On CargoNet’s map of cargo-theft hot spots, Dallas, Chicago, Atlanta and Memphis show up as distinct, high-incident red blobs. But the biggest blob, a red oblong smear, stretches out over the Los Angeles valley like molten lava.”

• “In Los Angeles, however, trains roared back into the public imagination in late November 2021, when a local NBC affiliate ran footage from a section of Union Pacific tracks strewed with thousands of ransacked boxes. The video included a man with bolt cutters climbing up onto moving cars and a reporter’s calls to the packages’ intended recipients, as well as their reactions to seeing their emptied-out boxes.”

• “The most extreme type of modern train theft occurs when thieves cut the air-compression brake hoses that run between train cars, thereby triggering an emergency braking system. When that happens, the engineer stays in the cab and the conductor walks the length of the stopped train, trying to locate the source of the problem. Of course, if a train is miles long, that walk takes a while. In the meantime, the pilferers unload.”

• “Gary Rogers, a former Union Pacific law-enforcement agent, says that during his decades working throughout the West, he saw thieves coordinate their movements precisely; one of them would climb aboard a moving train and know just when and to what extent to cut into the air-compression hose. ‘The train would stop, and the guys would be there waiting to unload,’ Rogers told me.” READ MORE

THE 21 HATS PODCAST

We’re Making Good Money. I’m Not Sure How: This week, Jay Goltz, Jennifer Kerhin, and Liz Picarazzi discuss their efforts to get a better grasp of what drives their profits. They ask how much they should manage their finances themselves, and how much they should rely on an accountant or a fractional CFO. When does delegation become abdication? Jennifer says she’s benefitted from hiring a fractional CFO who has taken an active leadership role, including setting up a database that helps Jennifer see in real time whether the fees she’s charging cover the labor she’s deploying. “Whatever she's charging me,” says Jennifer of her CFO, “it's absolutely worth it.” Liz, meanwhile, thinks she should be doing more herself. And Jay says he was paying big bucks for a full-time CFO until late last year. “And it was a complete waste of money,” he says, which is why he’s decided not to replace her.

• Plus: Liz reveals her secret strategy for marketing directly to municipal government officials, some of whom have started to use the term “Citibin” generically. And the owners respond to a question from the head of a cost-reduction service who wonders why she’s struggling so much to get business owners to try her risk-free service.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren