Explosive growth in the buyout industry hasn’t led to benefits among employees of aquired firms–and that’s a problem, says one pension giant leader.
As the private equity industry’s value balloons, an executive at a leading hedge fund is imploring the sector to be more generous with the workers of its portfolio companies.
Specifically, Christopher Ailman, head of investment at the pension giant Calstrs, said in an interview with the Financial Times that private equity goliaths need to “share the wealth” with the employees under their purview.
The executive continued, saying to the publication: “Private equity has not shared enough revenues…It’s great they make money for our retirees — who are teachers and for other funds. But they need to also share the wealth with the workers of those companies and with the communities they invest in.”
While not all entrepreneurs would see this as a worthy goal, plenty of founders have turned to profit-sharing among employees as a means for ensuring staff productivity and overall buy-in of the founder’s vision. Eliminating or even just significantly reducing this corporate largess can erode even the best-made companies-and make founders all the more reluctant to sell to PE firms.
In recent years, private equity’s assets have soared in value, amid decades of sluggish growth for worker wages. Meanwhile, majority shareholders of PE giants Blackstone, Apollo Global Management and KKR have enjoyed a $40 billion surge in their share value since 2023, the FT notes. Despite Blackstone’s tumbling revenue–last year it declined 32.87 percent to $8.44 billion–it still reached $1 trillion in assets under management in 2023, on the heels of the industry explosion. Apollo has also stated publicly that it has ambitions to reach the $1 trillion milestone, according to Bloomberg, which reports that shares in major buyout firms soared last year. Blackstone and TPG, for instance, intend to allocate 85 percent of distributable earnings to shareholders in 2024.
By 2025, PricewaterhouseCoopers estimates the global value of PE’s assets are projected to reach $145.4 trillion. The sector’s expansionary presence and exploding shareholder value has prompted some major players to adopt a different formula, intended to prioritize worker equity. Major PE firms such as Apollo and Blackstone, have partnered with the non-profit Ownership Works, the FT reports. The organization expects to help buyout firms establish pathways to increase worker equity within their portfolio companies, and has cited the goal of generating $20 billion for workers by 2030 as a core ambition.
Ailman, for his part, made his comments on the eve of his ultimate departure from the financial world. He plans to retire in June …
Private equity executives need to “share the wealth” they create with workers at the companies they buy, according to the investment head of Calstrs, the giant US pension fund that is one of the world’s biggest investors in the sector.
Private equity executives need to “share the wealth” they create with workers at the companies they buy, according to the investment head of Calstrs, the giant US pension fund that is one of the world’s biggest investors in the sector.
The comments from
Christopher Ailman, outgoing investment chief at the $327bn fund, come after a decade of rapid growth in the buyout industry in which many dealmakers have made large fortunes from the hefty fees they have charged investors such as Calstrs.
“Private equity has not shared enough revenues,” said Ailman, who pioneered Calstrs’ move into private equity two decades ago and now holds $50bn in the asset class, in an interview with the Financial Times.
“It’s great they make money for our retirees — who are teachers and for other funds,” he said. “But they need to also share the wealth with the workers of those companies and with the communities they invest in.”
Ailman’s comments come as the private equity industry faces increasing pressure from regulators, campaigners and investors due to its growing influence over the American corporate landscape and a series of scandals involving workers at businesses they own.
Private equity-backed companies in the US now employ 12mn people, according to lobbying group the American Investment Council.
Calstrs, which has increased the share of its fund invested in private equity from about 10 per cent in 2020 to near 16 per cent today, has come under pressure from campaigners over its investments with Blackstone.
PSSI, a sanitation business owned by the private equity giant, was
ordered to stop using child labour after a 2022 Department of Labor investigation.
Blackstone said that it “stands unequivocally against child labour violations — which are fully opposed to our values and PSSI’s own hiring policies”.
Ailman said the industry had “created a backlash” against it and “needed to do a better job”.
He added that Calstrs had been putting pressure on managers like Blackstone behind the scenes over their investments. “We go directly to our general partners to have conversations, we just haven’t done that in the press,” he said.
Some private equity managers have taken steps to ensure that employees at companies they own can share in the profits, if the firm performs well.
New York-based buyout group KKR says that billions of dollars in equity have been shared between more than 60,000 employees at its portfolio companies since 2011.
Last year, the firm committed to offering equity sharing programmes to all employees in the takeover deals coming from its $19bn North American private equity fund and in all future funds in the region.
More than two dozen buyout groups, including Apollo, TPG, Warburg Pincus and Advent International have committed to a plan called Ownership Works that aims to generate more than $20bn in wealth for workers by 2030.
Ailman’s comments come as returns for private equity investors fall sharply due to a combination of lower economic growth and higher interest rates, which raise the buyout industry’s cost of borrowing to take companies private.
“When I started we assumed that private equity would generate as much as 500 basis points over publics, then we lowered it to 300,” said Ailman, who has been chief investment officer since 2000. “I wonder if it is now more realistic to assume that private equity will only really generate around 150 basis points over publics.”
He added that fees “were high” and “needed to be lower”, but said that the net return was “still worth it” and that the fund was taking steps to reduce these costs.
Ailman’s comments come as he prepares to “pass the baton” to a successor from June after
announcing his retirement last month.
One of his final acts has been to obtain board approval for a controversial $30bn of borrowing, to help manage the fund’s giant illiquid portfolio. The move attracted concerns that the fund had become overweight with illiquid assets, which are not easily traded.
Ailman signalled that its private markets allocation, which includes assets such as private equity and real estate and which amounts to around 40 per cent of the portfolio, had peaked.
“I actually think we are at the right balance [between illiquids and liquids],” he said. “I actually think we have achieved the sweet spot of where you want to be.”
Additional reporting by Antoine Gara in New York
