Now is a great time for investors to join the growing employee ownership movement, owing to a “silver tsunami” of Baby Boomers retiring, which will transition $10 trillion in assets, and growing attention from policymakers and the business community. When paired with the development of an “ownership culture,” employee ownership drives enterprise value creation by aligning incentives between workers and management, increasing employee retention, and creating a long-term orientation.
Our team at Transform Finance continually hears from asset allocators and fund managers, however, that the uniqueness of employee ownership deals– both from a financing and an impact perspective – creates high barriers to entry. To facilitate more investments in employee ownership, we have released a new briefing for investors based on original research and analysis of funds operating in the space.
As of June, Transform Finance identified 53 funds that finance employee ownership in the US and Canada. Nearly a quarter of these funds, which aim to manage a combined $1.6 billion in assets, invest exclusively in employee-owned businesses or businesses that become employee-owned through a conversion. Three quarters of the funds include employee ownership as a part of their investment strategy.
In total, the 53 funds have raised or are planning to raise $3.8 billion. A list of these funds is available on ImpactAlpha’s Ownership Economy fund database.
Ownership funds at a glance
The most recognized employee ownership strategies are spearheaded by private equity giants such as KKR and Blackstone, which are betting on employee ownership to grow productivity at the companies they acquire. But there is a much wider range of models and approaches, many of which offer more robust and durable impact approaches, while capturing different market segments.
Over half of the employee ownership funds operating today are less than 10 years old, and more than a quarter were established in 2020 or later, highlighting the growth and dynamism of the field. We have simplified the universe of funds into several categories that are most relevant to investors:
Employee ownership-exclusive funds. These funds invest only in employee ownership. They mainly fund conversion deals, in which a mature company is sold to its employees, but they can provide other forms of financing as well, such as startup financing and growth capital. Many of these funds have an explicit impact lens.
Non-employee ownership exclusive funds. These funds do not invest solely in employee ownership, but see employee ownership as an important dimension of their strategy, which can range from financing underrepresented business owners, to supporting economic development and building climate resilience in a particular region, to advancing shared ownership beyond enterprises (for example, real estate and other asset classes).
Examples include The Cooperative Fund of the Northeast, which invests in cooperatives, and Community Vision, a California-based community development financial institution, or CDFI, that finances nonprofits, social enterprises, conventional small businesses, and real estate to foster economic development in the communities it serves.
Non-impact funds with some employee ownership financing. These funds are focused on market-rate returns and occasionally invest in employee ownership transactions, in particular Employee Stock Ownership Plans, or ESOP, conversions – a qualified retirement plan that holds all or part of a company’s stock on behalf of employees – due to their beneficial taxation.
These funds are much less likely to include additional worker-centric impacts, such as elements of workplace democracy or ensuring financial benefits go to historically marginalized communities. They are also less likely to try to maintain the employee ownership structure in perpetuity.
That said, there are benefits for workers inherent in the sharing of ownership that may make those funds worth considering for mission-oriented investors, if those funds provide a starting place to learn about employee ownership. Examples include Cyprium Partners and New State Capital Partners.
How funds invest in employee ownership
The first step to investing in employee ownership as an impact strategy is to take a closer look at employee ownership-exclusive funds. These funds generally focus on a particular model of employee ownership such as ESOPs, worker cooperatives, employee ownership trusts, or partial broad-based employee equity. Each fund type has unique characteristics in terms of impact, fund size and return expectations.
- ESOPs are a qualified retirement plan that holds all or part of a company’s stock on behalf of employees. Shares are vested to a broad base of employees individually over time, at no cost, and employees cash out upon leaving the firm. Mosaic Capital Partners has been deploying this strategy for over a decade and is currently raising a second fund. Apis & Heritage is another example; it closed its first fund in 2022.
- Worker Cooperatives are a type of cooperative enterprise where the membership consists of the workers of the company who own and govern the enterprise on a “one worker, one vote” principle. The Fund for Jobs Worth Owning was established in 2019 by ICA Group, a technical assistance provider and cooperative developer, to fund worker cooperatives. A number of worker cooperative conglomerates also have funds to finance the acquisition of new businesses to support their growth, such as Obran, the Evergreen Cooperative, and the Industrial Commons.
- Employee Ownership Trusts, or EOTs, are a type of perpetual purpose trust – a trust that owns voting shares in a company to benefit a specified mission – that can hold a part or a majority of the voting shares on behalf of employees. These trusts typically include a profit sharing mechanism, elements of worker governance, and a charter protecting the company from a potential sale. Common Trust, an independent sponsor that has catalyzed a number of EOT conversions, recently launched the Groundwork Fund.
- Partial broad-based employee equity facilitates partial employee ownership by sharing a portion of a business’ financial success to a broad base of employees through mechanisms such as profit sharing, broad based. KKR uses this approach by granting phantom shares to employees of the companies it acquires, which can result in significant one-time payments to employees when the company is sold. KKR sees this strategy as a way to increase the financial success of the companies it acquires. It established Ownership Works, a non-profit dedicated to encouraging more private equity investors to use this approach. Blackstone recently announced that it will grant a share of profits to a broad base of workers in the companies it acquires.
An example with a more impact-oriented lens is Good Scout Capital, a mission-oriented private equity firm that allocates at least 20% of a company’s equity to employees. New Majority Capital deploys this investment approach in the context of a search fund strategy. It helps underrepresented entrepreneurs acquire companies by providing education and financial investment. The companies New Majority Capital acquires will implement profit-sharing with all employees, providing employees with a smaller but ongoing financial benefit if the company performs well.
Some fund invest across employee ownership models, which increases complexity of a fund but also allows it to use the model most aligned with the needs of its individual portfolio businesses. Project Equity, a non-profit working to expand employee ownership, manages Catalyst Fund, which finances conversions to ESOPs, EOTs and worker cooperatives based on what best suits a company’s needs. Torana Group’s Essential Owners Fund finances conversions to ESOPs, EOTs or broad-based profit sharing in companies in the food, agriculture, senior living and childcare industries.
How to think about financials
In terms of financials, investors looking for private equity-style returns can look to some of the ESOP conversion funds and funds that deploy partial board-based employee equity. These funds often make impact trade-offs compared to those taking in catalytic dollars and providing more concessionary returns.
Worker cooperative funds are often higher impact, but they could be considered less risky than traditional business lenders since they often provide governance support and other kinds of technical assistance for the employee ownership transition. These funds, which mostly include CDFIs, are more similar to cash investments, which is a helpful benchmarking tool.
Fund size can be a limiting factor for some investors looking at the employee ownership space. Over half of the funds we’ve identified are under $50 million in target size, meaning that allocators who are unwilling to take a large stake must write smaller checks or focus on larger funds. Cooperative and cross-model funds tend to be smaller, while ESOP and partial employee ownership funds tend to take in larger allocations.
The fact that some funds are giving private equity-style returns shouldn’t dissuade investors from smaller and more catalytic funds. The latter provide reasonable returns for the risk and impact.
Impact considerations
Many funders and investors are interested in employee ownership from a wealth building perspective. The impact of different fund approaches and the scale of their operations matters. Important impact considerations include: what percentage of economic rights are going to workers compared to other stakeholders; the size of the workforce impacted; and the size of the underlying businesses. All of these factors can be more important than what form of employee ownership is being created. If the employee ownership stake is significantly smaller than the share for investors, for instance, funds might actually increase the wealth gap.
Timelines for impact is another important consideration. Several of partial employee ownership funds, which typically invest in companies with a large number of workers, have a longer time horizon to realize economic benefits for workers, by exiting to an employee ownership company after a holding period or converting shares over time. Most non-partial employee ownership funds, on the other hand, start building wealth for workers right away.
Investors focused on wealth-building should examine the market fit for the capital they have available, and focus on funds that are prioritizing increased shares, governance, and the other impact factors we highlight in our briefing. Those looking for in-depth economic transformation might focus instead on worker cooperative funds. Others seeking impact in specific sectors, geographies and thematic areas can see which funds overlap with their existing approaches.
Below is a summary table that provides some key highlights by fund type.
| Investment approach | Number of funds | Number of funds raising capital | Average fund size ($M) | Impact | Target net IRR |
| ESOP conversion | 4 | 1 | 174 | Financial benefit for employees, limited governance rights by default. | 14% – 15% |
| EOT conversion | 1 | 1 | – | Financial benefit and governance rights. Mission and asset lock. | – |
| Worker cooperatives | 5 | 4 | 34 | Financial benefit and governance rights. Access to employment for those excluded from the workforce. | 4% – 4.5% |
| Partial broad-based employee equity | 7 | 4 | 165 | Some financial benefit for employees. | 10% – 15% |
| Multiple models | 5 | 4 | 30 | Financial benefit and governance rights depend on the models. | 3% – 15% |
Deepening the impact
Beyond choosing the funds that best align with their priorities and constraints, mission-oriented investors can have deeper impact if they consider how they invest in the employee ownership sector. Employee ownership is a relatively young impact area, and many of the employee ownership funds on the market today are new and led by first-time fund managers. Investing in employee ownership is therefore similar to investing in other impact areas in their early days, like climate investing.
Timing and signaling matters: providing anchor investments to new funds and prioritizing new managers is critical for the field’s growth. For those with grantmaking capacity, providing blended capital can help pay for managers’ time and cover operational costs during the launch and fundraising phases.
Investors have much more to offer an emerging field like employee ownership than their capital. Investors can leverage non-financial assets, like relationship building, to introduce new players to employee ownership and build the field. This in turn helps ensure the success of fund and investments to come.
Mission-oriented investors have the opportunity to stand at the forefront of a growing movement in support of employee ownership in North America. As a growing number of businesses seek viable exits, employee ownership can provide an impactful alternative to traditional M&A. The wide variety of entry points and impact angles is a strength of the field – even though it can require time to become comfortable with the acronyms and the lack of easy benchmarks – because it allows a wide range of investors to participate.
Curt Lyon is executive director and Julie Menter is program director of Transform Finance, a nonprofit research, education, and implementation partner for the movement to transform finance.
If you’d like to learn more, check out Transform Finance’s new briefing and join the webinar on Tuesday, Aug. 20.
