Published September 2024

Why hasn’t there been more EO investment?

The employee ownership space has been very focused over the last decade on bringing employee ownership more into the limelight—getting it out of its silos and helping more people learn about and understand its value. As a result, there is more momentum in the space today than ever. One way this has manifested is an increasing number of new funds being organized with an employee ownership investment thesis. 

As the EO space continues to grow investment opportunities, we wanted to take a minute to think about what some of the barriers have been (beyond lack of familiarity or knowledge about EO) to investing in employee ownership. Here’s some of our hypotheses. 

Structural inequality and EO investing may be less “sexy”

Whether compared to cutting edge green energy or tech solutions to social problems, investing in ownership transitions of existing companies have less “shiny object” appeal. EO investing typically focuses on regular businesses with diverse workforces that deliver steady returns. But don’t worry, the impact data and stories create lots to be excited about!

Boring businesses can make great EO investments 

For investors familiar with search funds (also called ETA), the guidance for searchers is to look for boring businesses. What do we mean by boring? Companies with predicatble cash flow, based on their history over decades or generations. These companies make great EO investments. This doesn’t mean that they have no growth potential, just that the baseline requirement is solid, steady EBITDA.

A misperception of risk

Because of the low familiarity with EO, it is often perceived as risky, but the data doesn’t back this up. EO is usually put in the same risk profile as private equity investing or small business lending. High employee engagement companies with a long history of solid cash flow arguably belong in a different risk profile. 

Fragmented (but growing) market of investment opportunities

There are a growing number of investment opportunities in the EO space, but the investment marketplace is still in its infancy with most funds below $25M, and the largest (of which there are only a handful) raising only $100-300M. The good news is that there are a growing number of new entrants in the LMM (lower middle market). Plus, middle market commitments by private equity firms like KKR and Blackstone to phantom stock approaches are helping to raise the profile of employee ownership, especially in the mainstream capital markets. 

Let us know what your hypotheses are about what holds back EO investing, including your thoughts you have about how to address them!