Is portfolio company employee ownership a good thing for LPs? That’s one of the first things the editorial team at Private Equity International wondered when we started digging into the inner workings of such programmes earlier this year.

Front of mind was answering two specific questions: where does the equity shared among company employees come from, and how do employee ownership programmes affect investors’ returns? It wasn’t a straightforward task – most LPs, GPs, consultants and academics we spoke with were quick to fly the flag about what a great thing it is to include everyday employees in equity programmes; almost none could shed light on fund mechanics and how equity is diluted in such programmes.

Our Deep Dive for October examines all that, with the example of KKR’s 10x return from the sale of garage door manufacturer CHI Overhead Doors driving the point home: it’s a positive development – not just a feel-good story – and evidenced too in LPs’ returns. As KKR’s co-head of Americas Pete Stavros said to us, the firm’s experience over the years indicates a positive relationship between a broader distribution of ownership and investment returns. The deals with broad-based ownership have been among their best. Other firms such as Leonard Green & Partners have also reported the same experience.

There’s no doubt this movement is “big and very positive” for the PE industry, a UK-based head of European private equity at an asset manager told us this week, on the back of our article’s publication. You’d expect implementing such programmes would be an easy call to make for GPs, but support and adoption are yet to become widespread.

Some industry observers note counterarguments around the model that need exploring, such as taxation. Employees in the UK, for example, do not receive entrepreneur’s relief unless they hold substantial stakes. Other important considerations include employee risk on concentration of wealth in the company’s assets; retention – what’s the guarantee that workers won’t take their cash windfall and run?; and managing conflicts of interest between the owners and employees.

One top-level executive at a global investment firm told us their team has evaluated joining Ownership Works – the non-profit led by Stavros that aims to create $20 billion of wealth generation through employee ownership over the next decade – and decided they would instead launch their own programme, rather than be tied to a “US-centric, brand-building exercise” launched by a competitor. The long-term plan, according to the senior executive, is to roll out broad-based employee ownership across its portfolio.

Pushing egos aside, a lack of financial data on how underlying returns are affected is likely another factor hindering wider adoption, as are questions about appropriate levels of transparency and accountability to employees. As James Bonham, president of the Washington, DC-based Employee Stock Ownership Plan Association told us, it’s important that employees have “true ownership that is not reversible once it has been awarded”.

Ceding real wealth and power to all workers is not historically how private equity firms have operated, but strong governance through active ownership is. Tying these two concepts together, when done right, can benefit both portfolio company employees and investors in PE funds alike.

Read the October Deep Dive here and listen to a 12-minute podcast here.