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KKR partner on selling C.H.I. Overhead Doors: ‘Productivity really exploded’

KKR Partner & Co-Head of Americas Private Equity Pete Stavros joins Yahoo Finance Live to discuss the company's sale of C.H.I. Overhead Doors to Nucor for $3 billion.

Video transcript

- KKR has announced the sale of CHI overhead doors for $3 billion including debt. And the company's employees are reaping a pretty large windfall. CHI's hourly employees and truck drivers will receive between $20,000 $800,000 before taxes after KKR made each employee an owner following the initial acquisition in 2015. Here to discuss is KKR co-head of America's private equity, Pete Stavros. Pete, good to see you here this morning. Interesting plan, and it's one that you have been pioneering for many years. Talk to us through what this plan is and how you put it in place here at that company.

PETE STAVROS: Yeah, the program is making everyone in the business an owner. So everyone from folks on the factory floor, folks who clean the factory floor, janitors in the manufacturing plant up to the most senior executives, everyone participates in ownership. That's the foundation of it. Now, on top of that, what we've learned over the years is that's not enough to change culture and change behavior.

Really what you need to do is make people feel cared for, invested in, and a part of the overall program so their voices are heard. We delegate decision making rights. We share information, operate more transparently, invest in things like safety. Invest in the work environment. Make it a healthier place to operate. And it's all of those things taken together that really change corporate cultures and build a true ownership culture. That's what the program looks like.

- And Pete, because you put this structure in place, under your watch or under your ownership, what did you see from employees?

PETE STAVROS: Well, at the highest level, the performance and the productivity really exploded in this business. So we were the fourth private equity firm to own the business. The EBITDA margins were already 20%, which is more than respectable for a building products company. And by the end, they were well over 35%. Now, what really drove that was improvements in productivity, scrap production.

So revenue grew over 100%. Scrap only grew 7%. We figured out how to buy steel smarter. There were improvements in logistics and distribution and on and on and on. So what you see is, and we saw here, employees are, they're more stable in the job. They're more likely to stay at the company. And they're more engaged on the job. And it makes it much easier to drive operational improvement paradigms like what we drove here, which included a nearly 4x improvement in overall profits at the business.

- Selling CHI but also at the same time, we know that there's also still deal-making that's happening over at KKR as well. How would you describe the broader kind of deal-making mindset that you are looking across industries and segments that with right now?

PETE STAVROS: So we try not to predict where the world is headed. We are big believers in what we call linear deployment. So once you raise a fund, evenly deploy that fund over a four or five year period. Don't try and be a hero and say, "Now the time's to really is the time to lean in. Now's the time to pull back." Because I think history has shown people just don't know when that downturn is really coming or when markets are going to churn even higher.

So we remain focused on our seven industry verticals industrials, consumer, media, health care, software, et cetera. And we're continuing to deploy on an even pace over that four to five year period.

- Pete, it's Julie here. Just to go back for a moment to the deal and the ownership structure, I don't believe this is standard operating procedure everywhere in KKR in portfolio companies. Why isn't it? And why isn't it just SOP throughout the industry to do this kind of ownership structure when private equity comes in and buys a company?

PETE STAVROS: So it actually is our standard operating procedure now in the United States anytime we do a control buyout. It started in one industry vertical, which was the industrials vertical, which I used to lead. We started this in 2011, and it took time to develop the model. So this may sound easy and obvious like why don't you just make everyone an owner? Well, think about a company that's got 16,000 employees in 80 countries as Ingersoll Rand does.

There's a lot to this from a tax, accounting, structuring, legal, compliance, and just share plan administration perspective. There's a whole lot that goes into it, not to mention then how you take that ownership program and really build culture, build engagement, enhance the voice of the worker, build financial literacy training tools, et cetera. So this took us years to figure out.

Now, we started experimenting with it beyond industrials. And now, across all of those seven verticals I touched on, this is the only way we do business in the United States. Everybody participates in ownership, and we use ownership to build the financial resilience of the workforce and build a real ownership culture. Now, I think it's coming to the industry more broadly. So there's a nonprofit foundation called Ownership Works that was launched with the support of 60 organizations.

We now have over 20 private equity firms, many of the major firms that you would be familiar with, KKR, TPG, Leonard Green, Berkshire Partners, Warburg Pincus, Silver Lake, and many, many others. Everyone is committing to really try and make this model effective. So everyone's going to roll this model out in at least three companies by the end of next year. We already have ourselves 25 live examples of this in our portfolio. And every new deal just adds to that library of success.

And at the nonprofit we're doing two things. We are first helping companies roll this model out, by the way, not just private equity firms. We're working with public companies, family owned businesses, even working with a couple of restaurant chains in New York City. And then it's about collaborating so everyone learning from one another. As I said, this sounds easy. It's quite difficult to get an hourly workforce to understand value, equity, really believe in this program and change behavior over time.

So we're all going to be experimenting, trying new things, trying new ways of doing this and then sharing learnings back to the foundation, to the nonprofit foundation and just try and evolve and make this model as good as we can in the coming decade

- Pete, you've been at this for a while. More broadly, we've seen a major pullback in valuations across the board, across different sectors. Do you sense there's about to be a pretty big upswing in deal activity?

PETE STAVROS: In times like this, deal activity, usually the opposite happens. Confidence falls, and people are less active. As I said earlier, we really try hard not to predict which way the world is going. So I think from us, you will see continued steady activity. And that linear pacing mindset in a really hot market like what you've seen in recent years, it causes you to have a very high bar, which is what we've had. We've been very selective. We've maintained that steady pace.

And in the counterintuitive part and the hard part is when it's a trickier time and a scarier time, it forces you counterintuitively to lower your bar and lean in and find more creative ways to deploy capital that forces you to be aggressive. So if we go into a really choppy environment, you'll see us continue to evenly and steadily deploy and probably be more creative in finding ways to put that money to work.

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