Private Equity: Episode 22 – The Social Leverage Effect of the LBO
LBO in PE
In Episode 17, we explored the tax leverage effect enabled by fiscal integration in an LBO structure. Another key component of the LBO is the social leverage effect.
In an LBO, the investment fund may decide to involve managers and, occasionally, employees in the capital of the holding company. In this scenario, all stakeholders of the target company are aligned with a common objective of creating value. This virtuous circle encourages all investors in the holding company to move in the same direction to ensure the success of the project.
When the investment fund involves the management team in the capital of the holding company, this is referred to as a Management Package. This package details how value will be shared with managers at the conclusion of the operation, which helps solidify their commitment to working alongside the investment fund.
Although it is still uncommon for LBO deals to involve employees in the capital, this incentive can be a powerful motivator for the entire team. One of the most emblematic examples in recent years is the 2014 buyout of La Redoute. Two turnaround specialists, Nathalie Balla and Eric Courteille, took control of La Redoute, which was on the verge of bankruptcy, alongside the company's employees.
By 2018, La Redoute had bounced back, and to accelerate its recovery, Galeries Lafayette acquired 51% of the capital with the ultimate goal of eventually owning 100%. At that stage, employees retained 19% of the company’s capital.
By December 2022, with a valuation that had increased fivefold since 2018, the company’s management and employees sold the remaining 49% of the capital to Galeries Lafayette. In this transaction, employees were able to share 100 million euros, equating to an average of 100,000 euros each.
This example illustrates the significant potential of the social leverage effect in an LBO and its variations. In the future, investment funds accustomed to management packages may increasingly incorporate employee shareholding into their deals.
