Employee Ownership Needs Institutional-Grade Structures to Attract Scaled Capital

Employee ownership is becoming legible to institutional capital at the same time that allocators still lack enough of what they usually need: proven managers, clean strategy categories, track records, exits, and consistent underwriting frameworks. That tension was the center of the discussion. Jack Moriarty opened with the question of how private capital could help take employee ownership into its next phase of growth. The answer from the panel was not simply “more capital.” It was more precise capital, placed against clearer structures, with enough evidence and discipline for institutional investors to treat employee ownership as a financeable transition market rather than a values-only field.

Chavon Sutton put the investability test most directly. Sutton, a managing director at Cambridge Associates, said she had described employee ownership as “the next frontier” of private markets. Cambridge, she noted, advises endowments, foundations, pensions, and private clients globally, with about $600 billion in assets under advisory. From her position across manager research and client portfolio allocation, the relevant question is not whether employee ownership is socially appealing. It is whether the opportunity can be understood, underwritten, placed in portfolios, and monitored with the same rigor as other private-market strategies.

Sutton’s case for investor interest began with market dislocation. She cited roughly three million founder-owned companies, $10 trillion in assets, an aging-owner demographic, and a highly underpenetrated transition market. In most areas of investing, she said, that kind of dislocation attracts capital. Employee ownership, in her view, can move from niche to mainstream only when it moves beyond a values-based conversation and into one about a financeable transition market.

The practical requirements are straightforward but hard: better capital-stack design, supportive policy, more education for institutional clients, more institutional-quality fund managers, and more consistency in how allocators evaluate opportunities. Cambridge’s role, Sutton said, has been to educate clients, conduct disciplined due diligence, and place employee-ownership strategies in the right portfolio context. That means distinguishing whether an opportunity belongs in private credit, private equity, grant-oriented capital, or another category, because each carries different risk-return expectations.

Sutton’s warning supplied the article’s spine. The field needs a stronger story, but the story cannot substitute for market readiness. If due diligence is wrong, she said, employee ownership risks ending up “at square one.”

Regina Carls described why capital is nevertheless paying closer attention. Carls, managing director and head of ESOP advisory at JPMorganChase, said the ESOP market is strong and increasingly visible. Awareness is growing year over year because new entrants are coming into the space and changing how ESOPs are explained to business owners. A structure once known, in her words, as “the least understood corporate finance tool” is now being positioned by more advisors as one of several strategic solutions for owners considering succession, liquidity, retention, and ownership transition.

That shift matters because the historic perception was narrow. ESOPs were often viewed as a buyer of last resort for small middle-market companies that could not sell to a strategic acquirer or private equity buyer. Carls pointed to BDO’s 2023 transaction — a sale of a 42% stake for $1.3 billion — as a marker that changed the conversation. She said it was noteworthy because of its size and scale, because the company was clearly looking to the ESOP as both a liquidity event for owners and a retention tool for employees, and because accounting firms have not historically been the strongest promoters of ESOP structures.

After BDO, Carls said, more accounting firms are both positioning ESOPs as an option for clients and considering whether to follow BDO’s lead themselves. The broader pattern is industry normalization. ESOPs have long been available across industries, but Carls said they have tended to cluster in fields such as architecture and engineering firms and contractors. She now sees accounting firms, law firms, healthcare companies, and real estate development companies engaging with the model. Her point was not that every industry has adopted it, but that employee ownership is increasingly being presented as a normal ownership-transition option rather than a niche exception.

Carls also identified several conditions helping the market. She said there is “a ton of capital” looking to be deployed, including private equity, family offices, and private credit. She credited media coverage and research with helping tell success stories and put performance metrics into the market, including Rutgers work on productivity gains. And she said the Department of Labor’s removal of ESOPs from a national enforcement project that had targeted them for 20 years has reduced a major perceived litigation risk for investors and sellers.

“Employee ownership” names an outcome, not a single asset class. Moriarty echoed a point attributed to Delilah Rothenberg: employee ownership is not itself an asset class. It can involve private credit, private equity, seller financing, grants, policy support, employee ownership trusts, ESOP transition strategies, hybrid structures, or broad-based equity-sharing programs inside conventional private equity. For allocators, conflating those categories is not a harmless vocabulary problem. It can lead to incorrect underwriting, misplaced expectations, and capital being assigned to the wrong part of a portfolio.

Chavon Sutton identified “category confusion” as one of the field’s material risks. She said there is confusion both about strategy — what different employee-ownership approaches are meant to do and what their risk-return profiles are — and about asset class. If allocators cannot determine whether an opportunity belongs in private equity, private credit, private capital more broadly, or a different bucket, they cannot reliably find a portfolio home for managers.

That problem is magnified by the thin manager universe. Sutton credited Ownership Capital Lab with increasing visibility around the market, including nearly 30 specialized employee ownership firms and hundreds of millions of dollars being raised or already committed. She also acknowledged broader private-equity-style employee ownership efforts that do not create 100% employee-owned companies but do bring attention and capital to shared ownership. Even so, from her seat in manager research, there are not enough funds to underwrite. Many managers are Fund I vehicles, whether focused on employee ownership trusts, ESOP transitions, or hybrid approaches. A Fund II is rare enough to be notable.

This creates a burden Sutton did not minimize. Institutional investors need track records, exits, and scaled proof points. The field needs managers who can demonstrate performance, not only intent. It also needs those managers to be clear about what part of the capital stack they occupy and what risks investors are actually taking.

Emily Thomas described Morgan Stanley’s internal framework differently but with a similar conclusion. The firm organizes impact around three “I”s: intentionality, influence, and inclusion. Employee ownership can appear in each. Under intentionality, it may include private credit funds that provide capital for transitions to employee ownership, as well as private equity funds that include broad-based employee ownership components. Under influence, it includes how asset managers engage companies in their portfolios, including around the combination of capital and company culture. Under inclusion, Morgan Stanley recently updated its definition to include employee-owned asset managers.

That last category gave Thomas a practical way to introduce employee ownership to more people inside Morgan Stanley even where dedicated employee-ownership funds remain limited. She said Morgan Stanley’s research found a number of asset managers that are 100% ESOP-owned, some of which also bring other diverse ownership perspectives or intentional impact approaches to their investment philosophy. This is not the same thing as investing in a fund that finances employee ownership transitions, but it is part of the broader ownership market and a way to create portfolio exposure.

Regina Carls added another layer through ESOP capital structures. She said the passage of S corporation ESOP legislation in the late 1990s helped create the market as it exists today. The most prevalent structure she sees is a 100% S corporation ESOP, which can be tax-exempt. In that structure, sellers have often been willing to take deeply subordinated notes with warrants, effectively filling the mezzanine or equity-like layer that third-party capital might otherwise occupy. That seller willingness has historically reduced the need for outside institutional capital in some transactions.

Private equity has entered through drop-down LLC structures, Carls said, but those can create “tax leakage” and may be less tax-efficient than a 100% ESOP structure. Outside capital may therefore depend on the selling shareholder’s preferences. Some sellers are willing to accept a deeply subordinated note from a company they understand and earn a market-like investment return. Others will want more immediate liquidity. The capital-market opportunity depends partly on the seller’s desired outcome, the tax structure, and the type of capital being offered.

The implication is that the field cannot ask institutional investors to “fund employee ownership” in the abstract. It must specify whether it is asking them to finance senior debt, subordinated debt, equity-like capital, a private credit strategy, a private equity fund, a transition fund, a grant-supported intermediary, or a broader ownership model. Only then can investors evaluate return, risk, duration, liquidity, impact, and portfolio fit.

Institutional capital will not scale on narrative alone. Moriarty put the question directly to Regina Carls: from a lender’s standpoint, what are the underwriting benefits of ESOPs and broad-based ownership?

Carls said JPMorganChase had long observed within its own portfolio that ESOP companies behaved differently through cycles. The more important development came when the National Center for Employee Ownership asked the bank to contribute portfolio statistics to work comparing ESOP companies with non-ESOP peers. Other banks contributed as well. Carls said the results were striking internally, especially for credit committees.

In a traditional corporate investment portfolio, she said, default rates might be 7% to 10%. In ESOP portfolios, she said, they were “well under 2%.” JPMorganChase has continued tracking those portfolio statistics year over year, and Carls said the performance has only improved. Her internal argument to credit partners is that the bank should lean in more, not less, because lending is the business of taking risk — and the observed default experience suggests something different is happening inside employee-owned companies.

The mechanism Carls described was not a simple guarantee of superior performance. She pointed instead to behavior under stress. In downturns, a sponsor-backed company may rely on deep-pocketed owners to inject capital. An ESOP company does not have that same sponsor behind it. Yet Carls said she has seen seller financing put money back into companies during difficult cycles because sellers believed in the continued existence of the ESOP. She also said these firms have preferred reducing hours over laying off workers. Over multiple cycles, in her view, that operating behavior has contributed to performance relative to peers.

Jim Sorenson made a similar claim from the perspective of an impact investor. His interest in employee ownership sits inside a broader ownership thesis: owning the home one lives in, owning a piece of the business one works for, and owning appreciating assets that grow in the market. Sorenson said ownership touches many outcomes, which is why his foundation has focused on building an ecosystem around research, case studies, awareness, and intermediaries.

Sorenson said his foundation has also invested directly in funds focused on ownership, including what he believed may have been the first institutional investment in Apis & Heritage. He characterized those investments as producing both financial returns and strong outcomes for workers. In his closing advice to investors, he made the performance point plainly as his own experience: investments around ownership, he said, have shown better financial returns, better performance, and better safety metrics when ownership is integrated.

Emily Thomas brought the performance argument back to the wealth-management client. At Morgan Stanley, she said, client demand drives her work “100%,” but not necessarily in the vocabulary the field often uses. Clients are generally not asking for “ESG strategies”; she said she would lose most client meetings if she led with that framing. They are asking for outcomes and solutions to large problems. They also want to know why a strategy is good for business and why it should help performance.

Thomas illustrated the point with a meeting in Morgan Stanley’s Washington office. She asked an experienced advisor whether his clients would be interested in more private-market impact strategies. His response was that she had to tell him the story: why it was good for business, and why it would help performance. When she explained employee ownership, the aging-owner transition opportunity, and the impact potential, he told her it was an “amazing story” he had not known.

For Thomas, that anecdote captured both the opportunity and the deficit. There are Morgan Stanley clients asking about employee ownership, but there is also a much larger group that does not know it exists. The platform’s role is scale and democratization. She said Morgan Stanley’s Investing with Impact platform already has more than $100 billion in assets and saw its strongest growth in the prior year. That provides a distribution channel, but only if employee ownership can be explained as an investment solution rather than merely a social preference.

Thomas later said she had heard of studies showing employee-owned firms outperforming the S&P 500, though she could not recall the source; Moriarty suggested it may have been a Stout index analysis. Thomas used the point directionally rather than as a cited proof point: investors should be aware, she argued, that there is performance-oriented data around employee ownership, and if many investors have not yet paid attention, that underattention may create an opportunity for those who do.

Chavon Sutton gave the field high marks in two areas: research and narrative. The research base, she said, has been critical to due diligence, especially for investment strategies evaluated through an impact lens. Credible research showing improvements to retirement balances, training, job security, and community stability helps address long-standing critiques of employee ownership. For institutional investors, research-backed claims matter because they can be incorporated into underwriting rather than treated as anecdotes.

The narrative work has also improved. Sutton said the field has expanded beyond the technical mechanics of ESOPs to the broader language of ownership and wealth-sharing models. That helps because people already understand the meaning of owning a home or owning a car. Connecting those familiar forms of ownership to employee ownership lowers the explanatory barrier.

Emily Thomas made a similar point from the perspective of client engagement. The field needs founders to know employee ownership exists, know whom to call, and see it as a real opportunity. It also needs investors to know that there are funds and companies requiring support. Policy is necessary, she said, because employee ownership transitions remain bespoke, high-touch, and complex. But policy alone will not create scale if the market lacks awareness among founders, advisors, and capital providers.

The report card had harder marks elsewhere. Sutton named several pain points: seller liquidity, transaction complexity, and a still-maturing advisor and lender ecosystem. Some of these barriers may be real, and some may be perceived, but she argued both matter because perceptions shape seller and investor behavior. Sellers want their money. If they believe ESOPs cannot deliver liquidity comparable to other exit options, they may not pursue the path.

Advisor incentives are also important. Carls said one reason awareness is growing is that more advisors can now position the ESOP, explain its narrative, and dispel myths. Sutton’s point implies the field still needs more advisors with the incentive and confidence to present employee ownership alongside strategic sales and private equity exits.

Manager quality is the most consequential institutional constraint. Sutton was explicit that the field needs institutional-quality managers and that allocators cannot lower diligence standards because the mission is attractive. In a nascent market, weak infrastructure can be hidden by a compelling story. That risk is especially serious because a few poorly executed strategies could damage confidence in the category.

Thomas’ framework added that the field must be careful about culture as well as capital. Employee ownership is not simply a financing event. Earlier speakers, she said, had emphasized the need to bring capital and company culture together. If a company becomes technically employee-owned but does not build the practices that allow workers to understand and benefit from ownership, the investment thesis weakens.

This became concrete during the audience question from Brian Kulos. Kulos said he and coworkers were trying to become employee owners, but he raised what he called a “red flags” question from the standpoint of investors. He used his own situation as the example: eviction, living in a car and motels, no credit. If workers attempting to become employee owners are in severe financial distress, he asked, where do investors see that risk? Will they support the proposal or pull back and play it safe? He also named the fear among coworkers: what if the effort fails and leaves them stranded in an even worse position?

Sutton answered from the perspective of someone who underwrites funds rather than individual worker ownership proposals. She said that, in evaluating fund managers, she looks deeply at the manager’s impact framework and how the manager intends to execute the community and employee elements of the strategy. In one Fund II underwriting process, she said, Cambridge spent hours asking how the manager planned to execute for “the human being behind the strategy.” If a manager fell short on the community element, Cambridge would continue the conversation and expect improvement rather than accept the financial thesis alone.

Her reasoning was direct: if the community and employee element fails, the whole strategy fails. That means the human realities Kulos described are not peripheral to the investment case. For Sutton, they are part of what must be evaluated before capital is allocated.

Jim Sorenson argued that policy is an essential part of the ownership playbook, alongside grantmaking and investment capital. His foundation has supported research, intermediary-building, education, and policy efforts intended to create on-ramps and incentives for capital. He described the American Ownership and Resilience Act, which Moriarty noted they had worked on together, as an example. In Sorenson’s characterization, the goal of that proposal is to create a zero-cost subsidy deployed through funds to help finance ESOP structures.

Sorenson also pointed to a broader retirement-access policy example. He described what he called the Retirement Savings for All Americans Act as having been signed through executive order and said it created a retirement-plan option for the 40% of American households without access to a managed 401(k)-type program, included a government match of up to $1,000 per year for low- to moderate-income participants, and used the federal Thrift Savings Plan. The article does not independently verify that policy description; the point in Sorenson’s argument was that ownership-oriented public policy can work alongside private capital.

For Sorenson, these examples sit inside a larger ownership economy rather than a narrow ESOP agenda. Moriarty made the same connection, describing employee ownership as part of a broader mosaic that includes retirement assets, homeownership, and renter wealth strategies. The shared logic is that capital markets, philanthropy, and policy can be used to expand asset ownership rather than only wage income.

That broader frame also shapes the politics. Chris Mackin asked Sorenson about his role in early conversations around the American Ownership and Resilience Act, including introductions to Republican political leaders. Mackin noted that employee ownership ideas appear unusually capable of drawing both Republican and Democratic support. Sorenson responded that ownership in general is bipartisan because it uses the tools of free markets and capitalism to address inequalities. He said he had not encountered people on either side of the aisle saying the idea did not resonate or that they did not want to support it.

Regina Carls focused on the regulatory side of the market, where she saw both necessary guardrails and costly deterrence. ESOPs are part of qualified plans under ERISA, so she said protections against abuse are important. But she argued that the Department of Labor’s ESOP enforcement posture created a major headwind. For roughly 20 years, ESOPs were part of a national enforcement project, which she said made the structure feel like a regulatory target.

The result, in her view, was an imbalance. Negative media tended to focus on abuses and failed situations, while the broader base of functioning ESOP companies did not receive equivalent attention. Carls said there have been a select number of abuse situations, but they have overshadowed a market where, in her experience, the opposite story is playing out.

Her practical advice had long been that if a company put the right advisors in place, it could stay out of trouble with the Department of Labor. But the presence of a national enforcement project and the litigation that followed many cases — often ultimately settled — increased perceived risk for sellers and investors. If investors can place capital elsewhere and earn a return without that same form of litigation risk, she said, they may avoid ESOP transactions even if the underlying company is attractive.

Moriarty framed the regulatory problem as a distorted incentive. A seller might face more regulatory risk selling to employees through an ESOP than selling to a buyer that could produce worse outcomes for workers. He called that an irrational equilibrium if the goal is to encourage employee ownership formation. Carls agreed that the regulatory history limited the opportunity for business owners to pursue ESOPs as a solution.

The distinction was between guardrails against abuse and enforcement uncertainty that discourages legitimate transactions. For institutional capital, that distinction is material. Investors can price known risks; they are more likely to avoid markets where litigation exposure feels unpredictable or reputationally asymmetric.

The panelists converged on optimism, but not on a call to move recklessly. Regina Carls said the market is at an exciting point: more business owners are approaching her firm asking about ESOPs as an alternative, rather than requiring an explanation of what ESOPs are. She attributed that shift to growing awareness, Rutgers research, expanding ESOP stories, and concern about the wealth gap. In her view, speaking clearly about company performance and employee outcomes will continue to attract capital and interest.

Emily Thomas framed the opportunity through distribution. Morgan Stanley’s role is to make investment ideas scalable and accessible to clients through advisors. Employee ownership has to be translated into the questions clients actually ask: What problem does it solve? Why is it good for business? How does it perform? Where does it fit in a portfolio? If the field can answer those questions, wealth-management platforms can amplify the story beyond the existing employee-ownership community.

Chavon Sutton supplied the caution that tied the discussion together. She described herself as a “wet blanket,” then argued that the field needs to become as obsessed with solving real-world problems for human beings as it is with innovation. Employee ownership, in her view, is not a place for a “go fast and break things” mentality. If investors move too quickly, ignore infrastructure, misclassify strategies, or underwrite weak managers because the story is attractive, the field could fail the workers it is meant to benefit and lose institutional credibility.

Education, due diligence, and portfolio context are not procedural details. They are what allow employee ownership to move from a niche strategy into a financeable market without sacrificing the outcomes that make the strategy worth pursuing.