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146: Social Capital Partners & Taylor Guitars Financing

Bret Keisling is joined by Jon Shell (Social Capital Partners) and Marjorie Kelly (The Democracy Collaborative) to discuss a Canadian pension fund’s financing of Taylor Guitars’ ESOP and why it matters to all of us.


Episode 146 Transcript

Bitsy McCann: 00:03 Welcome to the EO Podcast, where we amplify and celebrate all forms of employee ownership.

Bret Keisling: 00:12 Hello, my friends. Thank you for listening. My name is Bret Keisling, and as it says on my business cards, I'm a passionate advocate for employee ownership. We have a very exciting new episode for you, which we'll get to in just a moment. First, I want to tell you about next Friday's Mini-cast.

Bret Keisling: 00:29 A few weeks ago, I joined Clubhouse, which is an app for audio chat. Imagine being able to listen or participate on a conference call with a couple of people up to a few thousand people. I see an amazing opportunity to build an employee ownership ecosystem on Clubhouse and I hope you'll join me on the Friday Mini-cast to hear about it. By the way, if you're already on Clubhouse, look me up. I formed a club called naturally enough Employee Ownership and my clubhouse handle is EO underscore Bret [EO_Bret] with one "T", which is the same as my Twitter address.

Bret Keisling: 01:10 Now let's switch to a recent Mini-cast we did about Taylor Guitars. It was Mini-cast Episode 119, which by the way is available wherever you get your podcasts and it's also available along with our entire archives of more than 275 episodes at On Mini-cast 119, we talked about Taylor Guitars transitioning to an ESOP. Taylor Guitars is a well-known legendary company and we celebrated their addition in the EO sandbox.

Bret Keisling: 01:45 We weren't aware at the time of the incredible and unusual aspect of the financing. Meanwhile, the folks at The Democracy Collaborative, which publishes the excellent [Fifty by Fifty] Employee Ownership News, which is edited and curated by Karen Kahn, they knew about the financing and they've been providing it a lot of coverage. After our Mini-cast came out Karen reached out to me and facilitated the podcast you're about to hear.

Bret Keisling: 02:12 I'm joined by Jon Shell of Social Capital Partners and Marjorie Kelly of The Democracy Collaborative. Jon will discuss Taylor Guitars financing, and Marjorie will share why it's so important for all of us to spread the word. When we recorded this podcast episode, I was also able to record individual segments with Marjorie and Jon to talk about themselves and their organizations. We're looking forward to bringing you these segments before too long, either as individual episodes or combined into one. And if you subscribe to our podcasts, wherever you get your podcasts, you won't miss an episode.

Bret Keisling: 02:47 With that, here's my conversation with Marjorie Kelly and Jon Shell.


Bret Keisling: 02:53 My friends I've got a double treat for you today. There's only one thing that makes me happier than having a passionate advocate for employee ownership on the podcast and that is having two of them! And be still my heart, we're adding an international aspect as well.

Bret Keisling: 03:10 My first guest, Marjorie Kelly, you are with The Democracy Collaborative. We're going to talk a little bit about that and a lot about what you're doing, but good morning. Thank you so much for coming on the podcast.

Marjorie Kelly: 03:21 Yeah, thanks Bret.

Bret Keisling: 03:23 And we are also joined by Jon Shell, who is the managing director of Social Capital Partners. And for those of you listening at home, that's the international component. They are based in Canada. Jon happens to be Zooming in from Australia. Jon, thank you so much for coming on the podcast.

Jon Shell: 03:39 It's great to be here, Bret, thanks.

Bret Keisling: 03:42 So we are going to tee this up and just so that our listeners know we're going to spend a very focused 20 minutes or so talking about Taylor Guitars and the financing, but Marjorie and Jon will both be on different episodes. We'll where we will have their fuller stories for both of their organizations.

Bret Keisling: 04:01 So with that Marjorie, Taylor Guitars, legendary company. Employee ownership is thrilled that a company with their provenance, if you will, is now part of employee ownership. Could you talk a little bit about the role of your organization and just how this came about?

Marjorie Kelly: 04:20 Yeah, thanks Bret. I I know you like to collect employee ownership "A-ha Moments," and I'm just going to say, to start here, that this pension fund investment in Taylor Guitars, to me, is one of these A-ha Moments. I mean, when the pension fund said, this is a low risk investment. [Laughter.] I've told that story several times that employee ownership is a going thing and it's a great deal for investors.

Marjorie Kelly: 04:50 So we'll come back to that, but let me just back up and say that The Democracy Collaborative is -- we call ourselves an R&D lab for a democratic economy. So we're in the business of both research and and policy and on the ground practice, showing and helping people understand what would a more democratic economy look like that that works for all of us; and it's designed to work for all of us, isn't just sort of regulated into it.

Marjorie Kelly: 05:21 As part of my work there, I'm an executive vice president and senior fellow, I've been working for years on employee ownership. It's been I think a hidden secret for far too long. It's a proven model. These are substantial companies. I like to talk about Recology in the Bay Area, which is a couple of, it's like $1.2 billion in revenue. And this is a garbage and recycling and composting company. It works across three states. It's a place where garbage collectors who drive garbage trucks are making a hundred thousand dollars a year. Because if you're not siphoning more off to absentee wealthy investors, there's more to go around for employees.

Marjorie Kelly: 06:04 So, I'm just a huge fan of employee ownership. And with my background as a journalist says, well, let's just, let's spread the news. Let's get the word out there. So we publish Employee Ownership News to spread the word. And I'll tell you this recent story about Taylor Guitars has been one of the biggest stories we've ever run because it is this A-ha Moment. It says, oh you mean, you mean investors can invest in these large transitions to employee ownership -- this is a very large company-- and a pension fund invested in it. So, it's a tremendous story. It's fun to be here talking about it.

Bret Keisling: 06:42 I really appreciate that. And it did not occur to me as we were setting this episode up, and I'm sure you've had other A-ha Moments, that the Taylor Guitars would be an A-ha Moment. So Jon, we want to bring you in on the capital side. Let me tee it up this way. I was, as you know, an ESOP trustee for seven years, I'll just be honest with you. When I hear private equity. When I hear investment funds, in the context of me needing the fairness of the deal as a trustee, I've always been under the impression they wouldn't work out together, to be honest, some of my most difficult transactions had private equity. So what makes your investment different? And just why is this a good thing?

Jon Shell: 07:23 Well, let me say you know I'll say, let me back up a step and just talk about how, how a pension fund ended up investing in Taylor Guitars. I think that's sort of helpful here. When we first found out about ESOPs a few years ago, because we're Canadian, we don't have ESOPs, right? So we heard about this thing in the US that had been super successful and these millions of employees who own shares of their company, you know, in an accessible way, right? So they don't have to buy the shares, they get them for free. And we thought, boy, I mean, this is fantastic! You know, let's find out more about it. And what we learned when we dug in was that, you know, this was great, super successful, but could be more successful. And the thing that was missing was debt capital, right?

Jon Shell: 08:10 So if you wanted to -- if you wanted the owner of a large company who would be attractive to a buyout firm, to a private equity buyout firm, to instead choose employee ownership, there was a big sacrifice they were making in terms of the upfront cash they would get, right? So, you know, you get as much debt as he can from a commercial bank, but that's not going to come anywhere close to what you're going to get from a private equity firm in terms of upfront cash, right? Over time, it's the same, but upfront cash is different.

Jon Shell: 08:39 And we thought that was strange, right? Because we've looked into employee ownership. We believe in the research, we've looked at it quite detailed. We believe that it's lower risk. We understand why it's lower risk. We don't understand why the debt capacity of an employee owned firm ought to be any different than the debt capacity of a private equity owned firm. Certainly all the evidence would suggest that it's a lower risk investment in terms of the amount of time it goes bankrupt. I mean, if you want to look at the grocery industry; it's a wonderful way to identify the risks associated with private equity ownership versus the risks associated with employee ownership. And so, okay, well, you know, this feels like a gap in the market, right? You know there ought to be a way for employee owned companies to have more debt, therefore -- from a third party -- in a way that doesn't risk the company, which would allow owners to receive more cash upfront, making employee ownership, more competitive with private equity.

Jon Shell: 09:40 That was our entire thesis. And when we thought about the type of capital that needed, which is long-term capital, which is reasonably priced capital, which is capital, that doesn't require early payments, right? So, capital that can be out for a very long time. It's the perfect fit for a pension fund, right? Pension fund is interested in low-risk long-term returns for their members. And so we thought, boy, this is a great fit.

Jon Shell: 10:09 The problem is the amount of money that pension funds need to invest, right? So pension fund needs to invest quite a bit of money at a time in order for it to work for them, because they generally have billions and billions of dollars under management. They don't have enough time to do a $5 million deal here, or a $10 million deal here. They can't oversee it. But there is no debt funds that serves the employee ownership market that's large enough to take a private equity check, sorry, a pension fund check.

Jon Shell: 10:35 We set out to try to find a company that was transitioning to employee ownership, or that was thinking about transitioning to employee ownership, that was large enough to receive a check from a pension fund, and we were going to go out and find a pension fund that thought this was a pretty good idea and to put these things together. And so we started talking to pension plans and we, you know, we walked them through, this is how employee ownership works. This is why it's lower risk. This is why this capital is important. And this is why it is great for long-term returns for your members. And look, you know, it also helps that it happens to produce a great outcome for workers, right? Pension funds are the holders of the wealth of the 99%, right?

Bret Keisling: 11:16 Forgive me. But and it's kind of ironic -- what you've said is, hey, pension fund solid investment fits in everything that you're trying to do, you're protected lower risk. And by the way, you're doing a world of good for the employees.

Jon Shell: 11:29 Yeah!

Bret Keisling: 11:29 You know, it's just kind of funny that that's like the cherry on the ice cream, if you will. You know, that's just really cool.

Jon Shell: 11:36 Yeah, for sure. And, you know, look, pension funds have a fiduciary responsibility to ensure they get an appropriate return for their members. That's their number one priority. In fact, they are not allowed in most cases to receive one penny less than an appropriate return for their members. So, it has to be "and bonus" situation, right? They have to receive what they need in order to provide for the retirement of their members. And if they get a bonus, fantastic. Because they are, they also, you know, their members care deeply about it. We were able to convince three or four pension funds that this was a reasonable idea. They would look at a deal if we got one. And then we started working with the employee ownership community to identify a deal. And September of last year, September of 2020 this deal came across our desks.

Jon Shell: 12:23 So, we looked at a bunch of deals that, you know, a couple were pretty close, a bunch didn't work, but this one was Taylor Guitars. And we brought it to one of the pension funds where we thought it would really fit. And we said, look, this deal's big enough. It achieves the right returns. We will, de-risk this for you, right. We will take the role of the sponsor in the deal. We will, you know, kind of help you understand how the ESOPs work. We'll make sure that the right people are at the table. We're going to co-invest alongside you. So you know that, you know, that we're in this for the long-term and we believe in it. And we will, you know, we'll do all that so that you can take a real strong look at this deal because we think it's perfect for you.

Jon Shell: 13:02 And on the Chartwell [Financial Advisory, Inc.] side -- so Chartwell was the investment bank who brought the Taylor Guitars deal and invited us to the table. You know, they had had long conversations with the owners of this company and they were dead set against private equity sale. They were dead set against a sale to a competitor. And for all the reasons you would want them to be, right? They cared about their employees. They cared about the community. They thought Taylor was a wonderful company. They wanted Taylor to exist in 200 years, right? That's how they talk about it. And they thought, there's no way that's going to be true if we sell it to some third party, right? And they've seen it in their industry. I mean, Guitar Centers of America has been crushed by private equity over, you know, kind of more than a decade. So they've seen how that's happened.

Jon Shell: 13:51 So, I'm taking too long, Bret, I apologize. But Chartwell knew that the owners of Taylor would really like the idea that workers are coming to the table to help finance this. And so, you know, the process began in September. It was us. There were other people at the table, right? So they were debt funds, like large, very large debt funds at the table that are sort of you know, kind of traditional providers of debt to private companies. But in the end, you know, the package that we were able to provide in partnership with the Healthcare of Ontario Pension Plan -- it's a wonderful organization, also located in Toronto, a hundred billion dollar pension fund. They had great people at the table. Our money was longer term. More flexible. You know, and the people that Taylor believed that we would be a better long-term partner for them, but if they needed something that we would come to the table because of the values alignment between what HOOPP, Healthcare of Ontario, cared about and what Taylor Guitars cared about.

Jon Shell: 14:54 And so they chose us. And, you know, I'll tell you one very quick story. Early on, there was a meeting between the owners of Taylor Guitars and the principles of the health care pension fund plus us. And we kind of stood back and let the principals at the pension fund talk to the owners of Taylor. And it was just, it was just wonderful to see. I mean, they cared about the same things, you know, the long-term success of the company mattered to them. They shared stories. And you know, it just proved the thesis that if you could connect this source of capital to big enough deals in employee ownership, that we could really grow the sector and create even more wealth for employees. So, sorry, I took a long time, but that's kind of how it all came to that.

Bret Keisling: 15:44 I appreciate it. And it's important. And, and I see the A-ha Moments coming out of this. Marjorie, what role did your organization have in this? We've kind of gotten the financing figured out, but what role did you play?

Marjorie Kelly: 15:57 Well, The Democracy Collaborative played the role of basically journalists and I think megaphone. We think that a key missing ingredient to grow employee ownership is awareness, information. People simply don't know about it. You can't read about it in the Wall Street Journal every day like you can Wall Street owned firms. So our job is to find the most interesting news and to get it out there as broadly as we can. So when we heard about the Taylor Guitars deal, we're like, oh my God, this is one of the best stories that's come down the pike in a very long time.

Marjorie Kelly: 16:39 And we were right. So we wrote about it and we've put it out there and we've seen just tremendous interest. As I said, I've been able to mention it on a couple of different webinars, reaching investors, reaching progressive business. So this is the kind of story that we think really, it proves the case. It is this A-ha Moment. And it shows that employee ownership, these are lower risk businesses. These are benefiting employees. They're benefiting investors. Let's do, let's do more of this.

Bret Keisling: 17:13 We have a similar view. So how do we, if I may be so bold, how do we expand? Jon, you've done capital into the United States. Clearly you have folks willing to talk about and publicize your efforts, but I also assume that we're all coming from the same page. That Jon, your goal isn't to be proprietary, you know, nobody following your model.

Jon Shell: 17:38 Oh, no.

Bret Keisling: 17:38 You want to expand it. So, we've got a first transaction. It's very exciting. What are our next steps?

Jon Shell: 17:45 Look, I think the way that this becomes a much bigger deal is if we can break out of the employee ownership community and start to shift deals in the mainstream M&A [Merger and Acquisitions] community. So, you know, you'd want -- there would be any number of companies across the US where the owners would say, gee, I know that I have options to sell my company, but I'd rather not sell to a financial firm. I'd rather not sell to a competitor. What are my options? And you want every advisor to say to them, well, there is this ESOP, which we can look at as well. And right now they, don't.

Jon Shell: 18:22 There's lots of reasons for that. You know, there's a lot of incentive problems in that market. But the more we talk about these types of deals, the more there's an awareness that large pools of capital are available to support these deals, the more that those advisors will mention ESOPs as an option. So our job at Social Capital Partners is to engage those mainstream M&A advisors and say, listen for those clients of yours that you've been trying to get over the line for the last five to ten years, who are really struggling with the idea of giving up control, who are struggling with the idea of selling to someone who might resell the company -- not might, who will resell the company in five or six years, who are worried about what that will do to their employees and to the communities where they've operated it's our job to get them to say, well, you should look at an ESOP. And we know of this big fund out there who can -- we don't have a big fund, but you know, the objective is there will be not just us, but several large funds, large enough to receive pension fund money, which means a billion dollars or more whose objective is to provide debt to companies transitioning to ESOPs.

Jon Shell: 19:33 We believe there's a market for that. And we believe the capital is available who wants to do it. And once that's true, you know, I think we'll see M&A advisors start to recommend it to certain clients who care about this stuff. I mean, there's a spectrum, right? There's a spectrum of owners of companies who are transitioning from those who don't care at all, who, you know, I'm going to get out and I want the highest bid and okay, that's fine. To those who are going to do employee ownership, no matter what, if they have to lend the money, they'll do it. But there's going to be a pretty big swath in the middle who would prefer an outcome that is employee ownership, that's, community-based, that's going to keep jobs in their community, that's going to keep the culture, who don't have that option today. We need to provide an option for those people.

Bret Keisling: 20:17 Let me ask a question of you, and then Marjorie can answer as well. Boy, like everybody in EO, I have had so many conversations with potential shareholders on why they won't get that top dollar. You know, I say wringing every last penny out of the transaction. And as an ESOP trustee, I was the one who inflicted the news sometimes that you will not get last dollar.

Jon Shell: 20:37 Yeah.

Bret Keisling: 20:37 I hadn't really drawn the connection. How much of the decrease in sales value, and I'm not even sure if that's right, but how of that is because of the cost of equity? In other words, if I, as a trustee were approving a transaction -- and I didn't necessarily approve the financing terms, per se, it just had to be part of the deal -- but if I approve something with say 12% return, well, that's got to fit into the transaction. That's going to lower the cost. Whereas if if I understand it, the pensions funds expectations they've got to make, there's got to be return, but it doesn't need to be through the sky. Does that potentially lessen some of the decrease in what the owner might have?

Jon Shell: 21:22 Yeah. So, look, I think we believe that straight debt deals will lead to a more appropriate capital terms for these deals and allow the transactions to be fundable without being too onerous in terms of the debt of the interest payments, right? So, what happens in some of these deals is the return expectations of the capital provider in order to get up to the debt level that would get enough upfront capital are incredibly high because they're sort of, they're funded through a combination of debt and structured equity. So suddenly you're looking at teens or high teens returns, very challenging to make that work, right, from a financial aspect. It can happen sometimes, but it's not, it's not going to have that many applications.

Jon Shell: 22:06 If instead it was just straight debt, right? So, you know, we're going to go up to a certain level of debt to EBITDA [earnings before interest, taxes, depreciation, and amortization]. It's going to be a reasonable level of debt to EBITDA. It's one that doesn't, where there's not a ton of risk in the company. The owner is going to have a seller note above that, so there's the feeling that there's a backup in case things go wrong. There, you can apply a reasonable rate of return that pays an investor an appropriate interest rate on their debt and is manageable for the company. So, I don't know if that answers your question, but certainly, you know, we've seen a lot of deals where that's true, right? Where without causing any strife for the company long-term, without affecting their ability to invest in the company, without affecting their ability to invest in growth, they can transition to employee ownership at a competitive rate. It's not going to work all the time, right? So, you know, we have to accept the fact that there are some industries and some companies where you're not going to be able to match a private equity offer or a competitor offer with employee ownership. That's going to happen. But again, there's this group in the middle where you can, right? Where the multiples are going to be sort of in the eight to twelve range where an appropriately structured straight debt deal will be able to allow employee ownership to compete with an alternative offer. And those are the deals that we have to get. I hope that makes sense.

Bret Keisling: 23:28 It does, Jon, our time is running short on your schedule. And I just want to bring in Marjorie one more time. And I'll say again, with my expectation that I will reach out and would love to have you come back. But Marjorie, what can you do? Someone like me do what can do to help make sure that not only does Jon have more transactions in the future, but other folks like Jon do this? How do we ramp up knowledge, that sort of thing?

Marjorie Kelly: 23:55 Yeah, I think that we as investors and I think even small investors, like me, can start talking about employee ownership to our advisors. Or maybe we have a church that has a pension fund or various options like that. But just to build awareness. I think sharing stories like this so that this is taken seriously. This isn't just some, you know, some, kooky person with a big idea. No, this is a pension fund investing serious money in an employee ownership transition.

Marjorie Kelly: 24:32 I think building awareness is huge and there are a dozen funds forming for employee ownership. There are mostly, these are going to be open mostly to qualified investors. And that's not, that's not ordinary, you know, small investors, but I think we'll get there eventually. And I think our job at this point is to raise awareness and spread the good news.

Bret Keisling: 24:54 Excellent. Jon, you are the one on the hard stop. Any last words before we let you go?

Jon Shell: 25:01 Look, I think what I would say is, you know, we feel incredibly honored to have been part of this deal. We know that HOOPP feels honored to have been part of this deal. Everyone feels, feels really special about it, but I will say we haven't done anything yet. Because this, Taylor Guitars was going to be employee owned, right? They were committed to it. What we need to do is transition a company that was not going to be employee owned. And that's really where we make the leap. And that's what, that's our long-term objective and where we're headed. A lot of these funds that Marjorie talked about, that's what they're going to go and do. They're going to do it on smaller deals, which is fine -- and not just fine, it's great and incredibly important. And so we're, we think it's wonderful. And we have talked to a bunch of them. We're investing in at least one of them ourselves.

Jon Shell: 25:46 But our job, what we hope to do, is to make the leap so that larger companies that would otherwise have been sold to someone who isn't employee owned or sold -- or not sold to an ESOP, does transition to an ESOP. And that's when we'll really start to shift things.

Jon Shell: 26:05 And let me just say, being on the phone with you guys -- and Marjorie you especially. Bret, I don't mean this with any offense, but Marjorie being on the phone with you and the work that you've done to explain this the way you do. We recommend your articles to so many people, you know, when we talk about employee ownership especially in Canada where we don't know very much about this stuff. You know, it makes a huge difference and what you -- the work you're doing really matters. And so I really appreciate being on the phone with you, Marjorie and with you Bret. And I look forward to talking to you both again.

Marjorie Kelly: 26:37 Thanks, Jon. It was great, great talking with you.

Bret Keisling: 26:40 Thanks, Jon. Thank you very much. And for the record, I'd rather have Marjorie on than myself too.

Jon Shell: 26:45 [Laughter.]

Bret Keisling: 26:46 Jon thank you very, very much and safe travels when you return from Australia. And very sincerely, sir, keep doing what you're doing. There are a whole lot of us who will do whatever we can. Some of it through amplification others through more concrete stuff, but please let all of us help you and to your success. You are doing important work.

Jon Shell: 27:06 Thank you, Bret. Really appreciate it. Talk soon. Bye bye.


Bret Keisling: 27:12 I have to chuckle at how this segment ended. I told you at the top that I recorded individual segments with each of them. Jon joined me first on a Zoom call, then Marjorie joined in for the combined segment that you just heard. And when Jon disconnected Marjorie and I continued to record her individual segment, that's why you may have noticed that I thanked and said goodbye to Jon, but not Marjorie.

Bret Keisling: 27:40 I'd like to do that now, Marjorie, thank you also so much for coming on the podcast. As I said before long, we'll have both Jon and Marjorie's individual stories, and we certainly look forward to bringing you those.

Bret Keisling: 27:52 If you're on Clubhouse, look for me at EO underscore Bret with one T and hopefully you'll check out next. Friday's Mini-cast, where I lay out my vision for building an employee ownership community on a really cool new app.

Bret Keisling: 28:08 Although the light seems to be at the end of the tunnel, our country continues to go through an awful lot together and that's how we'll get through it, together, which is in the best spirit of employee ownership.

Bret Keisling: 28:19 Thanks for listening. This is Bret Keisling; be well.

Bitsy McCann: 28:27 We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling.

Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.

A note on the transcript: This transcript was produced by Temi, an automated transcription service. While it has been reviewed by The ESOP Podcast, we can not guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.


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