154: Jon Shell of Social Capital Partners



Bret Keisling is joined by Jon Shell of Social Capital Partners, who arranged the funding of the 100% ESOP conversion of Taylor Guitars and explains the importance of pension plan funding to grow employee ownership.


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Note that the segue into this episode overlaps with Mini-cast 129: Jon Shell of Social Capital Partners; you'll want to stay tuned as we take a deeper dive here.


The ESOP Podcast is licensed under a CC BY-NC-ND Creative Commons License.

Episode 154 Transcript


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

Bret Keisling: [00:00:12] 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. In April, 2021 on Episode 146 of The EO/ESOP Podcast, I was joined by Jon Shell of Social Capital Partners and Marjorie Kelly of The Democracy Collaborative who discussed Taylor Guitars recent transition to employee ownership.

The fact that an iconic company like Taylor Guitars became a employee owned would be big news on its own, but in that episode, you'll hear how the financing came about. Funding was provided by the Healthcare of Ontario Pension Plan [HOOPP] in what appears to be the first funding of an employee owned company by a pension plan. I hope you'll check out Episode 146 at our website, www.EsOpPodcast.com, or wherever you get your podcasts.


This week and next, we're bringing you conversations with both Jon Shell and Marjorie Kelly. Next week, I hope you'll join me for my conversation with Marjorie. In the meantime, here's my conversation with Jon Shell.

Bret Keisling: [00:01:27] I'm very pleased to be joined by Jon Shell, who is the managing director of Social Capital Partners. Jon is a tremendous employee ownership advocate and also the first international guest of our podcast, so we're extra excited. Jon, thank you so much for coming on.


Jon Shell: [00:01:45] Thanks, Bret. Nice to be here... or be on Zoom with you.


Bret Keisling: [00:01:49] That's as close as any of us have gotten in 2020, so you're absolutely right. And Jon a lot of what we're going to be talking about is a Canadian-based, but you happen to be in Australia right at the moment, so this is extra international.


Jon Shell: [00:02:02] Yeah. I'm trying to bring all of the international as much as I can to you.


Bret Keisling: [00:02:05] I love it. Jon, since September, 2020, we have been collecting EO A-ha Moments from our guests who've had those moments that not just where they heard about EO or liked it, but somehow it was such a moment that it was, "Holy moly, this is important!" Have you had one or several A-ha Moments you'd like to share?


Jon Shell: [00:02:24] Yeah. If you'll indulge me, I would say there are probably three. The first is super boring. The first is and what we'll, I'm sure we'll talk about this, but over the past three or four years at Social Capital Partners, we've been in a process of trying to figure out the best opportunities for us to engage in helping to broaden ownership in the private sector. We are a nonprofit whose objective is to increase economic opportunities for people who don't otherwise have them. So we started thinking about ownership three or four years ago, what's the best opportunity? So we just did a bunch of research, honestly. And because we're Canadian, we didn't really have any idea about the ESOP in the US.


Our ESOP is a stock option plan. This whole US ESOP was foreign to us, to pardon the pun. And we, when we found out about it and so how successful it had been, it was amazing to us. I think it's much more well-known in the US and so it was, frankly, just the research. We said this is clearly the best opportunity for us because it's the most scaled way to broaden ownership that's ever been invented. And so how do we -- so we were like, okay what, how do we find out more about this? And how do we help it grow even more?


And so that's number one, is just purely through research. Number two is one of the first things we did once we said, okay, we need to learn more about this, is we went to the NCEO conference in Pittsburgh, in 2019. Now that was an A-ha Moment. First, seeing a senator both Democratic and Republican open the conference and from an outside observer perspective, that seemed unusual in the US. And to sit amongst the 2,000 or 2,500 odd people there who didn't have a, necessarily, a political point of view, or would have had a wide spectrum of political points of view, but were there because they believed so deeply in employee ownership and what it had done for them, what it had done for their companies, how powerful it was both personally and financially, was almost overwhelming in terms of the, just how lovely it was to be in that crowd. And say, gee, this is very different from the financial system that we at Social Capital Partners know reasonably well. It doesn't work like this! Who are these people? How did they get here? How do we have more of them? This is great!


And I'd say the third, we, not to -- we shouldn't get too, we've done only one, we just closed a deal in December to finance the transition of Taylor Guitars to a hundred percent employee ownership, which I'm sure we'll talk about. But the closing meeting, which was obviously held over Zoom in, on December 31st, was an unbelievable moment for everyone who was on that call. First of all, we got to hear the genuine passion that the owners of that company had for what they had just done. We were able to hear the genuine thrill of the pension fund that we worked with to finance this at being involved in this transaction.


And, I've been to closing dinners before. I've been to closing dinners on bigger deals then this one, but nothing has ever compared to the feeling of being in that room as this deal was closing, which confirmed our thesis, which is that a a financial actor, so the pension fund whose objective is commercial returns for their members, could be a very powerful actor in supporting ESOPs and be a super appreciated person at the table by ESOPs themselves and the owners of those ESOPs. So that was a very powerful moment for us in saying, okay, we're actually onto something here. This could actually work.


Bret Keisling: [00:05:50] Jon, those are great. And a couple of things came to mind. First of all, on seeing the politicians from different political parties, I've talked to often on the podcast, wouldn't it be great to get politicians all over the country? -- I happen to be in Pennsylvania. Senator Pat Toomey is a conservative Republican. He's a strong supporter. Bernie Sanders is a famous from the left very strong supporter. And I've often thought it'd be great to bring these politicians who are diametrically opposed into the same room to talk about employee ownership. And then, because for me hope springs eternal, after they talk about employee ownership, make them sit down and talk about some other stuff as well. [Laughter.]


It's very cool that resonated. And the capital outlay, let me ask -- and we're going to have an entire other episode with you, Marjorie Kelly of Democracy Collaborative, and me -- but it would seem to me, it was probably an excellent exhilarating transaction. Just it's new, it's important. Made any cooler at all because it was Taylor Guitars?

Jon Shell: [00:06:46] Totally. It's funny because the company that we worked with on this, Chartwell, a year prior had done a very similarly sized company, a very similar sized transaction, which also would have made sense for pension fund investment. And the company was like, it was called Precision Pump, which is a water pump manufacturer in Texas. I can tell you, if I were to choose between those two deals, I'm really glad our first deal was Taylor Guitars. And it's absolutely helped in terms of us telling the story and people being interested.


So a hundred percent, it was great that it was Taylor.


Bret Keisling: [00:07:18] Excellent. Let's talk a little bit about Social Capital Partners. Do you put deals together? I mean, just give us the oversight of what you do beyond the ESOP transaction and I guess there's an interplay between solid investment that needs returns and also your social mission.


So can you just tell us a little bit about your firm?


Jon Shell: [00:07:35] Social Capital Partners is a nonprofit based in Toronto established in 2001 by my partner, Bill Young. And for most of our existence, we have focused -- so, Bill formed the company, I should say a little bit more about this, he formed the company because he had a pretty successful business career and was in, he was to be in his forties, and a couple of things have gone really well for him. And he thought, it's really strange, honestly, how well these things have gone for me when I can see that it's just the luck of the draw, I happen to be in the right place at the right time. I don't believe I'm particularly skilled or special. But because I was at the right place at the right time, I now have all of this money. And I don't feel like I've earned it. I feel like I was just given it and I don't feel like I want to spend the rest of my life making more of it. I want to spend my rest of my life doing something about the difference between what I got and what most people get.


And so he founded Social Capital Partners with the objective of saying, what can we do in the private sector in order to shift incentives so that there was a more equitable result in terms of how financial returns work.


And for most of that time he focused on employment. So how do we help people facing employment barriers get good, full-time work? And did a bunch of other things around social finance and social entrepreneurship. Most famously, at least in Canada, he started lending money to small businesses in exchange for them hiring from their local community service organizations, hiring people facing barriers to employment, and then the interest rate fluctuated based on their success in hiring someone.


So if they hired someone from that was facing a barrier to employment, their interest rate would go down by a point. If they hired two people, it'd go down by two points. It would go all the way down to zero.


Bret Keisling: [00:09:19] Wow, that's incredible.


Jon Shell: [00:09:20] It was a really good idea. It worked really well. He did 80 of these loans. 500 people ended up getting jobs, that otherwise wouldn't, through this program; worked with the government to try and scale it.


So, Social Capital Partners is like an operating company that takes a think tank approach to coming up with an idea. Once it comes up with an idea that it thinks is really good, it goes and does that idea and that's what it's done throughout its history.


When I joined in 2017 I had a relatively similar background to Bill in that I was a consultant and then I started buying veterinary practices, and we can talk a little bit more about that, but in the 12 years or so I was involved in the veterinary industry, the industry changed so dramatically that the thing that I happened to do became incredibly valuable. So buying veterinary practices was not such an interesting thing in 2006, but when I, by the time 2017, I had done it in Canada, I had done in Australia , it became an incredibly valuable thing because, for a lot of factors that I hope we get to talk about, but a lot of factors, including pension funds, who we're now investing a bunch of their money in private equity companies who were desperately seeking for ways to place their money so they could start getting paid, found veterinary industry, and all of a sudden the industry changed.


So, I got this windfall, which I didn't think I deserved. So the world has paid me vastly more than I had earned. And Bill and I had known each other for a little while. We reconnected in 2016, or in '17, and I explained to him where I was. And said, I saw this thing happening in the vet industry. I know, I've done a bunch of research, I know what's happening in a whole pile of other industries. It's driven by these macro factors that are hard to understand and hard to do anything about, but I feel, I feel the need to do something about it.


We're seeing ownership concentrated in such few hands and as much as we talk about income inequality, the bigger issue is wealth inequality, which involves this concentration of ownership. I want to do something about that.


And he said listen, that sounds great. I've been spending a lot of time focused on these issues. We've been focused on it on income. I get what you're saying on the wealth side. I agree with you. Let's work together and try to figure out what we can do on the capital side.


So we started working on that and that led us to ESOPs. Now we, as a company, don't have a financial objective. So, we'd be happy to lend our money out and get nothing back, get 0% return if that was the thing that led to the best result. Our operations are all funded independently by Bill and I, which gives us a lot of freedom to choose high-risk ideas and go after them. And so when we learned about the ESOP in the US we said, boy, this feels like a really big opportunity. It's big, but it could be bigger. How do we help make it bigger?


And also, we don't have it in Canada. Which is weird. People think of Canada's as being socially progressive and adopting all of these new tools. But here in the UK, they adopted Employee Ownership Trusts in 2014, we still don't have any of this stuff here in Canada. We have almost no employee ownership as a result.


So we embarked on doing, what we are mostly focused on, which is two things. One is trying to bring institutional capital, so large pools of capital, to employee ownership in the US. We absolutely believe the employee ownership market in the US can absorb it. We think if we can bring this capital, we can bring bigger companies into employee ownership. And by doing that, we can start to scale it in a way that allows it to compete with private equity for larger companies, which we think would be a good thing.

And then we have an advocacy campaign in Canada, where we're trying to encourage our governments to bring in a form of employee ownership into Canada.


More broadly, we are working to partner with other people where we can help finance other ideas that work to broaden ownership, that are not necessarily ESOP related or not necessarily employee ownership related. Bigger picture, our view is the economy needs to be more broadly owned. Anything we can do to achieve that is useful. And as much as we can be involved in that, the better.


Bret Keisling: [00:13:23] And I would imagine Jon that with the social mission purpose, so to speak, that there are ways for you to address wealth or income inequality that isn't necessarily employee ownership in any given sense. So you have an open mind of how do you solve the problems that you've identified without saying this is the only tool we will use.


Jon Shell: [00:13:44] Totally. We are not at all dogmatic about this. We came to employee ownership because we thought it was the most scalable version of broadening employee ownership. We are very worried about a bunch of other factors in the economy. We're worried about the fact that it's harder to own things if you're a professional, right? So professionals now it's much harder for them to own their own companies. We're worried about succession, right? Where we don't think the only answer to succession is employee ownership. We think that succession can also lead to more equity. If you had more people of color, more women, who were both encouraged and backed to buy companies themselves and be the sole owner of those companies, because right now we have an entire search fund industry dedicated to making white male graduates of Harvard and Stanford owners of small businesses, which, you know, is not going to solve that many problems.


So there's a number of ways that we think you can broaden ownership in the economy. This is the one we're focused on because we think we can have the biggest impact, but we're super supportive of others as well.

Bret Keisling: [00:14:46] My thanks to Jon Shell for joining me on this podcast, as well as Episode 146 with Marjorie Kelly.


Please join us next week for my conversation with Marjorie Kelly. Thank you so much for listening. This is Bret Keisling; be well.


Bitsy McCann: [00:15:03] 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 Bret@KEISOP.com, 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, and I'm Bitsy McCann.


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 Descript, 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.