Paying for People Twice: The Hidden Cost of Buying Growth
Right now, the streets are packed with shoppers, and these shoppers have heavy wallets.
Private-markets GP transactions rose 40% last year, and Preqin expects the total enterprise value of these deals to double, from $1.7 trillion today, to $3.4 trillion by 2030. Firms that once grew only by raising larger funds are sometimes now buying other firms in order to scale, and paying record premiums for the privilege.
When a firm wants a strategy it doesn’t already have, there are actually three ways to do it, but which is right for you?
THREE WAYS TO ADD A STRATEGY
Imagine that you are running a mid-market credit shop, and you notice the avalanche of LP cash rushing into ABF. If you are not prepared to let the opportunity pass you by, you essentially have three options:
You can build:
This means hiring a team, wholesale or (more realistically) one senior mandate at a time, and developing the strategy organically within your own brand. It demands patience, but it is the least expensive, typically. I think it is the most sustainable route for many firms, but as a recruiter, I would say that.You can buy:
The logic is seductive: why spend five years building a capability when you can own one by Friday? If you can find and acquire a firm that already runs the strategy, this is the fastest way to expand your AUM. With GP valuations soaring (especially for those with expertise in niche, hot strategies), it is also comfortably the most expensive.You can borrow:
This option is often overlooked. Partnering with a specialist through a joint venture, can be a good move for both parties. They get your distribution and scale; you get their origination channels and their specialist skills. And it doesn’t have to be forever, of course.
Naturally enough, the important question is not “which of the three looks good today?”. It is “which still looks good five years later?”
BUILDING FOR THE FUTURE
I won’t dwell on this option. As a recruiter, it’s usually the one I recommend: It allows a manager to build up a team whilst respecting the existing culture of the firm. Individuals can be carefully selected and integrated. Yes, this way can take more time to scale, but it is the most sustainable approach.
THE TROUBLE WITH BUYING
In a behind-doors session, a significant player in our industry shared his thoughts on the dilemma. “When you buy a firm”, he said, “you pay for the people twice.”
What did he mean? His position was that you pay once in the acquisition of the business they work for. Then, once the earnouts have run their course, they leave and you have to pay again to replace them. And they tend to leave to set up their own firm, competing with precisely the strategy they added to your arsenal through the acquisition.
I see this from a privileged vantage point, of course. A change of control is the single best moment to recruit someone out of a firm. Senior investors and fundraisers who were settled, well paid and unreachable become movable the day the deal is announced: Their economics change, their autonomy changes, and the name they give at the dinner table when someone asks where they work changes. I have built entire searches around it.
LP capital can be similarly restless. Fund terms can fetter LPs only for so long and there is no guarantee that the new name above the door won’t see investors start shopping around for a new place to deploy.
Integration is the third problem, and the one most reliably underestimated. Hire people carefully, one at a time, and culture absorbs them; acquire forty at once and you have two cultures, and sometimes even two teams competing for the same deals. I have watched firms pay premium prices for businesses that duplicated strategies they had already spent millions building in-house, and then lose good people on both sides, in the overlap.
There is a version of buying that works, of course. When BlackRock acquired HPS, the market read it as a reverse acquisition: HPS’s founders took charge of the combined private financing platform. The people who might have otherwise left are running the show, instead. Few deals, however, are structured with that level of humility.
BORROW WHILE YOU BUILD
The third option is one worth spending a moment on. Particularly if the strategy you want is genuinely specialized, and especially if the niche is not one you are certain is a long-term play. The strongest teams in these specialist strategies are small in number and expensive to acquire. It might be possible to prise a mid-level investor away with the promise of finally running their own strategy, but it is not easy.
In heavily regulated industries like aviation finance, where either you know everyone or you know no one, finding a JV partner may be the best (and, sometimes, only) option. It lets you participate now, at a realistic price, and preserves flexibility if opportunities or markets move.
But borrowing is a bridge, not a destination. The right sequence is to partner while you build: learn the strategy from the inside, hire deliberately, and let the organic team compound. Built growth sticks and this hybrid approach of kickstarting the strategy with a joint venture can be an excellent option. Ultimately, the people you attracted stay because they created something, and the LPs stay because they backed you, rather than a logo you acquired.
FINAL THOUGHT
There is only one real argument for buying, and it is impatience. Sometimes impatience wins: a market window is closing, or a headline number has to move, fast. But if you want growth that is still yours in five years, build it, and borrow while you do. Not only will you avoid the inflated pricing in the market right now – you’ll also avoid paying that price for the people a second time.