Their surprising finding was recently published in the Journal of Portfolio Management and builds on an analysis of a unique real estate private equity dataset with detailed buy-side and sell-side information. The authors use this dataset to construct and analyse stacked interaction networks for each vintage class. A novel variable in this research context is network centrality which measures the embeddedness in the industry. The authors tracked 2,717 real estate private equity funds and established links between, 216 plan sponsors investing with 837 fund managers over time. They find evidence that fund managers benefit considerably from their established connections to existing plan sponsors while fundraising. By adding fund size into the equation, they demonstrate that the total capital under management and the size of previous funds have a significant and positive effect on fundraising speed.
Our findings seem to confirm the old adage 'it's not what you know, it's who you know'. We were surprised to see that there was virtually no significant statistical relationship between relative past fund returns and subsequent fundraising success. Instead, size and connectedness seemed to matter much more..
says Dr Fuerst.
The authors attribute their finding to the fact that -in contrast to the listed sector- past financial performance is often not directly observable to potential private equity investors. This means that they typically have to rely on other factors such as size and brand name as a signal of success.