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New CRERC research: Connections are more important than performance

last modified Nov 27, 2015 02:14 PM
A new study by Dr Franz Fuerst of CRERC and Sebastian Krautz, a visiting scholar at the Cambridge Real Estate Research Centre, shows that connections and company size are more important for successful fundraising in the private equity real estate sector than skill and performance track records.

This surprising finding is reported in an article which was recently published in the Journal of Portfolio Management and builds on an analysis of  a unique real estate private equity dataset with buy-side and sell-side information. The authors use this dataset to construct and analyse stacked interaction networks for each vintage. 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  2,216 plan sponsors investing with 837 fund managers over time. They find evidence that fund managers benefit considerably from their established connections to 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'", says Dr Fuerst. "We were surprised to see that there was virtually no significant statistical relationship between relative past fund returns and subsequent fundraising success but size and connectedness seemed to matter much more." 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 which means that they typically have to rely on other factors such as size and brand name as a signal of success.

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