The “Small World” of Private Equity Funds

Abstract

The authors explore the structure of the network of relationships between 225 private equity firms arranging “club deals” between 2000 and 2017 with different private equity firms. After using the tools of social network analysis to assess this structure and the prominence of the players within it, they find that the network is dominated by few central players, suggesting the existence of a “small world” of relationships. Some players are found to act as a brokers of relationships between other players, despite having a lower number of connections, increasing the resources exchanged in the network. Network centrality is shown to have the largest economic effect on the likelihood of club deal formation. This finding supports the idea that the establishment of private equity consortiums is not merely for capital constraint motivations or portfolio diversification, but also to increase social capital and ensure future deal flow.

TOPICS: Private equity, portfolio construction, in portfolio management, quantitative methods