Domestic companies have been searching for capital for a year and a half, albeit for short-term needs, but there are also those that are considering investments even in a recession. The first and simplest choice for companies is credit.
Interviewed by: Gordana Gelenčer
However, banks are reluctant to lend to the real sector as provisions for bad loans have increased significantly, and companies are already over-indebted. Where else is there capital for investments? There is, among other places, in so-called venture capital funds. However, entrepreneurs in this case must ‘release’ part of their ownership to the investor, but Mirna Marović, president of the Croatian Private Equity and Venture Capital Association, says that the advantages of such investments should not be overlooked.
What types of companies are such investors most often interested in?
– Private equity and venture capital investors are interested in dynamic companies, that is, those that can achieve rapid growth and sustainable comparative advantage within a five-year investment period. These investors assess the potential of the investment based on the possibility of achieving returns on invested capital and the amounts of investment. The expected return on investment depends on the stage in which the company is located. Thus, for start-up companies, which are riskier, a higher return is expected than for already established companies in a later stage of development. On average, these funds seek a 25 percent return on investment per year. Part of the return is also achieved through financial leverage (the share of loans in total financing). In practice, private equity funds achieve an average return on investment of 15 percent per year because, on average, one or two out of a total of ten investments of a typical fund fail.
Can small companies attract them or only medium and large?
– Foreign private equity and venture capital investors are mainly interested in medium and larger companies in later stages of development (business expansion or acquisition). Most foreign funds invest more than 10 million euros, but there are also those where the initial amounts start from five million euros. As an example, I cite the investment of one of the largest private equity funds from Central and Eastern Europe – Mid Europe – which acquired the Croatian Istra Cement for 40 million euros. Of that, 20 million euros is a direct investment from Mid Europe, and 20 million euros is a long-term loan from Zagrebačka Bank. Regional and domestic funds are also interested in significantly smaller investments, from one to six million euros per project. However, they will also invest several hundred thousand euros in the first phase of investment if there is potential for the company to expand its business and be ready for larger amounts in the second phase of investment.
What conditions should a company meet to attract a private equity investor?
– An entrepreneur must have an idea, that is, a business plan on how to grow quickly and leverage an advantage over competitors and market their product or service, preferably not only in the Croatian market but also in regional and/or global markets. It is important that the company has an excellent management team that has the ambition for accelerated growth and market expansion. It is important that the company is willing to allow the private equity fund to enter its ownership structure and participate in all important strategic business decisions. It is also important that the company and the private equity fund agree on one or more exit strategy options after the investment period. This may include selling the fund’s stake to the management team, a strategic partner, another fund, or an initial public offering of shares.
Why is such a form of financing poorly developed here? Is it because there are no interesting companies or because companies do not want to share ownership?
– The Croatian financial system is bank-centric; for most companies, banks are the main source of financing. Only larger companies have managed to finance themselves in the capital market, and only about thirty have been financed by private equity and venture capital from 1997 to today. There are enough investment opportunities in Croatia in amounts ranging from five to 15 million euros. Such investments are generally of most interest to domestic and regional funds, and less so to larger foreign ones, which typically seek opportunities for acquisitions and business expansion in larger amounts. After all, foreign funds encounter the same obstacles as other foreign investors: disorganized property rights, corruption, networking, and poor corporate governance. Until now, the demand for such financing has been low because entrepreneurs are not familiar with it, but also because most entrepreneurs oppose the entry of venture capital funds into their ownership structure. Entrepreneurs understand bank credit as a financing instrument very well, but generally know little about the advantages of having a fund enter their ownership. In addition to providing a long-term and stable source of financing, funds also bring ‘know-how’: how to successfully grow and expand into regional and/or global markets.
What is the purpose of state aid in package number two, according to which these funds and the state would each invest one billion kuna?
– The situation has changed significantly since the beginning of this year. The Croatian Private Equity and Venture Capital Association is increasingly being contacted by interested entrepreneurs with their projects. Recently, we also conducted the VentureXchange competition to select the most promising entrepreneurial projects. We received 23 entrepreneurial projects seeking financing worth over 250 million euros. An expert jury selected nine finalists with projects seeking more than 50 million euros in investment. All finalists base their entrepreneurial ventures on the use or development of high technology or ‘cleantech’, clean, profitable production for environmental preservation.
Are there sectors that are more interesting to investors?
– A company can be from any sector except real estate and finance, as other funds deal with such forms of investment. This is evidenced by the examples of previous private equity and venture capital investments in Croatia, which we find in almost all sectors such as frozen food production (Hlad), retail chains of drugstores (Kozmo), tourism (Aqua), private hospitals (Akromion), fast food restaurants (Daily Fresh), distribution of special and automotive equipment (Promotehna), distribution of consumer electronics (TechnoMax), delivery (Overseas Express), and document archiving (Arhiv trezor). Although I do not exclude the possibility of investing in all sectors, Croatia has plenty of potential for the development of high-tech and ‘cleantech’ sectors with the help of venture capital.
