Private Equity Funds on the Hunt for Good Companies

Although the macroeconomic environment marked by high inflation, rising interest rates, and fears of recession is not the most favorable atmosphere for investments, Croatia continues to see announcements of new private equity (PE) and venture capital (VC) funds, indicating further development of this market and alternative financing options. In just five years, private equity investments have increased fivefold, reaching 439 million euros in 2022, accounting for 0.65 percent of GDP, and judging by the announcements, this upward trend is expected to continue in the upcoming period.

– There are three new initiatives that will help further develop this market. The first is CEETT, based on which a VC fund for technology transfer will soon begin operations, aiming to commercialize promising research projects from our universities. There is also a new program to support VC funds, in which the European Investment Fund will again participate, and where part of the earmarked structural funds will be utilized, along with a new joint initiative of the Croatian Bank for Reconstruction and Development (HBOR) and the European Investment Fund (EIF) for the development of growth capital financing focused on green investments and innovations. The public funds available for these three initiatives are substantial (CEETT – 40 million euros, VC – 80 million euros, growth capital – 52 million euros), and private investors are also expected to participate in each of them, which means that PE and VC funds will have significantly larger amounts of capital available – said Mirna Marović, director of VentureXchange (VX) and president of the Croatian Private Equity and Venture Capital Association (CVCA), which includes funds with capital exceeding 3.5 billion euros.

No Stopping

Of course, there are also existing domestic funds, Invera, Provectus, and Prosperus, which have not yet completed their investment phase, as well as foreign ones, such as Mid Europe Partners or Enterprise Investors, along with some newly established ones, like SQ Capital, and numerous announcements of new funds, such as the Slovenian Silicon Gardens and AYMO Ventures. The founders of existing funds also do not plan to stop at just one.

Such a plan is in place at Invera Equity Partners, whose fund has so far invested about 60 percent of available funds in three investments: Museum of Illusions, Kompare.hr, and Marles Hiše Maribor.

– We are currently considering several potential investments both in Croatia and in the region, and in some of the potential investments, we are in very advanced stages of negotiations. We are actively working on new acquisitions and the placement of the remaining part of the fund. This would allow us to start the process of raising a new and larger fund in the short term – announced Nikola Kličko, senior associate at Invera Equity Partners.

Unlike other funds, which are usually focused on several sectors, Invera is not focused on a specific sector or investment strategy.

– In evaluating acquisition opportunities, we do not set sectoral barriers. However, in our previous operations, sectors such as specialized manufacturing and tech-enabled services have proven to be particularly dynamic – noted Kličko.

Similar thoughts are shared at Prosperus – Invest, which has invested in five Croatian companies through the Prosperus Growth fund.

Different Investment Policies

– Our investment policy is not limited to specific industries. We select quality companies for investments that have ambitions for further organic growth, ideally expanding regionally, and potential for achieving acquisitions with synergistic effects – stated Tomislav Tičić, partner at Prosperus Growth.

When it comes to the stakes they take from owners, PE funds more often prefer majority ownership, but there are exceptions. For example, Mid Europa, which manages several private equity funds, is flexible regarding minority and majority stakes.

– Currently, we have two investments in Croatia, the first is a majority investment in Mlinar, and the second is a minority investment in M+ Group. We are also interested in further investments across Europe, and Croatia and the region are among our key markets – said Aleksandar Dragičević, principal at Mid Europa.

Investment policies of funds also differ in the amount of individual investments, and typically, investments from Croatian funds are smaller than those from regional ones, as the latter have larger amounts of capital at their disposal.

– Growth capital funds operating in Croatia have invested on average between three and 12 million euros. Regional funds, which primarily provide buyout capital, invest significantly larger amounts, typically a minimum of 20 million euros in direct investment, or a total transaction value of 40 million euros including bank financing – explained Marović.

PE funds generally have two basic strategies: investing in profitable companies in high-growth industries whose products or services are easily scalable, and companies in industries with consolidation potential and cost savings at the holding level of such companies, and they are often, but not always, oriented towards several sectors. On the other hand, VC funds, which invest exclusively in startups at various stages of development, are mostly open to investments in diverse sectors.

– Croatian VC funds Fil Rouge Capital and Feelsgood Capital are an important link in the development of the Croatian startup ecosystem, which has literally flourished based on such activities. Their average investments range between 250 thousand and one million euros, and they can exceed these amounts, often including additional amounts in future funding rounds – clarified Marović.

Thus, Fil Rouge Capital invests up to 100 thousand euros in companies that are in earlier stages of business development through a so-called accelerator program, while the investment amounts of this fund in already established companies in the market range between 200 thousand and 1.5 million euros.

– We typically invest in 10 – 15 percent stakes in a company. We support founders in developing the business and the company, helping them raise new investments. The exit strategy depends on the company we invest in, the product, the market, and the speed of potential development, so we aim for selling stakes to a strategic investor or a PE fund. An IPO is also an option, but it is less likely – explained Stevica Kuharski, partner at Fil Rouge Capital.

The range of investment amounts is, as noted by Renata Brkić, partner at Feelsgood Capital, a fund for social impact investing, from 250 thousand to three million euros, investing in various sectors, with the main condition being that the project must achieve a positive social impact alongside financial returns.

Before making an investment decision in a company, funds thoroughly evaluate the entrepreneurial idea, as well as the team behind it.

More about the funds operating in our area, as well as how they select companies to invest in, can be found in the new issue of the printed and digital edition of Lider.

*Collaborated by Anamarija Mujanović*