Small and medium-sized enterprises (SMEs) often find themselves in a situation where they have to reconsider or decide on the method of financing, whether it is bridging, investment, or other business steps.

This often means a balance between debt and equity. Such a crossroads is sometimes, for example, the initiation of investments in the development phase, when the entrepreneur (yet) would not dilute the ownership by allowing, for example, private equity investors, and for some reason cannot or does not want to rely entirely on banks or equity. Similar doubts can be imposed when, for example, in the entrepreneurial venture of two founders, one wants to leave and the other would like to continue their own. In such and many other business situations, something between a classic bank loan and equity is often the optimal solution – various variants of the so-called mezzanine financing, which is usually much more flexible than banking, including the issue of repayment or amortization of loans.

A new fund for the domestic market should soon be operational, which has recognized its market niche in this segment of SME financing, and whose investment potential should be close to HRK 400 million. Darko Drozdek, Krešimir Gjenero, and Tomislav Tadić are behind the Croatian Mezzanine Debt Fund project. Namely, at last week’s session of the Board of Directors, HANFA issued an approval for the establishment of the Croatian Mezzanine Debt Fund, a closed-ended alternative fund (ZAIF) for venture capital. This solution includes giving consent for the management of this fund to Mezzanine Partners. The fund plans to raise 50 million euros, and the duration of this fund’s investment is 4 to 7 years. Croatian Mezzanine Debt Fund is one of three venture capital fund projects that have passed the selection procedure of the European Investment Fund (EIF) and are financially supported by investments of the EIF and the Croatian Bank for Reconstruction and Development under CROGIP, an investment program these two institutions have agreed to encourage investment in small and medium-sized enterprises. Ultimately, the investment potential will be at least twice the amount of their support. According to Drozdek and Gjenero, the goal is ultimately to raise a total of 50m euros. After HANFA received approval for the establishment and management, talks with (other) potential investors, namely financial and institutional investors, will follow in the next few weeks.

All in all, the fund should start operating in a few weeks. Given the specific profile, and one of the features of the mezzanine arrangement is that investments start as debt, and the cycles in terms of transaction realization are somewhat different than, for example, private equity (PE) funds. Therefore, it is calculated that the first CMD fund transactions could follow as early as the end of the first quarter. “The mezzanine concept usually comes as a step before private equity capital,” Gjenero points out. Regarding the size of individual transactions, they point out that the target amounts are between one and five million euros. When it comes to required/expected returns, they are positioned in accordance with the hybrid character of the mezzanine “product” and the accompanying risks. Domestic financiers will say that the mezzanine is very well recognized today as a niche with good potential, although there are few institutional players, funds, in it so far. On the one hand, banks have tightened lending conditions, and on the other, the PE industry, they say, is already very crowded. HANFA points out that the plan is for the fund to invest in at least 10 to 15 companies via subordinated debt, not excluding warrants with an equity component.