NEW REGULATION OF PRIVATE EQUITY AND VENTURE CAPITAL FUNDS AND OPEN QUESTIONS

Abstract

This article provides an analysis of the new regulation of private equity and
venture capital funds which are in Croatian law regulated by Alternative Investment
Funds Act and ordinances. These funds can offer their units only via private offering
to primarily professional, i.e. qualifying investors. They invest mostly in shares and
units of companies, including both companies in early (start-ups) and in later stage of
business. For the companies in which they invest, these funds are very signifi cant as
they can provide capital for even small entrepreneurs which could not obtain fi nancing
from traditional sources (e. g. banks). This article analyzes investment transactions
between private equity (further in text: PE) and venture capital (further in text: VC)
funds and the company in which they invest (portfolio company). PE and VC funds
represent a new segment in the Croatian capital market which is still developing and
whose potential is yet to be fully recognized. PE and VC funds are not regulated on
the EU level. However, managers of AIFs, including PE and VC funds are under
certain conditions. Authors shall analyze these legal sources, both on the EU and
on the domestic level, with emphasis on the regulation of managers of AIFs when
they acquire controlling stake in non-listed companies and issuers, which is of special
interest to PE and VC funds due to their investment techniques. In that light, authors
question if there is a mechanism which ensures that PE and VC funds act as a socially
responsible shareholders/unitholders in portfolio companies (public accountability
of the managers of AIFs). If so, authors argue the existence of possible confl ict of
interest, as it is not clear in whose interest should managers of PE and VC funds act:
in the interest of their investors or in the interest of the portfolio company.