Alternative investment funds and their role in

portfolio companies – state of art in Croatian law and

practice

Braut Filipović, Mihaela; Derenčinović Ruk, Morana; Grković, Nikolina

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 Varazdin Development and Entrepreneurship Agency
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Economic and Social Development

18th International Scientific Conference on Economic and Social Development
Building Resilient Society

Editors:
Damir Mihanovic, Anica Hunjet, Zeljka Primorac

Book of Proceedings

Zagreb, 9-10 December 2016

 Varazdin Development and Entrepreneurship Agency
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Editors:
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Economic and Social Development

th
18 International Scientific Conference on Economic and Social Development
Building Resilient Society

Book of Proceedings

Zagreb, 9-10 December 2016

Title Economic and Social Development (Book of Proceedings), 18th International Scientific Conference on Economic and Social
Development Building Resilient Society

Editors Damir Mihanovic, Anica Hunjet, Zeljka Primorac

Scientific Committee Marijan Cingula, University of Zagreb, Croatia (President); Ayuba A. Aminu, University of Maiduguri,
Maiduguri, Nigeria; Gouri Sankar Bandyopadhyay, The University of Burdwan, Rajbati Bardhaman, India; Haimanti Banerji, Indian
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 18th International Scientific Conference on Economic and Social Development
Building Resilient Society Zagreb, Croatia, 9-10 December 2016

ALTERNATIVE INVESTMENT FUNDS AND THEIR ROLE IN

PORTFOLIO COMPANIES STATE OF ART IN CROATIAN LAW AND
PRACTICE
Mihaela Braut Filipovic
Faculty of Law University of Rijeka, Croatia
[email protected]

Morana Derencinovic Ruk

Croatian Financial Services Supervisory Agency, Croatia
[email protected]

Nikolina Grkovic
Faculty of Law University of Rijeka, Croatia
[email protected]

ABSTRACT
Alternative investment funds (AIFs) differ from traditional investors in their role as
shareholders of companies in which they invest. Although traditional institutional investors prevail
over alternative ones in the global share of investments, their role in portfolio companies is usually
passive due to regulatory and investment restrictions applicable to them (as for example UCITS
funds). Specific types of AIFs (private equity/venture capital funds/hedge funds) invest a significant
part of their asset in various companies and available comparative data suggests that they are
significantly more active in portfolio companies than other shareholders/investors. Through
different types of activism, AIFs tend to influence the corporate governance of companies in which
they invest. The goal of this article is to determine whether Croatian AIFs play an active role as
shareholders in their portfolio companies. Importantly, Croatian AIFs have just recently been
regulated in line with known global trends, which further enhance their position on the market.
Authors shall analyze available legal mechanisms for shareholders to actively participate and
influence the corporate governance of the companies under Croatian law. In order to de termine
whether AIFs as shareholders employ those mechanisms in practice, authors conducted research
among the managers of Croatian AIFs. Research was focused on determining whether Croatian
AIFs participate actively in governance of portfolio companies through voting rights, making
shareholder proposals, informal influence on the board members or other type of shareholders
activism. Finally, authors shall elaborate if the current state of AIFs activism in portfolio
companies represents a good example of corporate governance from the point of a long-term
criticized passive shareholders issue.
Keywords: active shareholders, alternative investment funds, corporate governance, managers
of alternative investment funds, private equity

1. INTRODUCTION
The Croatian capital market is relatively young. The development of Croatian investment funds
began approximately twenty years ago, when a first mutual fund was founded in 1997 linovi -
Herc, Grkov , 2013, pp. 53-60]. The regulation of mutual funds, especially of UCITS funds, was
under the heavy influence of the European Union (further in text: EU), even before Croatia became
a full Member State. On the other hand, alternative investment funds (further in text: AIFs) have

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just recently been regulated in line with known global trends and new types of AIFs are introduced
in the Croatian capital market. As on the EU level, we can divide Croatian investment funds into
UCITS funds and AIFs. Due to considerable differences in investment strategies and objectives,
pension funds fall out of the scope of this article. Opposite to UCITS funds, AIFs represent a
heteronomous group of funds which are mostly unburdened by the legislative restrictions in their
investments. This research is limited to Croatian AIFs that invest in equity instruments of Croatian
listed public companies and/or private companies. One part of the research therefore explores the
shareholders mechanisms which AIFs may employ, i.e. it contains an analysis of available legal
mechanisms that allow AIFs to be active shareholders in Croatian companies. Portfolio companies
are in most cases established as a public limited liability company (dion o dru tvo) (further in
text: PLLC) and a limited liability company (dru tvo s ogran nom odgovorno u) (further in
text: LLC). Therefore, the basis of AIFs available mechanisms is explored in this context. Authors
acknowledge that AIFs are typically divided into specific types (such as private equity, venture
capital, hedge funds, etc.) according the investment strategies which they usually employ.
Nevertheless, in some cases this distinction becomes blurred. Although the type of AIF may
indicate the level of activist approach, it is not necessarily the case. Croatian AIFs that invest in
equity as well as their foreign twins, AIFs on the global capital market, may employ investment
strategies not necessarily connected with their type. Therefore, authors focused on the
shareholders active mechanisms regardless of whether such mechanisms are a result of the
investment strategy usually connected with a specific type of AIF. In that regard, authors
conducted research among Croatian managers of AIFs (further in text: AIFM) in order to
determine if their AIFs are active shareholders in portfolio companies and if they are, which legal
mechanisms they are using. The overall goal of this article is to provide an answer whether the
Croatian AIFs as institutional investors play a role of an active shareholder comparable to trends
in comparative capital markets.

2. AIFs AS ACTIVE SHAREHOLDERS COMPARATIVE MARKET PERSPECTIVE

The prevailing literature regarding AIFs as active shareholders is focused specifically on hedge
funds, as they are known to have the most proactive strategy. Comparative data suggest that AIFs
invest significantly less in equity than traditional institutional investors elik, Isaksson, 2013, pp.
100-102]. However, when they do, the question arises whether AIFs actively participate in
corporate governance of the portfolio company and show higher degree of shareholders activism
than traditional investors. It is a topic that recently gained more attention, although shareholder
activism is not a new element in capital markets (it dates at least from the 1980s for the USA)
[Gillian, Starks, 2007, pp. 57-59].
Authors note that AIFs can influence the company through derivative positions (such as options,
convertible preference shares and other), share loan agreements, empty voting and other
techniques [Stowell, 2013, p. 269] as well. The activism of AIFs and their influence on the
companies in capital market is higher when taking that into account [AIMA, Simmons&Simmons,
2015, p. 29]. Likewise, besides the visible techniques that AIFs can employ in portfolio companies,
authors acknowledge the existence of unofficial or behind-the-scenes pressures that AIFs can
exercise on management boards. It seems that such behavior is reportedly very often in the practice
[Becht, Franks, Mayer, Rossi, 2015, p. 225; AIMA, Simmons&Simmons, 2015, p. 5].
Shareholde position in the company depends primarily on the size of the stake it holds.
Comparatively, in European countries the average stake size that AIFs hold in their portfolio
companies amounts from 6.1% to 9.7% [Becht, Franks, Grant, 2010, p. 20]. Such a result indicates

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that AIFs prefer the position of a minority shareholder (with the exception for private equity and
venture capital funds). They influence the company governance through various mechanisms, but
they are avoiding costly public takeovers.
Generally, traditional institutional investors such as mutual funds, pension funds and other are not
active shareholders, mostly due to organizational and investment restrictions applicable to them.
If they are active, they use the "passive" form of activism [Kahan, Rock, 2007, p. 1043]. This
mainly consists of making formal shareholder proposals, voting in favor or against shareholder
proposals, informal discussions with management board etc. Although it represents a certain type
of influence, it inclines towards only moderate changes in corporate governance at the smaller
price for active shareholders [Kahan, Rock, 2007, p. 1044].
On the other hand, when AIFs and especially hedge funds act as active shareholders, they are often
active in portfolio companies as a part of their strategy, i.e. they invest in certain companies
because their analysis suggests that they will profit from active engagement [Kahan, Rock, 2007,
p. 1069; Stowell, 2013, p. 269]. AIFs are generally not burdened with requirements for
diversification and other organizational issues, which enhance the likelihood of their involvement
as active shareholders [Clifford, 2008, p. 326; Klein, Zur, 2006, p. 7]. They strive towards
changing the corporate control in the portfolio companies in order to issue a decision which is
favorable for them, as are blocking the takeover of the company, acquiring the company for
themselves and other [Kahan, Rock, 2007, pp. 1029-1043]. Such activism is certainly more
expensive, but also more efficient with prompt results.
However, although helpful, such distinctions are relative. In fact, many AIFs employ techniques
usually connected with traditional investors. In a study from 2015, it was found that even 52% of
activism by AIFs relates to improving corporate governance of the portfolio companies, i.e. to the
passive form of activism [AIMA, Simmons&Simmons, 2015, p. 31].
A hostile takeover is a notorious notion often connected with the investment techniques of AIFs,
especially of hedge funds. However, available data shows that AIFs predominantly use non-hostile
types of actions in order to gain corporate control in portfolio companies [AIMA,
Simmons&Simmons, 2015, pp. 37-39; Brav, Jiang, Partnoy, Thomas, 2015, p. 273]. It confirms
the findings that AIFs use similar activist methods as traditional institutional investors. Thus, they
rather seek to influence the corporate governance through constructive methods (such as making
formal shareholder proposals, informal influence on management board, being represented in the
management and supervisory board and other), than employing aggressive methods (such as
takeover of the company, litigation against the company or its directors and others).
It is often discussed whether shareholder activism by AIFs represents a positive or negative impact
on portfolio companies and other shareholders. There are many studies which measure impact of
shareholders activism on target companies. The most frequent criteria used for analysis are short
and long-term reactions of stock market on shareholders activism, successfulness of shareholders
proposals, and influence on the management board.
Available academic literature supports the findings that active AIFs create values for other
shareholders [Brav, Jiang, Kim, 2012, p. 208; Becht, Franks, Mayer, Rossi, 2015, p. 246]. Some
authors argue that active AIFs improve corporate governance of the target companies and
especially that their presence influences the CEOs whose compensation usually drops and becomes
more tied with the performance results [Brav, Jiang, Partnoy, Thomas, 2015, p. 298]. It is
considered that management boards start improving the corporate governance of the target
company as soon as upon announcement of the investment.

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Available data demonstrates that activism by AIFs regularly achieves short -term abnormal price
returns in the shares of target companies [Brav, Jiang, Partnoy, Thomas, 2015, p. 286; AIMA,
Simmons&Simmons, 2015, p. 48]. However, reasons for such a reaction are not clear. In the ideal
scenario, a positive market reaction would be due to the expectations that AIFs shall add the
company value by improving the company management. It can also be a sign to other investors
that AIF detected an undervalued company worth of investing. As such it can bring additional
value to the shareholders of the target company, but without long-term positive activism of the
AIF in the company; the positive return is short-term and it affects the shareholders but not the
company.
It is much less clear whether company performance improves in long-term period after the AIFs
investment. There are mixed results regarding this issue [Coffee, 2015, p. 697]. AIFs as active
shareholders can contribute to the welfare of the company only if they act in the interest of the
company and not in the interest of their investment solely. Some AIFs are known to enter the
company with the goal to strip the company from its assets, thus maximizing their immediate
profit, but seriously damaging the company in the long term [Seretakis, 2013, p. 216]. Thus, it is
understandable that AIFs raise justifiable concerns, especially for the management boards who
should act in the best interest of the company and not individual invest benefit.
To conclude, although activism by AIFs obviously raises certain concerns, the overall view in the
academic literature towards AIFs as active shareholders is positive. Furthermore, there is a study
that shows that even among the AIFs, those who employ strategy of the active shareholder achieve
larger average annual return than passive AIFs [Clifford, 2008, p. 325]. Finally, the success rate
for active AIFs is very high. AIFs achieve their goal as active shareholders in around 60% of cases
[Klein, Zur, 2006, p. 30-31; AIMA, Simmons&Simmons, 2015, p. 33].

3. REGULATION OF AIFs UNDER CROATIAN LAW

Croatian AIFs have recently been regulated in line with global trends. That was done by the
Alternative Investment Funds Act from 2013, which was amended on 11 December 2014 (further
in text: AIF Act) with the aim to further harmonize Croatian law with the Alternative Investment
Fund Managers Directive (further in text: AIFMD). According to AIF Act (art. 3/2), AIF is an
investment fund established for the purpose of raising capital through a public or private offering
and investing this capital in different types of assets in accordance with a predefined investment
strategy and objective, but to the exclusive benefit of unit-holders in the AIF concerned. An AIF
may be an open-ended (separate pool of assets, without legal personality) and a closed-ended
investment fund (a legal person established in the form of a PLLC or a LLC). AIF with private
offering may be of any kind, in accordance with Croatian laws and regulations, including, but not
limited to, basic AIF and special kinds of AIF, such as private equity, venture capital, real-estate,
fund of funds, specialized AIFs, hedge funds, EuVECA and EuSEF. There are also several AIFs
established during 2010 as funds for economic cooperation (fond za gospodarsku suradnju) in
cooperation with the state, which basically function as private equity funds.
In order to fully understand the Croatian state of play regarding the AIF market, it is also important
to note that Croatia provides a different regime for (i) AIFMs when the cumulative AIFs under
management fall below the threshold of EUR 100 million; and (ii) AIFMs that manage only
unleveraged AIFs that do not grant investors redemption rights for 5 years and when the
cumulative AIFs under management fall below a threshold of EUR 500 million [art. 5/1 of AIF
Act]. In comparison to many other EU Member states this actually means that only one Croatian
AIFM, which manages only one AIF (with private offering and has only 2 investors), falls within

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the full scope of regulation under AIMFD. All other Croatian AIFs are well below the threshold
from AIFMD. However, even small AIFMs, which fall out of the scope of the AIFMD, are
regulated and supervised in Croatia.

4. ACTIVE SHAREHOLDERS POSSIBILITIES UNDER CROATIAN LAW

Croatian companies are regulated by the Croatian Companies Act (further in text: CA). Position
of shareholders is determined by the CA, thus authors shall analyze which mechanisms AIFs can
employ as shareholders in Croatian companies. As already stated, the focus in this article is put on
PLLCs where authors make no distinction whether these companies are listed or not, and LLCs
are often related as private companies.

4.1. Active shareholders in public limited liability companies

Generally, shareholders rights in PLLCs (dion o dru tvo) are divided into management and
property rights [Barb , 2010, p. 521]. Management rights provide basic tools for active
shareholders. Those of particular interest are shareholders rights to participate in general meeting
of the company and taking part in discussions, amending the agenda of the general meeting,
making formal shareholders sals on the general meeting, and voting rights.
The general meeting is a central place for shareholders to exercise their rights and to influence the
management of the company. The CA in art. 274/1 explicitly provides that shareholders have the
right to participate in the general meeting of the company. Authors emphasize the right of the
shareholders to request the management board to convene the general meeting. This right is even
given to the minority shareholders who hold 5% of share capital or less (if the lower limit is set in
the statute of the company) [art. 278/1 of CA]. Thus, if an activist shareholder holds at least 5% of
share capital, it shall be able to convene the general meeting. It is self-understood that once the
general meeting is convened, shareholders have the right to partake in discussions regarding
various decisions on agenda linovi -Herc, Has , p. 51].
Also, shareholders have the right to propose and amend the agenda of the general meeting. The
CA gave this right to minority shareholders as well [art. 278/2 of CA]. When making a proposal,
shareholders must accompany it with explanations and a proposal of the decision. It is possible for
activist shareholders to simultaneously request the convening of the general meeting and to
propose the agenda of what should be discussed [Barb , 2010, p. 1091]. The significance of this
right is clear as the CA in article 280/4 provides that general meeting cannot discuss issues which
are not put on the agenda of the general meeting.
Further, active shareholders have the right to make formal shareholders proposals regarding the
decisions discussed, either before the general meeting is convened or at the general meeting [art.
282/1 of CA]. It actually means that the shareholder who makes the proposal calls for a different
decision than the one suggested (usually) by the management board. Shareholders proposals are
an important tool given to shareholders in order to influence the management of the company. Of
course, whether a proposal shall be accepted depends on the voting of the shareholders at the
general meeting. Such proposals should be viewed as constructive for the company, but there is a
very interesting finding that stock market reacts negatively when a shareholde proposal occurs
[Cziraki, Renneboog, Szilagyi, 2015, p. 139]. The reasons are that it raises concerns for the
company performance and existence of corporate governance issues.
The right to vote is the fundamental right of each shareholder. Every share gives to its shareholder
the right to vote at the general meeting [art 169/1 of CA], except preferred shares without the
voting right [art 169/2 of CA]. Voting rights are tied with the amount of share capital which a

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shareholder has invested into the company [Barb , 2010, p. 545]. Although voting for or against
the proposed decision at the general meeting is a passive form of activism, it can be a strong tool
to influence the corporate governance of the company, especially if the shareholder holds a
majority block of shares. Authors acknowledge various mechanisms which active shareholders
can employ in order to gather necessary votes such as shareholder agreements, empty voting and
other.
Shareholders have the right to choose the supervisory board in a two-tier [art. 256/1 of CA], and
non-executive managers in a one-tier system [art. 272.c/1 of CA]. The election is usually done at
the general meeting. However, certain shareholders can have the right to directly choose up to a
third of members of the supervisory board [art. 256/3 and art. 272.c/1 of CA]. Further, as the
supervisory board chooses the members of the management board/executive officers [art. 244/1
and art. 272.l/1 of CA], shareholders can influence the choice of managers as well. By having this
right, active shareholders can more effectively monitor the business performance of the company
and indirectly influence its management.
To conclude, AIFs as active shareholders in Croatian PLLCs can use various mechanisms in order
to influence the corporate governance of the company. These mechanisms are in line with
comparative solutions, especially with company laws of other EU Member States.

4.2. Active shareholders in limited liability companies

Croatian LLCs (dru tvo s ogran nom odgovorno u) equity instruments cannot be listed on the
stock-exchange market. Their investors do not have a share but a unit which gives them
similar rights as shares do to shareholders. Authors shall refer to them as unitholders.
Unitholders rights resemble the ones described for shareholders. However, there are some
fundamental differences. They primarily stem from the basic features of the LLCs, which are
construed as companies with simpler and more elastic organizational structure, and some basic
unitholders rights are left to autonomous regulation within the company. A crucial difference is
that organs of the company are in a hierarchy, where the general meeting and thus the unitholders
are at the top [Barb , 2013, p. 7]. Bearing this in mind, authors shall further discuss the most
relevant management rights for AIFs, whichare active shareholders.
Unitholders as shareholders have the right to participate at the general meeting and to partake in
discussions. Decisions can be made in writing, even without convening the general meeting if all
unitholders give their consent to such a modus of deciding [art 440/1 of CA]. This speaks of less
formal requirements in functioning of general meetings. The biggest difference is that the general
meeting is the first in the hierarchy of organs. This means that the unitholders decision brought at
the general meeting is binding for the management board [art. 427/1 of CA]. In other words, AIFs
as unitholders can directly influence the management board by making obligatory decisions, at
least those who fall under the jurisdiction of the general meeting.
The voting rights of unitholders are arranged differently than those of shareholders. Every 200.00
Croatian kuna of ground capital gives the right to one vote [art. 445/2 of CA]. However, voting
rights can be organized differently, providing that each unitholder has at least one vote and that
such an arrangement is provided in the memorandum of association [art. 445/3 of CA]. In other
words, AIF as a unitholder can negotiate for higher voting rights, for veto power or other
privileges, even as a minority unitholder [Barb , 2013, p. 267].
After 2012, Croatian legislature introduced the simple LLC as a subcategory of the LLC. Even
though there are some differences, unitholders can employ the same techniques to actively
influence the corporate governance as in the LLCs.

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To conclude, AIFs as unitholders can have an easier access to the management of the company
and the influence on the management board can be done with less formal requirements. Also, there
is no risk of negative perception by the public if for e.g. AIF makes a formal shareholder proposal
at the general meeting. The main advantage is that there is a higher degree of autonomy where
AIFs can bargain for a better position within the company.

5. CROATIAN AIFs AS SHAREHOLDERS

According to the publicly available data on the website of the Croatian Financial Supervisory
Agency (September 2016), the Croatian AIF market consists of 14 AIFMs who manage 30 AIFs.
Authors conducted research among AIFMs by compiling a questionnaire. Questions were divided
into 5 groups: choice of portfolio company, modus of entering, activism in the company, time
period of investments, and exit strategies. Research was limited to equity investments, excluding
the influence which AIF can exercise through derivative positions, share loan agreements, empty
voting, and other techniques.
Out of 12 received answers, 2 were not taken into account as the AIFs invested in bonds only, and
additional 2 because the answers did not concern the AIFs under management but rather a general
standpoint of the managers in question. Thus, the final sample consisted of 8 answered
questionnaires, which covered around 50% of AIFs in Croatia who invest in equity.
In choosing the target company, AIFMs were asked about the most important risks of investment
they were taking into account before investing. Among various risks offered, in the first place is
the risk that the management board of the target company is not a good team. All AIFMs chose
this risk, which loudly speaks of its importance. The risk of inadequate exit strategy came in the
second place. The first two are followed closely by the risk of loss of the entire investment, risk of
competition, risk that the company will fail to adapt its idea to the market, risk of transparency and
accuracy of information and financial reports of the target company, risk of change of the legal
and tax system, risk of change of circumstances on global, regional and local market and other.
As for the modus of entering, AIFMs were asked about the threshold of equity investment. 5 of
them answered that their AIFs remain minority shareholders in the portfolio company. These funds
are careful not to cross the threshold for takeover of the company (25% plus one voting shares).
The remaining two declared that they prefer the position of majority shareholders (venture capital
funds), while one answered that it depends on the particular company. This result is in line with
the comparative findings elaborated earlier in the text.
AIFMs were questioned what legal form of portfolio companies they prefer. Only one answered
that LLCs are preferable as a portfolio company, regardless of its more simple structure that allows
more bargaining freedom to its unitholders. Thus, Croatian AIFMs dominantly opted for PLLCs
as their portfolio companies.
Regarding the perception of investment, all AIFMs answered that both the management boards
and the shareholders of target companies view the entering of AIFs in the company as being
positive. One AIFM even emphasized that they do not invest in the company if it is viewed
negatively by other shareholders and management boards. Thus, Croatian AIFMs do not use a
hostile approach in entering a company.
As to the activism, 7 of 8 AIFMs reported at least some form of influence which they exercise in
portfolio companies. All 7 reported that they consider that AIFs as shareholders should have an
active role in the companies in which they invest. The main reasons for activism are the protection
of investment and interest of the investors of AIFs. Some of them mentioned the improvement of
corporate governance and influence on important business decisions of portfolio companies as

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goals, which means that managers view activism as a tool for gaining some degree of control in
the portfolio company. AIFMs were offered a selection of actions typical for active shareholders.
Authors analyzed their answers in the following table.

Table 1: Activism by Croatian AIFM

Nomination/selection of members of the supervisory board 87,5 %
Personal attendance in portfolio companies 87,5 %
Telephone conversations with the management of portfolio companies 87,5 %
Forming business strategies of portfolio companies 75 %
Business monitoring of portfolio companies 75 %
Nomination of members of the management board 62,5 %
Support in managing portfolio companies 62,5 %
Recommendations in selection of the management 62,5 %
Making formal shareholders sals at the general meeting 62,5 %
Help with acquiring financial means 62,5 %
Giving financial support to portfolio companies 37,5 %

Importantly, all 7 active AIFMs highlighted the importance of their representation in the
supervisory board. In relation to their right to make formal shareholders proposals, some even
pointed out that they avoid situations in which that would be necessary, as their goal is to achieve
influence through the supervisory board. Needless to say, if AIFMs are represented in the
supervisory board, they can directly influence the election of the management board, which
represents the highest form of influence on the management of the portfolio company.
When influencing the nomination of members of the management board, 62.5% answered that it
is important to select an expert from the field of business of the portfolio company. Interestingly,
one answered they would opt for a financial expert, while one for a cross-sector expert who could
cast a new perspective on the management of the company. As to the time period of investment, it
is often emphasized that while traditional investors aim towards long-term, AIFs prefer short-term
investments. However, recent studies show that the average time period of investment for AIFs in
portfolio company is two years [AIMA, Simmons&Simmons, 2015, p. 40]. Croatian AIFMs
declared that their period of investment ranges from 3 to 7 years. This demonstrates that Croatian
AIFs have even longer time periods of investment that on the comparative level. For private equity
funds comparative data show that the time period of investment is much longer, ranging from 5 to
even 10 years [Kaplan, St mberg, 2015, p. 499]. Croatian private equity funds follow this trend,
as their managers report that the time period of investments is on average between 5 and 7 years.
AIFMs were questioned if they have some predefined mechanisms to protect their interest if during
the investment the portfolio company fails to achieve business objectives. Only 4 AIFMs answered
confirmatively. There are three main mechanisms equally represented. These are the change of
management of the portfolio company, higher influence on the business strategy of the
management, and earlier exit from the investment. As for the exit strategy, 87.5 % of AIFMs
reported the sale of shares privately or in the open market as their exit strategy. This is in line with
the comparative study that shows that the sale of shares in the open market forms almost two-
thirds of AIFs exits [AIMA, Simmons&Simmons, 2015, p. 41]. Only one AIFM reported
liquidation and one AIFM reported division/merger of the portfolio company as an exit strategy.
To conclude, Croatian AIFMs, which participated in this research, showed a high degree of
shareholders activism. Even 7 out of 8 declared some type of activism in the portfolio company.

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However, authors highlight that these results should be interpreted in light of the fact that 5 out of
8 analyzed questionnaires belong to AIFMs who govern private equity/venture capital funds,
which are known for their active involvement in portfolio companies. Interestingly, the prevailing
opinion of the practice and of public perception is that Croatian AIFs are usually passive
shareholders. In this regard, the results of this research are somewhat surprising. To interpret them
correctly one should bear in mind that this research covered only around half of equity investments
by Croatian AIFs, and that within that half most of them fall into the category of private
equity/venture capital funds industry, which is by default known for a high degree of shareholders
activism.

6. CONCLUSION
In this article, authors contributed to the comparative studies of AIF activism in portfolio
companies by conducting research among the Croatian AIFMs. As to the authors knowledge, it
is the first research of this type in Croatia. Comparative studies repeatedly report that AIFs are
significantly the more active shareholders in portfolio companies than traditional institutional
investors. According to this research, Croatian AIFs follow this trend. The majority of AIFs are
careful not to cross the threshold for takeover of the company, but nevertheless employ
mechanisms of influence. Statistically speaking, investments are predominately made in PLLCs.
As to the types of actions, Croatian AIFs reported a passive or a rather traditional form of
activism. The most important tool Croatian AIFs use is the nomination/selection of the members
of the supervisory board. Through that, AIFs can actively control and directly influence the
management of the portfolio company, especially by election of the management board. A direct
access to the management of the company renders other shareholders mechanisms as rather
superfluous, such as convening the general meeting, amending the agenda, shareholders proposals
and other. It seems that Croatian AIFs have even longer time periods of investment that on the
comparative level, excluding private equity funds. As this research did not analyze long-term
consequences of AIFs activism, it is difficult to say whether activist mechanisms employed by
Croatian AIFs represent a good example of corporate governance. It is clear that AIFMs view
active involvement in portfolio companies from the aspect of protecting the interest of their
investors, however, it is indicating that some AIFMs reported that in the case that a portfolio
company is not doing well, they would try to influence the business strategy and management of
the company. Presumably, they would do so in order to improve the company welfare, which
would have a positive effect on both the company and shareholders. This would certainly be the
case where the interests of AIF (on the one hand) and the company and shareholders (on the other)
are aligned. Other scenarios may create more complex situations. Complexity arises from the fact
that AIF as a shareholder has the duty to act in favor of the portfolio company, while at the same
time it has a legal obligation to act in the interest of AIFs investors.

ACKNOWLEDGEMENT:
1. This paper has been supported in part by the Croatian Science Foundation project no. 9366
egal Aspects of Corporate Acquisitions and Knowledge Driven Companies Restructuring and
in part by the University of Rijeka project no. 13.08.1.2.01 Protection of beneficiary on the
Croatian and European financial services market
2. The views and opinions of the author expressed in this article are personal views and opinions
of the author and do not reflect the views of the Croatian Financial Services Supervisory Agency.

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