Pressured by the need to be financially creative in Poland's anemic capital markets, venture capitalists are beginning to offer mezzanine financing along with their traditional equity-only investments.
Mezzanine financing is usually a high-risk, high-yield form of short-term debt lent to young, cash-rich companies planning to go public. Investors bundle mezzanine debt with an equity investment to offer an extra yield kick to risky transactions.
Poland-focused investment houses have usually given the financial instrument short shrift. But in light of Poland's maturing capital markets, and the need to exact more cash from sometimes unstable investments, investors are beginning to consider mezzanine debt.
"People are starting to make mezzanine investments," said Janusz Heath, the London-based managing director and head of Central and Eastern Europe private equity at Dresdner Kleinwort Wasserstein (DWK).
He said that it offers private equity firms an alternative to pure equity investments, and it can help spread some of the risk associated with giving cash to earlier stage companies.
"Less capital has to be committed for the equity (component)," Heath said. He added that DKW now provides mezzanine financial tools - a business he expects to increase.
Investors are taking notice of the benefits. "Actually this is something we do not provide, but we are thinking about," said Tomasz Pietka, the managing director of bmp Polska. "As we see it, the Polish market is becoming more mature. We are trying to keep (up) with the market."
June Mezzanine Management, a European investment house, completed the first closing on a €76 million mezzanine fund that will focus exclusively on Central Europe. U.S. and European banks, including the European Bank for Reconstruction and Development, have invested in Mezzanine Management's fund.
But for all the interest, many venture capital investors cannot shift their investment strategies on the fly.
"We do consider it, but we would have to ask our investors first," said Richard Engel, the president of European Convergence Partners.
Private equity funds sign agreements with investors stating their investment strategy. Funds contemplating shifting gears would have to revamp those agreements and get a thumbs-up from all investors.
The weak private equity funding environment in Poland could push financiers to do just that - out of necessity.
"I would say that there is more creativity these days," Engel said, explaining that venture investors need to keep dreaming up new ways of operating in Poland's fledgling private equity market to balance risk as well as to attract the better quality investments.
