What Do Vulture Funds Do ?

Countries and companies are in turmoil all the time. When entities are close to financial distress, the normal tendency of investors is to flee. Common investors think that no more money can be made when an asset is about to hit rock bottom. This is not the case with vulture funds that are markedly different.

As the name disturbingly suggests, vulture funds feed on the sick and dying companies. Instead of selling out when companies near bankruptcy, vulture funds buy into such companies. When everybody is selling, the price of the shares tends to get irrationally low because of the fear which is prevalent on Wall Street. This is when the vulture funds buy in.

Vulture funds are experts at complicated legal processes. Once they get hold of a debt for cents on the dollar, they try to maximize their payout. They do so by suing the bankrupt companies or countries who owe them money. Vulture funds are like the exact opposite of a venture capital fund. Venture capital funds make money by bringing a company into existence whereas vulture funds make money by taking a company out of existence.

Strategies

Some of the common strategies that are used by vulture funds are as follows:

• Forced Takeover: Vulture funds may acquire substantial equity in a sick company. They then become a controlling shareholder and start taking bad loss making decisions. These decisions trigger a sell off and other shareholders want to exit the company at whatever price they can obtain. When people are selling and exiting and throwaway prices, vulture funds are the ones that are actually buying the stock being sold. Within some time, vulture funds end up with almost 100% of the company. The price that they pay for such acquisition is very low because of the panic that they caused. They then tend to run these businesses successfully earning astronomical returns from their cheaply acquired investments.

• Overseas Asset Takeover: Vulture funds have wealthy and influential shareholders. Therefore, they tend to have a lot of political clout and can influence international matters. One of the strategies followed by vulture funds is to sue the government or company in the international courts. They attach properties which are owned by the defaulting entities overseas. Their political clout allows them to take possession of and sell these properties to recover their dues.

• Restructuring the Debt: Vulture funds can also have a detrimental effect on the value of other investments. They are known to provide desperate borrowers with last minute deals. However, these deals come with conditions that allow them to have the first claim on the assets of the company in the event of a takeover. Such debt restricting allows vulture funds to recoup their own investments along with handsome returns even though the other investors will not see a dime of their money back!

• Liquidation Arbitrage: Vulture funds like to push down the value of companies so low that they are selling at a discount. They then buy into this company and sell its asset on a piecemeal basis. For instance, if a company has land worth $100 on its books, vulture funds will cause panic and bring down the value to $60. Then they will buy the company for $60, sell the land for $100 and make $40 by simply liquidating the company.

Providing Liquidity

Vulture funds are bottom feeders. However, they do exist because they provide a service. They lend money to entities which have almost no chance of a financial recovery. Since they face such a high risk, they also demand high compensations. This liquidity is critical to postponing or averting crisis. Consider the case of Greece and the Eurozone now. Almost, nobody is buying the bonds issued by the sick governments apart from vulture funds. Therefore, despite all their evils, they do provide a much needed service.

Predatory Behavior

Vulture funds are equivalent to loan sharks from the medieval ages. They don’t really care about anybody apart from themselves. They have been under severe criticism for wrecking companies, wrecking communities and even wrecking fellow investors. The normal business process followed by vulture funds is full of litigations. They either sue other people for money or they get sued for their high handed and predatory behavior.

Irresponsible Lending

Vulture funds often work in collusion with dictators. They would lend out money to a person like Zimbabwean President Robert Mungabe. Even though Mungabe is a head of state, he is known to be corrupt. Vulture funds will lend money to him for his personal lavish expenditures. However, the repayments will be owed back by the poor people of Zimbabwe. Often the repayments will be secured by basic necessities like water supply and school system in these countries. If they are unable to recover their money, vulture funds will leave no stone unturned. This usually means debilitating poverty and indebtedness for the people.

The problem in this whole episode is that vulture funds knew they were making bad investments but continued the irresponsible lending anyway.