Vulture Funds: The Name Says It All
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.
Some of the common strategies that are used by vulture funds are as follows:
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.
Vulture funds are equivalent to loan sharks from the medieval ages. They donít 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.
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.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.