Vulture funds are those that direct their investment economic activity to market opportunities derived from economic problems of a third party.
In the field of investment, the role of vulture funds is aimed at taking advantage of bankruptcy situations and derivatives in economic terms.
In other words, this type of investment fund manages its portfolio based on the search for investment opportunities with which to obtain high levels of profitability later.
This is the case of companies in situations of accounting bankruptcy, non-payment or even massive layoffs. Likewise, they focus their objective on market securities that are apparently undervalued but have future potential.
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Although it is usual to apply this denomination to investors who act following the above conduct, the most common practice is the development of said activity from a commercial and investment company.
Other common names for this type of venture capital companies are distressed funds or holdouts.
Basic operation of vulture funds
There are multitudes of examples in the financial day to day of how this type of capital company operates, the general scheme would follow the following points:
- Opportunity location.
- Acquisition at low prices.
- Execution of transformation processes: downsizing or sale of assets.
- Revaluation of the project.
- Future sale and achievement of profitability.
Compared to other examples of financial structure or standard investment funds, the funds known as vultures stand out for the following features:
- Debt acquisition. These funds assume debts or payment commitments from third parties with the aim of transforming their investment and obtaining returns in the future.
- Exploitation of interests. At the same time as acquiring debt, these funds have in their favor the interest generated in the market by said instrument.
- Detection of decadent projects. Where there is bankruptcy or serious problems, the vulture funds examine the possibility of refloating or generating profits. For this reason, it is important to observe and detect companies in this situation.
- Exploitation and transformation. Profitability will necessarily go through the refloating of the business project and its evolution towards a situation of profit creation (either daily or through its future sale)
- Specialization. The risk in this type of investment presupposes having highly qualified professionals in the financial environment.
Taking the above into account, the way this type of fund operates is based on the purest financial speculation.
Usually, they acquire company debt or even public debt below face value given the critical situation of said investment objectives.
Given all of the above, it is common in this operation to assume high levels of financial and business risk.
Similarly, success stories often translate into significant levels of profitability.
External view of vulture funds
By their very nature, these types of funds have a diversity of opinions in the field of investment.
Their speculative activity and detection of risk situations is often criticized, since in the future they do not usually maintain projects and templates in the long term, because they look for future sales and their translation into profits.
In this line, they are usually blamed for their short-term and interested vision of the economy and the financial field.
In this sense, economic and financial legislation in most countries has specific regulations for this type of risk investment profiles.