What is a Vulture Fund?
A vulture fund is a pool of investor money that makes investments in securities from distressed issuers (usually bonds).
How Does a Vulture Fund Work?
Let's say Company XYZ has lost 75% of its customers due to a food-poisoning scandal. The stock has lost 90% of its value, and the market does not believe the company can recover. Company XYZ still owns, however, a patent on a packaging technique that could be licensed and applied in other industries. Vulture Fund ABC knows this and buys high-yield bonds in Company XYZ, betting that the value of that patent might resurrect the company or at least ensure the return of capital plus interest if the patent is sold during bankruptcy.
Vulture funds often also purchase debt from lenders. So, for instance, if Bank DEF had lended $15 million to Company XYZ and Bank DEF wants to get this debt off the books, it might sell that debt to a vulture fund, similar to how credit card companies might sell customer debts to collection agencies. The vulture fund then negotiates with Company XYZ to secure a payout greater than the vulture fund's initial investment.
Vulture funds also invest in sovereign debt, which is the debt of countries' governments. When countries are struggling, vulture funds might purchase this debt and then become heavily involved and influential in the government's restructuring.
Why Does a Vulture Fund Matter?
Vulture funds often get a bad rap for circling dying companies in the hopes of picking off the last meat on a carcass for a quick profit. However, the analogy should sometimes be more like giving CPR. Vulture funds are often the last chance companies have to come back to life, and the funds' offers to provide cash may be the last attempt these companies can make to rescuscitate themselves.
