What is a Vulture Fund?
Vulture Funds are the type of hedge fund that invest funds in distressed companies by purchasing their bonds or securities from the secondary market at heavy discounts and on maturity, they redeem them at par or upon default, by filing a legal case for recovery of debt which in turn gives them the higher returns as compared to investing in normal risk securities.
Example of Vulture Funds
Company ABC is on the edge of bankruptcy due to loss of the case in the court, which involves massive loss to ABC Ltd., and it had taken a loan of Rs 10 billion from the bank. Bank wants to recover the loan. Bank has two options either sell off the asset, which is held as security, or sell the debt to the venture fund. Venture fund MNP researched the position of ABC Ltd, and it came to know that ABC Ltd. owns a Patent which can be sell-off in the market. MNP Venture fund approached the bank for the debt of ABC Ltd., and the bank sold it at 9 Billion. Now the Venture fund will negotiate with ABC Ltd for payment more significant than or equal to 10 Billion. In this way, Venture funds will earn a profit. In the absence of the guarantee for cost, the venture fund might file the case against ABC Ltd. or sell the patent to get his funds.
Strategies for Vulture Funds
It involves lots of strategies. Some of them are as under:
- Research about the companies on the edge of bankruptcy.
- Research about the essential assets of the company which can give them long term and high profits to the vulture fund.
- Analysis of whether the investment in the company on the edge of loss will give the profits.
- Obtain information about the loans and fixed income securities of the company on the edge of bankruptcy.
- Approach the bank for the purchase of debt or purchase the fixed income securities from the secondary market at the discounted price.
- Approach the company for settlement of dues or sell of the critical asset to recover the debt and earn the profit.
- Country Argentina defaulted in Governmental debts, i.e., fixed income securities issued by the Argentina Government due to the economic crisis in 2001. The vulture fund purchased some of the debts, and they settled it in 2016.
- A country named the Demographical Republic of Congo was in a crisis. Creditors were pressurizing the country to repay the debt. The creditor’s sell of the debt to the vulture fund called FG hemisphere vulture fund management of FG Management Ltd, an American company that filed the case against the defaulted country, got the $ 100 million as debt recovery. The debt was only purchased at $ 3 million, but it went up to $ 100 million, including interest and legal fees.
Vulture fund invests their funds into highly profitable at the same time highly risky securities or properties, some of them are as under:
- The real estate market and properties, as the market are highly volatile but highly profitable.
- Equity shares of the companies which provide the high returns.
- They also invest in the banks to purchase the loss assets.
- The funds can also invest in companies that are on the edge of bankruptcy with the assets which give long term benefits.
- The funds also invest in securities of loss-making companies in developing countries.
- It provides higher returns.
- It can earn a good profit with a lower investment.
- Vulture fund management can influence the market.
- The investment and actions for recovery are legally recognized.
- Solve the financial problems of banks or investors who invested in the loss company and purchase all debt at a time.
A vulture fund is the type of fund that invests the money into the securities of companies who are near to bankruptcy due to massive loss. It recognizes these companies through the research and invests in those companies with valuable assets at the discounted price. The fund first tries to settle with the companies if the company is unable to pay, then the fund will sell the asset or file the legal case for recovery. Recently the two countries Argentina and the Demographical Republic of Congo faced the legal issue from a vulture fund due to the inability to pay for Governmental bonds. Vulture funds usually invest in high risk-based securities to earn higher profits. It is the part of the hedge fund, but the scope of the hedge fund is the broader. The most crucial point about the vulture fund is all the process is legal.
This has been a guide to what is a vulture fund. Here we discuss examples, strategies, legacy cases, and vulture funds investment along with advantages. You may learn more about financing from the following articles –