Vulture Capitalists: Understanding Their Tactics & Impact

A vulture capitalist is a type of investor that scavenges off distressed companies for profit, like a vulture scavenges off the dead bodies of animals. (Vulture capitalists typically receive criticism because their tactics involve the targeting of individuals and/or companies who are already experiencing financial difficulties!)

Hedge fundsHedge FundA hedge fund, an alternative investment vehicle, is a partnership where investors (accredited investors or institutional investors) pool and private equity firms are the entities that are most commonly referred to as vulture capitalists.

Summary 

• A vulture capitalist is a type of investor that scavenges off distressed companies for profit.
• Vulture capitalists are, in a sense, overtly aggressive venture capitalists, going to extreme lengths to generate profits for themselves and profits for their clients.
• Vulture capitalists are a necessary evil because they help reallocate assets where they can be used effectively.

How Does Vulture Capitalism Work?

Vulture capital is a type of venture capitalismVenture CapitalVenture capital is a form of financing that provides funds to early stage, emerging companies with high growth potential, in exchange for equity or an ownership stake. Venture capitalists take the risk of investing in startup companies, with the hope that they will earn significant returns when the companies become a success.. The vulture explores money-making opportunities, seeking out and scooping up companies that are in financial distress. (To clarify, it should be noted that traditional venture capitalists give money to startup companies with high margins for early growth and success).

Vulture capitalists are, in a sense, overtly aggressive venture capitalists, going to extreme lengths to generate profits for themselves and for their clients. One extreme or highly aggressive tactic vulture capitalists use is asset strippingAsset StrippingAsset stripping refers to the process of purchasing an undervalued company and then separately selling its assets. It is commonly done by corporate raiders. A vulture capitalist disposes of some of a company’s assets in order to give its investors better returns. Asset sales are mostly thrown at the company’s net debtNet DebtNet debt = total debt - cash. Net debt is a financial liquidity metric that measures a company’s ability to pay all its debts if they were due today. Compares a company’s total debt with its liquid assets. but are also used to distribute dividends directly to its shareholders.

Vulture capitalists are also commonly known as thieves, taking another person’s discovery/creation and claiming it as their own.

Vulture Capitalist – A Necessary Evil?

Vulture capitalists are heavily criticized because, in short, they swoop in to purchase companies that are failing. They then dissect the businesses and sell off the pieces for a significant profit. Not only does it obliterates the company, but it also leaves thousands of workers unemployed.

However, the reality is that the world relies on the presence of vulture capitalists. Many step in and purchase failing businesses with an intention to help them get back on their feet. If it is not possible, then the company is broken down, and all assets that can be disposed of are sold for a profit. But, if vulture capitalists didn’t step in to do it, what would happen?

In the case of failing businesses, the government may step in to assist. Consider the government bailouts of banks during the housing crisis of 2008. The banks received government assistance, but many taxpayers and patrons ended up losing money. It was a nationwide failure for the general public. Had vulture capitalists stepped in, the banks’ assets could have been allocated to more profitable companies.

More Resources

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• Creeping TakeoverCreeping TakeoverIn mergers and acquisitions (M&A) a Creeping Takeover, also known as Creeping Tender Offer, is the gradual purchase of the target company’s shares. The strategy of a creeping takeover is to gradually acquire shares of the target through the open market, with the goal of gaining a controlling interest.
• Friendly Takeovers vs Hostile TakeoversFriendly Takeovers vs Hostile TakeoversIn mergers and acquisitions, there is often confusion between friendly takeovers vs hostile takeovers. The difference is solely in the manner in which the company is taken over. In a friendly takeover, the target company’s board of directors approve the takeover proposal and help to implement it.
• Private Equity FundsPrivate Equity FundsPrivate equity funds are pools of capital to be invested in companies that represent an opportunity for a high rate of return. They come with a fixed
• Venture CapitalistVenture CapitalistsVenture capitalists are investors who provide financing to start-ups or small companies that are looking to expand. The beneficiary companies are usually