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Vulture Capitalist

A type of investor that scavenges off distressed companies for profit

What is a Vulture Capitalist?

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 funds and private equity firms are the entities that are most commonly referred to as vulture capitalists.

 

Vulture Capitalist

 

 

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 capitalism. 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 stripping. 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 debt 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.

 

Vultures

 

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

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Creeping Takeover
  • Friendly Takeovers vs Hostile Takeovers
  • Private Equity Funds
  • Venture Capitalist

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