Definition
A vulture capitalist is an investor who acquires distressed firms in the hopes of making a profit. These investors target companies that are in financial or operational trouble, bankrupt, or are towards the end of their lifecycle. They invest in these firms with the goal to turn the business around or to profit from its liquidation.
Phonetic
The phonetic pronunciation of “Vulture Capitalist” is: “Vuhl-chur Kap-i-tuh-list”
Key Takeaways
- Vulture capitalist is a term used to describe investors that seek out companies or assets that are in desperate situations or on the brink of collapse. The main target of these investors are companies with undervalued assets.
- These investors earn a profit by buying these distressed companies at low prices, restructuring them and then selling the revamped businesses at a profit. This can often lead to job losses and restructuring of the company.
- Despite the negative connotation of the term, vulture capitalists can provide a lifeline to businesses that are struggling to survive on their own. However, their focus is mainly on their own profit margin, rather than the long-term future of the company they are buying.
Importance
The term Vulture Capitalist is significant in the business and finance field as it refers to a type of investor who specifically targets distressed firms or businesses in the brink of bankruptcy with the intent of buying them at a low cost. They aim to profit by either turning the company’s financial situation around or selling off its assets. While this term often carries a negative connotation due to the perceived opportunistic behavior of such investors, they can also play a crucial role in the market by providing liquidity to underperforming businesses that could otherwise face imminent closure. Moreover, their actions can lead to more efficient resource allocation in the market by shifting assets from less successful to more successful firms.
Explanation
Vulture capitalism is a type of venture capitalism where investors and firms seek troubled businesses with assets deemed valuable. The purpose of this investment style is to identify companies that are stressed financially, to control or buy them at a highly discounted price, and then to make efforts to turn these businesses around, or in some cases, sell their profitable portions. The term “vulture” may carry negative connotations, but its purport is the potential benefits that can be derived from businesses in financial distress.In the economic ecosystem, vulture capitalists serve a crucial purpose by injecting capital into distressed businesses for restructuring, which could potentially lead to their survival, economic stability and eventual growth. These investors take on significant risks in purchasing distressed assets, often involving complex legal processes and the potential for large financial losses if the businesses do not recover. Besides, their approach could result in the salvage of jobs and preservation of economic value which might otherwise be entirely lost.
Examples
1. Wilbur Ross: Known as “King of Bankruptcy” , famed investor Wilbur Ross made a name for himself by buying out struggling companies at a severe discount. For instance, after the financial crisis of 2008, Ross acquired numerous assets in the mortgage market and of struggling banks, notably BankUnited, which he later sold for substantial profits. 2. Carl Icahn: Icahn is one of the most famous vulture capitalists. He has a history of buying significant stakes in struggling companies, and then persuading management to undertake major changes to increase shareholder value. A notable example was when in 1985, he took over Trans World Airlines (TWA), stripped it of its assets to repay the money he borrowed to buy the company and then took it into bankruptcy. 3. Cerberus Capital Management: Cerberus, named after the mythical three-headed dog guarding the gates of Hades, is a private investment firm. A notable example of their vulture capitalist activities came in the mid-2000s when they bought a controlling stake in Chrysler when it was near bankruptcy. Cerberus couldn’t restore the auto company to profitability and let it go bankrupt, wiping out its investments, but not before it sold some of Chrysler’s more profitable assets.
Frequently Asked Questions(FAQ)
What is a Vulture Capitalist?
A Vulture Capitalist is an investor who buys the stocks and other assets of struggling or bankrupt companies at low prices with the aim of making a significant profit when the company recovers. They specialize in high-risk investments.
Why are they referred to as ‘Vulture’ Capitalists?
They are referred to as vulture capitalists due to their aggressive approach and the nature of their business, which often involves preying on the misfortune of failing businesses much like vultures with their prey in the wild.
Are Vulture Capitalists bad for the economy?
This is subjective and depends on perspective. Vulture Capitalists can be seen as providing a benefit by buying and potentially reviving failing businesses. On the other hand, critics argue that they can prevent a more systematic and orderly process of handling bankruptcies and debt restructurings.
How do Vulture Capitalists make a profit?
Vulture Capitalists make a profit when they succeed in turning around the fortunes of the distressed companies they’ve invested in, or when those companies’ assets are sold off.
What types of companies do Vulture Capitalists invest in?
Vulture Capitalists often invest in companies that are financially struggling, in the process of bankruptcy, or in industries that are declining.
What is the difference between a Vulture Capitalist and a Venture Capitalist?
While both invest in businesses, the key difference lies in the status of the companies they invest in. Venture Capitalists typically invest in start-ups and growing companies with high potential, while Vulture Capitalists invest in companies that are in financial distress or going through bankruptcy.
What are the risks involved for Vulture Capitalists?
The primary risk for Vulture Capitalists is that the distressed companies they invest in may not return to profitability, resulting in a loss on their investment.
Can any investor become a Vulture Capitalist?
While technically anyone can attempt to invest in distressed companies, doing so successfully often requires significant financial resources, a high risk tolerance, extensive due diligence and a deep understanding of company valuation and the bankruptcy process.
Related Finance Terms
- Distressed Securities
- Private Equity
- Risk Arbitrage
- Junk Bonds
- Bankruptcy
Sources for More Information
