Vulture funds are hedge or private equity funds that involve the strategy of investing in debt. Generally, the entity that issues the vulture fund is considered to be in a weak situation, and possibly close to failure. The concept can be applied to a business enterprise that is projected to fail shortly, or can also refer to debt issued by a nation. Sometimes referred to as special situation funds or distressed debt, the idea behind this type of investment is to allow the investor to pick over the remains once the entity has failed, much in the same manner that a vulture picks over a dead carcass.
There are several reasons why investors may choose to invest in a vulture fund. As with all types of investing, the goal is to make a profit. Vulture funds tend to be available for relatively little investment, but have the advantage of giving investors access to assets that can be claimed to recoup the loss once the issuing corporation fails. Often, the value of those assets will exceed the original investment, allowing the investor to earn a return.
Another benefit of the vulture fund is that holding the investment can position the investor to make a profit if the entity undergoes an unanticipated recovery. This may take place due to a buyout of the corporation, or even a reorganization that allows the company to begin operating at a profit once more. In either case, vulture fund investors find themselves with an increased return on their original investment.
The concept of a vulture fund can also be utilized with the debt of a sovereign nation. While relatively uncommon prior to the middle of the 20th century, this approach became more viable as nations looked for ways to restructure existing debt and avoid sanctions due to unpaid balances on commercial debts. Over the years, various strategies to help convert this type of investment into something that is more likely to produce revenue for investors have been developed, with the idea of Brady bonds being a good example.
While there are still situations in which investors go with a vulture fund option with the idea of litigating the debt and picking over the assets to earn a profit, many investors have a different idea. More and more often, investors purchase the debt with an eye toward allowing the entity to recover and earn a higher return over time. At times, this may be due to expectations that changes in the economy and the consumer market will result in a drastic increase in demand for the goods and services offered by the issuer of the debt. There may also be anticipation of a takeover or buyout by a financially secure entity that will convert the vulture fund into some other type of investment that has long-term potential to generate a return.
