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Vulture capitalists are investors that acquire distressed firms in the hopes of making them more profitable and selling them for a profit, or purchase discounted debt on secondary markets in order to turn a profit.
Due to how vulture capitalist make firms more profitable, and their aggressive investing nature, vulture capitalists are often criticized.
Venture vs. Vulture Capitalist
A venture capitalist is an investor who provides funding for start-ups, early stage firms and companies with growth potential. These types of firms seek out venture capitalists, as they are too small or too new to have credit profiles, making them ineligible for bank loans and other forms of raising capital.
Although risky, venture capitalists invest in firms as there are very lucrative returns on their investments when the company they are investing in is successful. Furthermore, venture capitalists will often invest in a range of firms rather than just one or two, in order to mitigate risks if the investments are unsuccessful.
On the other hand, vulture capitalists are a type of venture capitalist, which provide a final attempt at gaining funding. Whereas venture capitalists seek firms with growth potential, vulture capitalists seek firms where costs can be cut in order to increase profits. Most often, these firms are distressed and on the brink of bankruptcy. Due to this reason, vulture capitalists are able to buy these firms for very low prices.
Once the firm is acquired, vulture capitalists cut-down costs wherever possible, which often means firing workers and cutting benefits. With reduced costs, the firm becomes more profitable, raising share price, giving investors profit. Lastly, the vulture capitalists sell any equity they own, allowing for more profit to be made.
Criticisms of Vulture Capitalists
Vulture capitalists receive a lot of criticism as they often go for firms that are in very poor shape, meaning these firms are unable to secure capital from banks or even venture capitalists as they are too risky of an investment. Due to this, vulture capitalists are able to acquire the firms for prices that are way below the actual market value price.
Once vulture capitalists acquire a firm, they often fire workers to reduce costs, in order to raise profitability for their own gain. Vulture capitalists are criticized for this as the newly unemployed people put pressure on the social system through needing unemployment benefits, which comes from taxpayers’ money. Meanwhile, vulture capitalists pay only 15% tax on their profits. In other words, while vulture capitalists reap in the rewards, they put more pressure on the social system.
Due to these reasons, venture capitalists can be accused of being a vulture capitalist, or vulture for short, depending on how they conduct their business. In this sense, vulture capitalist is used as a derogatory word for venture capitalists, as the vulture capitalists are considered to be preying on firms in distress for their own profit.
Vulture funds are one of the ways that vulture capitalists work. These funds are a type of hedge fund that purchase secondary market debt for a fraction of the price the debt is worth. Once purchased, the vulture capitalists in the fund will file a lawsuit against the original owner of the debt for the full amount as well as interest.
These funds are notorious for seeking out countries with very high level of debts that are on the brink of defaulting and have very little or no stability.
Vulture Funds Peru
In 1996, Peru defaulted on their debt. The same year, vulture capitalist Paul Singer purchased a portion of the debt for $11.4 million through his vulture firm Elliot Management and sued Peru for full repayment of the debt.
Vulture Funds Argentina
In December 2001, Argentina defaulted on their national debt of $93 billion. After debt restructuring, 93% of debt holders accepted the payment of roughly a third of the value they were originally owed.
Paul Singer's vulture fund, Elliott Management, purchased some of the debt at a reduced price, but did not accept the payment from the debt restructuring. Singer then sued Argentina in the Supreme Court of the United States for nearly a decade, in order to make sure that his vulture fund would get paid before the other debt holders. Due to not being able to pay bond holders before the vulture fund, Argentina was forced to default again in 2014 as it couldn't afford to pay the hedge fund, hence preventing Argentina from also paying the bond holders.
On June 6, 2014, Paul Singer defeated Argentina in the Supreme Court of the United States. The Supreme Court ruled in Paul Singer's favor, granting his hedge fund, Elliott Management, access to Argentina's bank records, in order to allow for the seizure of assets in compensation of the $2.5 billion amount that Paul Singer was originally owed.
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