Today there are so many funds that it can be very confusing. Fixed income funds, equity funds, money funds, mixed funds, even funds of funds! But there is one that can be very curious because of its name: The vulture fund. What is a vulture background? How does it work?
If you want to know the answers to these questions, I recommend that you keep reading. We will explain what a vulture fund is, how it works and which ones are in Spain. In addition, we will comment on his modus operandi during the 2008 crisis, so that you can get a better idea of his way of working.
Why is it called a vulture fund?
To understand the name of these funds, we will first explain what a vulture fund is. These are economic organizations of free investment or venture capital that acquire those debt securities of companies that have a very compromised solvency, but also of States that are on the verge of bankruptcy. That is to say: Basically they are capital or investment funds of high risk whose objective is to buy debt securities, whether public and private, of companies or of countries that are in very serious problems. They are generally between 20% and 30% below their nominal value.
Its original name is English, «vulture fund», which literally means «vulture fund». Vultures are raptors that feed primarily on carrion. Do you see the similarity? Both the vulture funds and these animals take advantage of the remains, hence they have this name. Furthermore, these funds are also known as 'holdouts'. However, this term is actually used to refer to bondholders. These may have been acquired as part of an investment strategy and generally do not agree to participate in debt restructurings. Instead they prefer to initiate a lawsuit through the courts.
It remains to be noted that the vulture funds they tend to have very extensive knowledge of the markets they intend to enter. In addition, they are generally made up of large and professional teams, both lawyers and specialists in business restructuring processes.
How does the vulture fund work?
Now we know what a vulture fund is, but how do they work? What do they do with those acquired debts? Once you have purchased the titles that we have mentioned above, the vulture funds do their best to collect the full value of these debts. Apart from this, they add up the interest for all the years that they have owed. When they carry out this type of operation, they do not take into account takedowns or restructuring.
Vulture funds have specialists whose objective is to find markets that are in a very bad economic situation. These professionals have a lot of experience and know perfectly how the restructuring processes of companies work. Once they manage to buy assets at the lowest possible price, they try to sell them in the short or medium term at a much higher price than they paid to acquire them. As can be expected, the benefits they obtain are very large.
There are some countries that have come to criticize this type of operation a lot. As vulture funds generate profitability at the expense of debts of countries or companies that are in a very difficult situation, on the verge of bankruptcy, and then sell it for a much higher price to the highest bidder, they consider it unethical.
Spain and the vulture funds
In 2008 a very important economic crisis took place. It was then that the vulture funds became very important in Spain. By then, they massively bought various mortgage loans. Their modus operandi was based on buying the debt from the bank and subsequently pressuring the debtor in order to recover the full debt they had acquired. As a consequence, the debtor, who already had a debt with the bank and probably a bad economic situation, could not assume this debt. At that time, the vulture funds proceeded to denounce and thus initiate the foreclosure process.
It is especially in Spain where the vulture funds are focused on buying mainly mortgages, companies and bank debts. Among the best known in Spanish territory are Cerberus, Lone Star and Blackstone. But how much money can these funds handle? Well, the volume of money they mobilize can easily reach hundreds of billions of euros.
If we are faced with the claim of a vulture fund, the first thing we must do to ensure that it is the true creditor. If so, we can try to negotiate with him. Generally, this is easier than negotiating with the banks themselves.
I hope I have clarified all your doubts about the vulture funds and its methodology. They are entities that must be treated with great care and always reading the fine print.