Where the Vultures Gather
What is vulture investing?
Turkey Vulture landing. Photo: Don DeBold. Source: Wikipedia
Vulture investing is a way to profit from poor management. A vulture fund typically invests the debt of troubled firms, then seeks to convert that debt into equity. They can also invest in distressed sovereign debt, then use the courts to bring actions against the issuer to force some kind of recovery.
The phrase “vulture capital” was originally coined as a derogatory term, meant to criticize investors who profit from someone else’s financial difficulties – in the same way that vultures live off dead bodies. But the legal actions that these firms bring also bring accountability into the financial system. Often they unveil corruption or other financial shenanigans. In this way, they are like their real-life counterparts.
Scavengers serve an important role in every ecosystem. They clean up carcasses and animal remains, and appear immune to the pathogens that multiply in dead bodies. Without their strong digestive systems, carrion would become a breeding ground for all kinds of diseases. Their strong sense of smell – rare among birds – allows them to locate and dispose of corpses that would otherwise generate problems. Not surprisingly, they have few predators.
In the same way, vulture funds have an important economic function, sniffing out and cleaning up financial pathogens. Recently, vulture funds have been in the news because they’ve invested in the sovereign debt of Argentina and Puerto Rico. Without their activities, investors would be at the mercy of managers and elected leaders who often take advantage of the fact that most people don’t have the resources to force a creditor to pay.
Turkey vultures and vulture investors each serve a critical role: cleansing the system of pathogens that might otherwise infect healthy members of their communities. They’re not my cup of tea, but in their own way, they can be quite attractive.
Douglas R. Tengdin, CFA