Today there are so many funds that it can be very confusing. Fixed income funds, equity funds, money market funds, mixed funds, even funds of funds! But there's one that might seem particularly curious because of its name: the vulture fund. What is a vulture fund? 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 given to these funds, let's first explain what a vulture fund is. These are hedge funds or venture capital organizations that acquire debt securities from companies with very compromised solvency, as well as from states on the verge of bankruptcy. In other words, they are essentially high-risk investment funds whose objective is to buy debt securities, both public and private, from companies or countries facing serious problems. They are generally priced between 20% and 30% below their face value.
Its original name is English, "vulture fund," which literally means "vulture fund." Vultures are birds of prey that feed primarily on carrion. Do you see the similarity? Both vulture funds and these animals take advantage of the remains, hence their name. Furthermore, these funds are also known as "holdouts." However, this term is actually used to refer to bondholders. These bondholders may have acquired the bonds as part of an investment strategy and generally refuse to participate in debt restructurings. Instead, they prefer to initiate legal proceedings.
It's worth noting that vulture funds typically possess extensive knowledge of the markets they intend to enter. Furthermore, they generally consist of large, professional teams of lawyers and specialists in corporate 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 the debts they acquire? Once they've purchased the securities we mentioned earlier, vulture funds do everything possible to collect the full value of those debts. In addition, they add the interest for all the years the debt has been owed. When carrying out these types of transactions, they don't consider debt forgiveness or restructuring.
Vulture funds employ specialists whose objective is to find markets in dire financial straits. These professionals are highly experienced and have a thorough understanding of how corporate restructuring processes work. Once they manage to acquire assets at the lowest possible price, they attempt to sell them in the short or medium term at a price far exceeding their initial purchase price. As expected, their profits are substantial.
Some countries have strongly criticized these types of operations. Because vulture funds generate profits at the expense of the debts of countries or companies in dire straits, on the verge of bankruptcy, only to then sell them for a much higher price to the highest bidder, they consider it unethical.
Spain and the vulture funds
In 2008, a major economic crisis occurred. It was then that vulture funds gained significant prominence in Spain. At that time, they massively purchased numerous mortgage loans. Their modus operandi consisted of buying the debt from the bank and then pressuring the debtor to recover the full amount they had acquired. As a result, the debtor, who already had a debt with the bank and was likely in a precarious financial situation, was unable to repay the loan. At that point, the vulture funds would file lawsuits and initiate foreclosure proceedings.
It is primarily in Spain where vulture funds focus on buying mortgages, companies, and bank debt. Among the best-known in Spain are Cerberus, Lone Star, and Blackstone. But how much money can these funds handle? The volume of money they mobilize can easily reach hundreds of billions of euros.
If we are faced with a claim from a vulture fund, the first thing we should do is verify that it is indeed the legitimate creditor. If so, we can try to negotiate with it. This is generally 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.