Vulture Fund

A vulture fund is a private equity or hedge fund that invests in debt issued by an entity that is considered to be very weak or dying, or whose debt is in imminent default. The name is a metaphor comparing these investors to vultures patiently circling, waiting to pick over the remains of a rapidly weakening company or, in the case of sovereign debt, debtor country. Market practitioners prefer to refer to them as distressed debt or special situations funds. Note that the debt condition involved is often a temporary or artificial distress situation and not necessarily one affecting long-term ability to repay earlier loans.

Vulture funds focused on debt target not only corporate obligers, but also sovereign debtor states. In the recent (2012) case of Argentina, for example, vulture funds bought up a significant portion of the country's external public debt at very low prices (sometimes only 20% of their nominal value), and then attempted to cash them when the Argentine economic crisis resulted in the bonds' default in January 2002. A single vulture fund run by Kenneth Dart, heir to the Dart Container fortune, claimed $700 million in a lawsuit against the government of Argentina. Argentine investors were behind many of the secondary market purchases, however. Some estimate that in the debt exchange of 2005, Argentine bondholders controlled over half of the debt tendered. The reduction in principal that resulted from the restructuring led a significant minority of bondholders, including Dart, to become holdouts.

Vulture funds have sometimes had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before actually realizing the attachments in forced sales. In one instance involving Peru, such a seizure threatened payments to other creditors of the sovereign obliger. Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance. A related term is "vulture investing", where certain stocks in near bankrupt companies are purchased upon anticipation of asset divestiture or successful reorganization. A prime example in the United States is K‑Mart, where the real estate held by the company was the anticipated payout for investors who bought stock during their bankruptcy proceedings.

As in almost any loan default situation, there are "losers" which typically go unrecognised by the media discussions. For example, original funding for the bonds purchased by "vulture funds" often comes from pension programmes and small investors. When the loans go into default, a disproportionate degree of loss is often experienced by such small investors. The 2012 economic distress for the state of California and its political subdivisions (teacher pensions, etc) is adversely affected by many "deadbeat" foreign loan recipients whose nonpayment is encouraged by a history of forgiven loans. The "vulture funds" on the other hand, seek to penalise, rather than reward, the deadbeats.