Vulture Capitalist: Meaning, Criticism, Example

What Is a Vulture Capitalist?

A vulture capitalist is an investor who seeks to extract value from companies in decline. The goal is to swoop in when sentiment is low, the company is trading at a rock bottom price, and take whatever action is necessary to engineer a quick turnaround and sell it for a profit.

Key Takeaways

• A vulture capitalist is an investor who purchases troubled companies at severely depressed prices.
• Aggressive action is taken to revive the company and boost profits, usually via hefty cost-cutting exercises like job layoffs.
• If they don’t succeed, vulture capitalists will find other ways to line their pockets, such as engaging in asset stripping.

Understanding Vulture Capitalists

A vulture capitalist is a type of venture capitalist (VC) who looks for opportunities to make money by buying poor or distressed firms. Like the bird they are named after, vulture capitalists are predatory. They wait for the right opportunity and swoop in at the last minute, buying stakes at the lowest possible price.

Most vulture capitalists buy companies at a very low price to maximize potential returns and minimize the risk of walking away empty-handed.

Vulture capitalists target companies that financial institutions (FIs) do not want to lend money to. After failing to obtain credit or funds from banks or other investors, the struggling company often has no choice but to accept whatever help is offered.

Once onboard, the vulture capitalist pieces together aggressive financial goals. They start by attempting to revive the business, cutting costs wherever possible to boost profits. If they don’t succeed, vulture capitalists often resort to selling off assets.

Regardless of the outcome, vulture capitalists almost always find ways to squeeze money out of their investments, even if the acquired company eventually files for bankruptcy.

Vulture Capitalist vs. Venture Capitalist (VC)

Vulture capitalists and venture capitalists (VCs) operate and choose to invest their money differently.

VCs focus on providing capital to startups showing early success, rather than preying on the weak and cutting costs. The success of VC investments depends on targeted companies excelling and living up to their potential.

VCs aim to support nascent companies and set them on a path to become large-cap companies. Vulture capitalists also hope for investment turnarounds, albeit with a more short-term focus. They also explore ways to profit from the demise of the companies they invest in.

Criticism of Vulture Capitalists

Vulture capitalists are often criticized for stripping companies down to line their own pockets, laying off staff, and lending money at high interest rates to companies that need help.

Despite criticism, vulture capitalists manage to revive firms and governments that appeared beyond saving.

Vulture capitalists forced Argentina into bankruptcy, although some applaud them for their harsh penalties, claiming it forced the country to get its act together.

Proponents argue that vulture capitalists at least facilitate resource reallocation in the economy, taking unused resources out of companies and putting them to better use elsewhere.

Without vulture capitalists, more businesses may need taxpayer-funded bailouts according to some pundits.

Example of a Vulture Capitalist

Vulture capitalism gained attention during the 2012 Republican primaries. Mitt Romney touted his time at Bain Capital, a private equity firm, and claimed he helped rebuild struggling companies and create jobs.

However, his opponents criticized him for preying on businesses and their employees. In the end, Romney became the Republican nominee but lost to Barack Obama.