Vulture Investing – Cashing in on Disaster

In February of this year, the S&P/Case-Shiller Home Price Index indicated that the recession in the housing market is not yet over, with that month’s figures revealing that new-home sales had dropped by 28 percent as compared to the previous year. Vulture investors who bought up properties from distressed owners, or foreclosed properties from financial institutions, with the intention of offloading them when the market picked up, may find this plan turning into a long term project.

In the case of companies in financial trouble, vulture funds – private equity or hedge funds that invest in failing companies’ debt – are likely to scour the market for debt securities that are undervalued, buying them up at a drastically reduced value. It may be noted that vulture funds prefer to be known as ‘distressed-debt specialists’, which they believe is more representative of the role they play in the economy, a role which may result in the failing company being rescued. In a 2002 article by Stanford University, Peter Copses of Apollo Management in Los Angeles was quoted as saying the label of ‘vulture investor’ gives the erroneous impression of cashing in on the misery of someone else. He noted that what happens in these cases is that something which began as a debt security is transferred from a “traditional fixed-income investor to someone who is willing to hold what has economically become an equity security”.

With property prices and interest rates low, real estate vulture investors will no doubt continue clearing up the debris of disaster, and some ‘fallen angels’ may find that vulture funds are ultimately their saving grace.