The Art of Vulture Investing: Adventures in Distressed Securities Management

CHAPTER 3

Looking for Prey

To enable the vulture to live, not only is it able to sustain a prolonged fast, but it is gifted with the power of discovering food at almost incredible distances. At early dawn, it rises in the air circling round and round until it is scarcely visible. From this enormous elevation it surveys the country for many miles around. Not even a lamb can die without being espied by a vulture.

—Reverend John George Wood, Birds and Beasts

We vultures are adaptable creatures. We’re happy to feed on almost any type of prey, and willing to try new hunting strategies. While the fulcrum security remains our basic tool, vultures have other ways to profit when a company goes under. We can lend money on very favorable terms to companies desperate for cash, or we can act like a private equity firm and use our newly acquired stock to gain control of the reorganized company. In both cases, the highest return comes from acquiring some or all of the equity.

Lending is an increasingly common strategy for vulture funds, particularly those that have longer-term lock-up provisions (which prevent investors from withdrawing at least some of their money for several years). Under this strategy, better known as loan-to-own, vultures lend to companies desperate for cash—desperate enough ...