Vulture capitalist

Last updated

Vulture capitalists are investors that acquire distressed firms in the hopes of making them more profitable so as to ultimately sell them for a profit. [1] Due to their aggressive investing nature, and the methods they use to make firms more profitable, vulture capitalists are often criticized. [2]

Contents

Distinguishing between venture and vulture capitalists

A venture capitalist is an investor who provides funding for start-ups, early stage firms and companies with growth potential. [1] These types of firms seek out venture capitalists, as they are too small or too new to have credit profiles, making them ineligible for bank loans and other forms of raising capital. [3]

Although risky, venture capitalists invest in firms as there are very lucrative returns on their investments when the company they are investing in is successful. [1] [4] Furthermore, venture capitalists will often invest in a range of firms rather than just one or two, in order to mitigate risks if the investments are unsuccessful. [5] [6]

On the other hand, vulture capitalists provide a final attempt at gaining funding. [4] Whereas venture capitalists seek firms with growth potential, [1] vulture capitalists usually seek out firms where costs can be cut in order to increase profits. Mostly, these firms are distressed and on the brink of bankruptcy. [4] Due to this reason, vulture capitalists are able to buy these firms at a much lower price than if they had been profitable and expanding. [4]

Once the firm is acquired, vulture capitalists can attempt to increase efficiency in order to turn the company around. This is often done by cutting costs wherever possible, which in part is likely to be accomplished by firing workers where possible, reducing benefits, or both, which increases short-term profits or the perceived likelihood of future profitability, thus raising the share price and the worth of the investors holdings. Lastly, the vulture capitalists sell any equity they own, making a profit. But vulture capitalists can also choose to divide and sell off the entire company in pieces, if this should increase the attractiveness of each individual piece to its purchaser and thus allow the vulture capitalist a net profit. [7] [1]

Criticism

Vulture capitalists are subject to heightened scrutiny as they target firms that are generally financially vulnerable [4] due to failures in securing capital. These firms [3] are then acquired by vulture capitalists for prices that are often considerably lower than perceived fair market valuation. The lack of bidders and the state of duress accompanied by a last-chance buyout generally favor the vulture capitalist. [4]

Once vulture capitalists acquire a firm, cost-cutting measures usually consist of mass layoffs (alongside other operational streamlining measures), [7] the goal being to increase or outright generate profitability for their own gain. Vulture capitalists, amongst other reasons, are criticized for this, especially as the newly unemployed people can be said to put pressure on the political economy and general society through their need of unemployment benefits, which comes from company payroll taxes and other taxpayers. [7] [ unreliable source? ][ better source needed ]

For the same reasons, venture capitalists can be accused of being vulture capitalists, or "vulture" for short, depending on how they conduct their business. [8] In this sense, vulture capitalist is used as a derogatory word for venture capitalists, as the vulture capitalists are considered to be preying on firms in distress for their own profit. [2]

See also

Related Research Articles

<span class="mw-page-title-main">Leveraged buyout</span> Acquired control over a company by the purchase of its shares with borrowed money

A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The use of debt, which normally has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. This is done at the risk of magnified cash flow losses should the acquisition perform poorly after the buyout.

Private equity (PE) is stock in a private company that does not offer stock to the general public. In the field of finance, private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, "private equity" can refer to these investment firms, rather than the companies in which that they invest.

<span class="mw-page-title-main">Venture capital</span> Form of private-equity financing

Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations, etc. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake. Venture capitalists take on the risk of financing start-ups in the hopes that some of the companies they support will become successful. Because startups face high uncertainty, VC investments have high rates of failure. Start-ups are usually based on an innovative technology or business model and often come from high technology industries such as information technology (IT) or biotechnology.

<span class="mw-page-title-main">Public company</span> Company that offers its securities for sale to the general public

A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public company can be listed on a stock exchange, which facilitates the trade of shares, or not. In some jurisdictions, public companies over a certain size must be listed on an exchange. In most cases, public companies are private enterprises in the private sector, and "public" emphasizes their reporting and trading on the public markets.

An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of investments include equity, debt, securities, real estate, infrastructure, currency, commodity, token, derivatives such as put and call options, futures, forwards, etc. This definition makes no distinction between the investors in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors. An investor who owns stock is a shareholder.

<span class="mw-page-title-main">TPG Inc.</span> American investment company

TPG Inc., previously known as Texas Pacific Group and TPG Capital, is an American private equity firm based in Fort Worth, Texas. TPG manages investment funds in growth capital, venture capital, public equity, and debt investments. The firm invests in a range of industries including consumer/retail, media and telecommunications, industrials, technology, travel, leisure, and health care. TPG became a public company in January 2022, trading on the NASDAQ under the ticker symbol “TPG”.

Bain Capital, LP is an American private investment firm based in Boston, Massachusetts, with around $185 billion of assets under management. It specializes in private equity, venture capital, credit, public equity, impact investing, life sciences, crypto, tech opportunities, partnership opportunities, special situations, and real estate. Bain Capital invests across a range of industry sectors and geographic regions. The firm was founded in 1984 by partners from the consulting firm Bain & Company. The company is headquartered at 200 Clarendon Street in Boston with 22 offices in North America, Europe, Asia, and Australia.

Growth capital is a type of private equity investment, usually a minority interest, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.

A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years. At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. From the investors' point of view, funds can be traditional or asymmetric.

In finance, the private-equity secondary market refers to the buying and selling of pre-existing investor commitments to private-equity and other alternative investment funds. Given the absence of established trading markets for these interests, the transfer of interests in private-equity funds as well as hedge funds can be more complex and labor-intensive.

A venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of venture funding is among the primary stimuli for the development of new companies and technologies.

AlpInvest Partners is a global private equity asset manager with over $85 billion of committed capital since inception as of December 31, 2022. The firm invests on behalf of more than 450 institutional investors from North America, Asia, Europe, South America and Africa.

<span class="mw-page-title-main">History of private equity and venture capital</span>

The history of private equity, venture capital, and the development of these asset classes has occurred through a series of boom-and-bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel, although interrelated tracks.

<span class="mw-page-title-main">Early history of private equity</span>

The early history of private equity relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.

<span class="mw-page-title-main">Private equity in the 1980s</span>

Private equity in the 1980s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks.

<span class="mw-page-title-main">Private equity in the 1990s</span>

Private equity in the 1990s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital, experienced growth along parallel although interrelated tracks.

<span class="mw-page-title-main">Private equity in the 2000s</span>

Private equity in the 2000s represents one of the major growth periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital expanded along parallel and interrelated tracks.

Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies. CVC is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage." Examples of CVCs include GV and Intel Capital.

Entrepreneurial finance is the study of value and resource allocation, applied to new ventures. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the startup; and how should funding contracts and exit decisions be structured.

<span class="mw-page-title-main">Unicorn bubble</span>

A unicorn bubble is a theoretical economic bubble that would occur when unicorn startup companies are overvalued by venture capitalists or investors. This can either occur during the private phase of these unicorn companies, or in an initial public offering. A unicorn company is a startup company valued at, or above, $1 billion US dollars.

References

  1. 1 2 3 4 5 "Definition of Vulture Capitalist". Investopedia.com. Investopedia. Retrieved 16 October 2014.
  2. 1 2 Evans, Denise; Evans, William (2007). The Complete Real Estate Encyclopedia . The McGraw-Hill Companies, Inc. p.  434. ISBN   9780071476386.
  3. 1 2 Hendricks, Drew. "The 5 Best Ways To Raise Capital". Forbes. Archived from the original on July 25, 2014. Retrieved 16 October 2014.
  4. 1 2 3 4 5 6 Lund, Marcie (29 May 2014). "Venture vs. Vulture Capitalists". missionwealth.com. Mission Wealth. Retrieved 16 October 2014.
  5. ↑ Feld, Brad. "How Do VCs Mitigate Risk In Their Investment Portfolios?". AsktheVC.com. AskTheVC. Retrieved 16 October 2014.
  6. ↑ Arthur, Harold. "Vulture". Birds life. Retrieved 26 September 2023.
  7. 1 2 3 "How Did Mitt Romney Get So Rich?". YouTube.com. YouTube. 11 April 2012. Retrieved 16 October 2014.
  8. ↑ "Vulture Capitalist". Financial-Dictionary.com. The Free Dictionary. Retrieved 17 October 2014.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.