What is a Vulture Capitalist
A vulture capitalist is an investor who buys up distressed companies in order to turn them around so he can sell them at a profit. Vulture capitalists are often criticized because of their aggressive behavior.
BREAKING DOWN Vulture Capitalist
A vulture capitalist is a type of venture capitalist who looks for opportunities to make money by buying poor or distressed firms. They are also known for taking control over someone else's innovations and, as a result, the money that person would have acquired from those innovations. The term is slang for someone who is an aggressive venture capitalist, and as such is believed to be predatory in their nature. Just like the bird they are named after, vulture capitalists will wait until they see the right opportunity and swoop in at the last minute, taking advantage of a situation with the lowest possible price.
Most vulture capitalists often make more money than traditional venture capitalists do.
The term "vulture capitalist" isn't the only instance in economics where animals are used as descriptors. Bull and bear are also used, where the former refers to a market affected by rising prices, while the latter is typically one when prices are falling. Similarly, a hawk is someone who likes to use interest rate hikes to keep inflation in check, while the opposite — a dove — believes lower interest rates will lead to a spike in employment.
Vulture Capitalist vs. Venture Capitalist
As mentioned above, vulture capitalists will usually look for distressed opportunities or companies that are failing. They will provide funding as a last-ditch effort to these companies — many that have been unsuccessful in obtaining credit or funds from banks and/or other investors. As a general rule, most vulture capitalists will buy companies at a very low price so they do not end up losing out of pocket before they attempt to turn the firm around.
Vulture capitalists look for areas in which they can cut costs in order to make the most profit. Once they make their acquisitions, they may do things like cutting staff, reducing benefits or even both.
By contrast, a venture capitalist will typically look for companies that have growth potential and will provide capital to startup ventures. They may also support small companies that wish to expand but do not have access to equity markets. Venture capitalists will usually invest in these kinds of companies because they can earn a large return on their investments if these companies become successful and profitable.
Why Are We So Critical of Vulture Capitalists?
Vulture capitalists are often criticized for their aggressive behavior because they are seen as preying on the companies they buy in order to make a profit. They are called out because they will seek out the most distressed companies at really low prices. They will go to great lengths in order to keep their costs down so as to make the most profit. A venture capitalist may look first at cutting down staff, which can lead to unemployment and cause a ripple effect in the economy.
An Example of a Vulture Capitalist
Although vulture capitalism has been part of American culture for a long time, the term came into the spotlight during the Republican primaries leading up to the 2012 general election.
During the primaries, Mitt Romney said he was the best candidate to lead the party to the presidency because of his time at Bain Capital, a private equity firm he helped co-found in 1984. During several debates, he stated that he helped rebuild companies that were struggling and, in turn, helped create jobs. He promised to do the same thing for the U.S. that he said he did for Bain Capital: build businesses, create jobs and boost the economy.
Unfortunately, his opponents did not see it the same way. While Romney called himself a venture capitalist who helped companies in trouble, they said he did nothing but prey on businesses and the people who worked for them. Rick Perry, Newt Gingrich and Ron Paul all took shots at Romney, who claimed Bain Capital put people out of work in order to boost its own profits. But their efforts failed and Romney became the Republican nominee. Romney eventually lost to Barack Obama, who went on to lead the country in his second term as president.