Vulture funds are basically private equity or hedge funds with deep understanding of special situations. They buy assets cheap, strip them and even take management control before selling them. They are known as vulture funds as they prey on companies which are in distress, but have the potential for revival and growth.
Globally, players such as Elliott hogged the limelight when, in the mid-90s, they pounced on sovereign debt of the Pana-manian government at a hefty 40 per cent discount at $17.5 million. Later, they even took the country to the court seeking full repayment of $27.8 million. The court in New York came down heavily on the government, directing it to make the payment, including an interest of $57 million, to Elliott.
The other big players are Cerberus, JP Morgan, DE Shaw, Davidson Kempner l, KKR, Blackstone, Anchorage Capital and Goldman Sachs. The basic strategy of these funds is to buy cheap with the aim of making hefty gains. In India, too, many such funds are making a beginning, though the distressed asset market is yet to evolve due to the countrys legal system and also because most companies here are promoter-driven. A few years ago, US-based Apollo Global, a vulture fund, had tied up with ICICI Ventures to set up AION Capital to invest in distressed assets. Blackstone, WL Ross , KKR, DE Shaw, Farallon Capital and Clearwater are also operating in India.
Their experience has so far been mixed. UK-based private equity player, 3i, has shut its buyout division. Distressed funds that entered the Indian market after the Lehman crisis have even lost capital. WL Ross & Co, though, has made decent returns in the last 10 years. Hong Kong-based SSG Capital has entered India through the ARC route. The idea was to go for a complete buyout, takeover the management, and revive it. KKR , too, is buying a stake in Mumbai-based IARC.
Vinayak Bahuguna, CEO and MD, ARCIL, says: "Globally, the strategy has been recovery and not restructuring. It means stripping of assets to get back money." With hopes of regulations changing, it is hoped that India will also open floodgates for the vultures to grab their prey.