The Return of the Vultures

Throughout this credit crunch I have been awaiting the return of the vultures. In the 90s vulture funds were highly active in trading distressed debt and in the process disturbing established informal workout methods like the London Approach. These ways of restructuring relied on embedded relationships among professionals who knew how each other would respond in given situations.

Vultures were the new kids on the block who didn't understand the the folkways and customs and and who weren't afraid to disturb established patterns. As with most things financial, this passed and hedge funds and private equity took over.

The name vulture was then applied to another type of predator, one who bought distressed sovereign debt and sued for its recovery in the courts. The defendants were usually impoverished third world countries.

But now the original vultures have flown back across the horizon. They may prefer to call themselves "special situations investors", but no one is fooled by that transformation. Their aim is to buy as cheaply as possible: they are the bottom fishers. According the Financial Times two financiers, Warren Buffett and Ross Perelman, are actively searching for troubled companies.

Perelman has just closed a $4bn fund to "invest in and restructure financially distressed companies. He said his next moves were likely to be in insurance, mortgage servicing and car parts." Apparently the monolines have risen in attractiveness in recent weeks, with some forecasters predicting a "monoline tsunami."

Buffett is "looking to spend the $40bn cash-pile held by Berkshire Hathaway, his conglomerate, on a large financial or industrial company." The language being used in this market is very indicative of the approaches being taken. For example (from the FT):

"The elephant gun is still out," said Mohnish Pabrai, a California-based asset manager who owns shares in Berkshire, and follows Mr Buffett closely.

"This is Berkshire’s market. When you have this kind of sell-off in equity markets and the capital Berkshire has, things will happen".

Mr Perelman, who has assembled a collection of businesses ranging from Revlon cosmetics to Allied Barton security services by taking over companies in distress, said he regarded the current conditions as a "buying opportunity". "Over the next six months you are going to see very, very unique opportunities", he said.

Analysts said that, aside from well-known investors, several hedge funds and private equity groups have been raising billions of dollars in anticipation of a sharp rise in the volume of distressed assets and companies.

In finance, it is truly "ars longa, vita brevis".


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