I think there’s a bit of the vulture in most of us—at least in those who want to buy low and sell high rather than buy high and sell higher. But few of us have either the skills or the chops to rummage through failing or bankrupt companies looking for opportunities. George Schultze is a notable exception. In The Art of Vulture Investing: Adventures in Distressed Securities Management (Wiley, 2012) he shares his investing experiences over the past eighteen years. Written with the able assistance of Janet Lewis, this book describes what transpires in an often overlooked but nonetheless critical part of the financial world.
In an early chapter entitled “Learning to Scavenge” Schultze lays out some of skills necessary to becoming a successful vulture. The most important skill is to know how to use leverage, not leverage in the usual financial sense but the leverage of Archimedes: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” The vulture investor must learn to target “what we call the fulcrum security of any failing company in which you are considering an investment. Technically, the fulcrum security is the one most likely to receive equity in the reorganized company after it goes through a Chapter 11 bankruptcy or another type of reorganization.” (pp. 17-18) This fulcrum security is normally a company’s senior secured bonds.
Vultures don’t always wait for an animal to die to swoop in; sometimes they kill the wounded or sick. Similarly, vulture investors can also be short sellers of stock or deeply subordinated bonds of companies that are on the skids (preferably not so obviously sick that their condition is common knowledge) but that have not yet filed for bankruptcy.
Vulture investing is naturally a lot more complicated than shorting dying companies on the way down and buying a fulcrum security either roughly at the bottom or on the way up, even though both of these activities are difficult enough in and of themselves. Schultze takes the reader through a series of case studies that graphically illustrate some of the complexities. Navigating the often byzantine capital structures of ailing companies, for instance, can be a challenge. Trying to put a price tag on tort liabilities, especially long-tailed legal liabilities, is always tough. And maintaining an active involvement while a company is being restructured or after it is reorganized requires a lot of time and attention.
By and large, vulture investing is not a DIY project for the retail investor. But that’s no reason for the retail investor not to read this book. It’s a fascinating account—in fact, so intriguing that I decided that in my next incarnation I wouldn’t mind being a vulture (investor, not bird, thank you very much).