What is the Difference between Vulture Capital and Private Equity?

The future of finance

The future of finance

There is a vast difference between vulture capital and private equity. But before the details are given we should look at a brief explanation of vulture capital. The term vulture capital is a slang term that is related to venture capital only in a negative connotation. Venture capital is a form of funding for businesses and especially an entrepreneur. When a business is just getting started a company such as Effi Enterprises will become a funding source so that the business has a greater chance of growing. Usually this is in exchange for a percentage of the company’s profits. The term vulture capital is when funds are placed into a business for the purpose of slowly squeezing the life out of the business. A vulture capitalist will have a primary goal of eventually forcing the company out of business and then selling it for a profit. In pre-Reagan days this was called a leveraged buy outs. However, recently some have tried to say that private equity and vulture capital are the same thing.

Different Investment Purposes

Private equity is an investment into a company. Generally, this investment is done through a private equity firm, an angel investor or a venture capital firm. No matter what category the investment falls into, each company will have its own investment strategies, preferences and ways of setting goals. The main purpose is to provide the funds to help the targeted company continue with expansions, develop new products or they may be used to entirely restructure the company’s management or operation.

Some say that private equity is “no better” than the leveraged buyout. However, in a leveraged buyout the vulture capitalist will buy majority control of a firm or business. Usually an investment in made into a business via angel investors or venture capital firms, not for gaining any control, but for the opportunity of investing in emerging companies or entrepreneurship. They will invest in a company, help get it established and up on its feet in exchange for a portion of its profits further down the road.

Profitability Goals

Private equity and vulture capital are both ways to pour funding into a business. The main difference is that private equity (and real venture capital) will also be willing to pour time and expertise into the company to help it succeed and grow; whereas the vulture capitalist will have the goal of purchasing the majority of the controlling shares in a company for the purpose of liquidation. They both are looking for a profitable return down the road. However, the private equity firm will obtain their profits from helping get the business established until there is a solid profitability from which they can draw. The vulture capitalist is looking to profit from the yields of a liquidated business which is going under. Most investors are looking to put money into a company like “seed” money in hopes that the company will benefit from the investment and be able to work to provide long lasting profits. Vulture capitalists will try to squeeze everything out of a business and the efforts are not at all aimed at the success of a business; but rather at gaining from the loss. Many Vulture capitalists will actually force businesses to go further into debt or incur new loans until their only choice is to file bankruptcy. At this time the Vulture capitalist will profit from the forced liquidation.

Are they Necessary?

In the real business world there is a place for both the private investor and the true Vulture capitalist. Each one of them can play a major role that helps strengthen the economy. Vulture capitalist can have a positive effect if they give a failing business a way to get out gracefully.

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About Efraim Landa

My name is Efraim Landa I am an entrepreneur and an expert in venture capital. I am the co founder of Effi Enterprises, a venture capital firm as well as the co founder and CEO of Gluco Vista, a company that is in the process of developing a non invasive glucose meter for those with diabetes.

Posted on July 4, 2012, in investing, LBO, private equity, VC financing, Venture Capital and tagged , , , , . Bookmark the permalink. 2 Comments.

  1. Interesting post. It was a great explanation of the difference between vulture capital and private equity, and provided great descriptions of what each are

  1. Pingback: What is the Difference between Vulture Capital and Private Equity? | Offshore Business Formation Today

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