Deal number six, the last deal of private equity is represented by vulture financing. Vulture financing is the financing of a company that is in crisis or decline. This is the private equity investor is going to finance the last stage of the life cycle of the company. Like in replacement financing, the label is quite broad and we have evidence of different deals inside. In this case, in vulture financing we have evidence of two different deals. On one end we have restructuring financing and on the other hand we have distress financing. The reason why we have evidence of two different deals is related to the fact that the status of a crisis of a company can be regulated in two different ways. That's reason why in all the countries in the world, it's fundamental to identify two different stories of financing a company in crisis. Let's start in with restructuring financing. Some practitioners sometimes also say turnaround financing but in most of cases we say restructuring financing. What's the idea of restructuring financing? The idea is that a company stays in its crisis but the company is still alive. That means the company needs money to pay the other financers or to pay the suppliers, but the company needs money as well to invest in new fixed assets to relaunch the business or to design a new strategy. That means the company doesn't only need money, the company needs a lot of strategic support. If a private equity investor wants to invest in this kind of deal, it has to play two different roles. On one hand to be a financer, on the other hand to be a consultant, advisor of the company. More or less what happens if you remember also in early growth financing where the private equity has to support the company, in this case, the private equity has to support the company a lot. But this time in restructuring the deal is quite risky because we are investing in a company that is in crisis and to redesign the strategy could be very difficult. For this reason, deals of restructuring are not very common in private equity; and if we have a private equity willing to invest, in most cases the private equity investor wants to be the majority shareholder. The reason is related to the fact that the private equity wants to have the possibility to change the management, to change the CEO, and to completely redesign the strategy. It’s a very tough business that makes the business and the deal very difficult. The second deal of vulture financing is represented by distressed financing. In this case, distressed financing is the financing of a defaulted company. That means is a financing of a company which is dead. It seems a contradiction because if a company defaulted, it's not possible for the company to receive money. And this is true. So we say financing just to use the same wording of the other business. But effectively the deal of distress financing is a deal in which the private equity investor is going to buy assets of the defaulted company. Examples of assets are the brand name of the company, patents of the company, or high quality equipment and machinery. In all these cases the company defaulted and the private equity investor wants to buy these assets. The reason why the private equity wants to buy these assets is related to two different stories. The first one is the private equity investor is a “trader of assets,” so the private equity buys assets and sells these assets to other investors. The second story is a story in which the private equity investor buys these assets and inserts these assets into other companies the private equity has got in his or her portfolio to increase its value. To buy assets of a defaulted company is not easy because the private equity has to negotiate the buying process with the court. Since laws are different in different countries, but in all countries the process of defaulting is managed by the court. And the negotiation could be tough, because the goal, the purpose of the court is to maximize the amount of cash to satisfy the need of suppliers, banks, and so on. So it's a very tough negotiation and in many cases in these negotiations, the court wants to give to the private equity investor some poison pills. Poison pills are represented, for example, by some mortgages or by the fact that the private equity investor wants to buy a plant or machinery, but inside the plant or machinery we have a lot of workers and it's very difficult to negotiate with them. Unfortunately or not, it depends on our perspective, distressed financing is a very popular deal in countries where the GDP is not flying or in countries where there are a lot of defaults, for example in Europe where these deals are very popular. The last aspect, the way to work these deals is strictly related to the level of quality of the law. For example, in the United States, where the law of distress financing that is named Chapter 11, these kinds of deals work very well.
