The Finatical

Week of January 17th, 2023 - Vulture Funds, Recession Fears Trigger Lipstick Effect, Long Covid's Impact on the Labor Market

Finatic

Aditya Bagga

Ksheeraj Sanga

, and 3 others

Jan 18, 2023

Introduction

A vulture fund is a type of fund that invests in debt that seems weak or in default, such as high-yield bonds that are about to default or are already in default or stocks that are about to go bankrupt. The idea is to fly down like a vulture and purchase shares that are thought to be high-risk. Through research, it identifies these companies and makes discounted investments in the ones that have significant assets. Typically, hedge funds are in charge of managing these investments, and they employ a variety of different techniques to maximize returns for their investors.

Drawbacks

Vulture funds highlight a unique type of fund that can at times be very successful, but there are also many criticisms of vulture funds. Vulture funds employ unconventional investment techniques in search of heavy discounts and high predicted returns. Investment firms managing vulture funds that rely on the cheap debt of failed investments, and force corporations to make payments plus interest, have been criticized for operating in unethical ways. According to critics, vulture funds contribute to the financial suffering of already troubled nations. Many nations have tried to enact legislation regulating or prohibiting them in response to these worries. Along with this, vulture funds may not be the choice for buyers who want to play it safe. To increase their earnings, vulture funds typically invest in securities with high levels of risk.

Importance

Now that you know what vulture funds are, it may be useful to explore the vulture capitalists they are associated with. You may have heard of the term ‘venture capitalist’, which refers to someone who invests in businesses with a strong potential for growth, but have you heard of a ‘vulture capitalist’? A special form of venture capitalist known as a "vulture capitalist" searches for chances to profit by purchasing struggling or troubled businesses. They are also notorious for seizing ownership of other people's ideas and, consequently, the profits such innovations would have brought in. Vulture capitalists pose a concern to some since they are drawn to the most financially troubled businesses and will buy them at extremely low prices. To maximize their profit, they will take considerable measures to keep their costs as low as possible. Acts such as reducing staff might result in unemployment and have a negative impact on the economy.

Financial Trends

Recession Fears Triggers Lipstick Effect

The volume and size of mergers and acquisitions saw a huge decline this year as macro headwinds brought down the global market. According to the latest M&A (Mergers and Acquisitions) report by Willis Towers Watson, for the first time in three years, there were no mega deals valued over $10 billion during the third quarter. Despite being surrounded by fears of a global recession, geopolitical tensions have expectations for inflation and interest rates continuing to rise in 2023, as dealmaking activity will continue. The fundamentals that promote dealmaking are still in place and with valuations moderating after the historic levels reached in 2021, strategic and financial buyers will strive to take advantage of better-priced opportunities for growth.

Furthermore, WTW predicted that the recession fears could lead to a “lipstick” effect next year, which simply means that buyers start to focus on purchasing smaller deals, instead of big-ticket offers. This challenging environment will also lead companies to sell non-core assets. For instance, energy firms could begin to deprive themselves of their carbon-intensive assets due to the energy market’s environment. There is some hope, as it could create new opportunities for buyers to expand their product lines, service, or supply chains at a much lower rate. The tech sector could soon undergo a wave of acquisitions in the AI and machine learning markets in 2023, due to their need to speed things up in digital transformation across all industries.

Long COVID’s Effects on the Labor Market

Long Covid is disabling and will continue to disable millions of workers to a serious extent, where the labor market is forced to throttle back hours or disband the workforce altogether. When job openings have been at an all-time high this year, long Covid is reducing the availability of people able to fill in those positions. This dynamic between the long Covid and the labor market may lead to large and adverse effects on the nation’s economy. According to a professor of public policy and economics at the University of Michigan who also served as chief economist for the U.S. Department of Labor during the Obama administration, Betsey Steveson, said, “Long Covid is certainly wind blowing in the other direction of economic growth”.

Economists believe that hundreds of thousands of people and potentially millions are out of work because of prolonged symptoms after a Covid infection. At the very least, long Covid is adding a lot of uncertainty to an already uncertain economic future. There are more than 4 million full-time workers that are out of the labor force due to long Covid and of that population, 3 million of them account for 1.8% of the entire nation’s civilian labor force. This has also caused the labor force’s participation rate to fall by 0.2 percentage points – which may not sound like a lot, but it is approximately the same percentage as baby boomers returning each year.

Financial Guidance

“Beware of little expenses; a small leak will sink a great ship.” - Benjamin Franklin

Little expenses add up over time, leading to significant deficits in your budget, which can severely derail even the most meticulously thought-out plans.

Term of the Week

Pigouvian Tax: A Pigouvian tax is a tax applied towards products that produce a negative externality by the government in order to offset some of the societal effects suffered as a result of the negative externality.