A flock of “vulture” funds is gathering in Madrid in the hope that a banking sector shakeout will finally deliver a bonanza of real estate and distressed company assets at rock bottom prices. Hedge funds and private equity houses are renewing ties with Spanish lenders and government officials, bankers said, as reforms push banks to offload troubled assets at steep discounts. “They want to make sure they’re among the first five people we call up when assets from the banks start moving,” said a senior investment banker who spent the last two weeks shepherding such investors around the Spanish capital. Vulture funds, which were a regular sight at Dublin airport when Ireland’s banks were in turmoil, have swooped on Madrid’s plush Palace Hotel, shuttling up and down the Castellana avenue, one of the capital’s main arteries and home to investment bank offices and Spanish banks. Previous trips to Spain had ended in disappointment. The funds had been looking to bag portfolios of repossessed properties or consumer loans at 20 cents in the euro, bankers said, while lenders hoping for an economic pick-up had been reluctant to contemplate selling below 50 percent of face value. But now fresh bank reforms will force Spain’s banks, particularly those getting public help, to set aside repossessed property by year-end for a fire-sale, while provisions to counter 137 billion euros ($169 billion) of potential losses should make it easier to sell assets at steep discounts. Some believe that is already having a knock-on effect on prices, with another banker saying funds were “smelling blood”. “The price at which banks would be willing to sell and investors willing to buy has narrowed a lot. That is a fact,” said a Madrid-based lawyer who has advised savings banks, or cajas, on restructuring. More Pressure Fortress Investment Group, Oak Hill, Corsair Capital, TPG, and Apollo are among many other firms looking at Spain’s banking sector, bankers said, with U.S. investment banks also in the mix. Private equity groups Lone Star and Blackstone, which have bought portfolios of distressed property loans from Britain’s bailed out Royal Bank of Scotland and Lloyds , could also look at Spain, industry sources said. The notion that private equity firms could ride to the rescue of Spain’s banks during a three-year wave of consolidation among ailing cajas has remained just a tantalising prospect. Only financial specialists like J.C. Flowers showed any real interest in propping up the cajas with injections of equity capital, but no deals were ever clinched. But with Spain lurching deeper into the heart of the euro zone crisis, and after a 23.5 billion euro bailout of troubled savings bank Bankia, they are now looking at taking loan portfolios off the hands of the banks. “(They) are now looking at more specific assets: portfolios of non-performing loans, some foreclosed assets, and even performing loans,” said Jose Enrique Concejo, head of financial institutions for Spain and Portugal at Societe Generale. The banking turmoil could also throw up opportunities for investment in companies other than banks. Bankia for instance will have to sell chunky stakes in the likes of energy group Iberdrola so that its rescue can get European approval. Despite the economic slump, some firms also see longer term prospects in Spain and opportunities in the recession. HIG Capital, a mid-market company specialist, opened an office in Madrid earlier this year. “It’s a big bet on Spain,” said Jaime Bergel, managing director of HIG Capital for the country. “There are many very good assets that are struggling with their balance sheets, either because they are highly leveraged from the good years or because their earnings are substantially lower.” He added the firm was particularly attracted to companies geared towards exports. Judging valuations was still tough, Bergel said, but these were coming down to more realistic levels, while a greater range of companies were also coming up for grabs, including family-owned businesses. “Some have tried to delay as much as possible having someone else come in, but they do now need fresh capital,” Bergel said.