Distressed & Special Situations

Distressed and special situations strategies invest where capital structure, liquidity, or operational stress creates pricing inefficiency. In allocator terms, this is not “risk-on credit.” It is a strategy defined by process, legal mechanics, and recovery outcomes.

How allocators define exposure

Allocators segment by:

• Cycle posture: opportunistic vs dedicated distressed
• Instrument: loans, bonds, preferred, rescue financings
• Control rights: influence in restructurings and creditor groups
• Jurisdiction/legal complexity: recovery timelines and enforcement realities
• Liquidity: time-to-resolution and capital lock duration
• Industry cyclicality: sensitivity to macro and refinancing conditions

Allocator question:
“Can the manager execute recoveries—not just buy cheap paper?”

Core strategies within Distressed/Special Situations

• Distressed debt: restructuring-driven returns
• Rescue financing: structured capital into stressed issuers
• Complexity/structured opportunities: forced sellers, dislocations
• Turnaround equity / post-reorg: operational transformation post-reset

How it fits into allocator portfolios

Used to:

• Add countercyclical exposure (when timed and executed well)
• Capture complexity premiums unavailable in plain-vanilla credit
• Diversify return drivers versus beta-heavy credit

How allocators evaluate managers

Conviction increases when there is:

• Proven workout and restructuring track record
• Clear frameworks for entry, control, and recovery execution
• Conservative assumptions on timing and legal outcomes
• Strong sourcing of situations (not just “screens”)
• Transparent post-mortems on losses and slow recoveries

What slows allocator decision-making

Diligence stalls when:

• The strategy is actually “high yield with leverage”
• Workout/legal capability is thin or outsourced without control
• Time-to-resolution assumptions are optimistic
• Concentrations are hidden behind “situations” language

Common misconceptions

• “Distressed always wins in recessions” → timing matters; recoveries can be long.
• “Cheap price means good risk” → without control, cheap can get cheaper.
• “Legal is a detail” → legal mechanics often determine the outcome.

Key allocator questions

• How does the manager gain influence in creditor negotiations?
• What is the base-case recovery timeline—and what delays it?
• What is the plan if refinancing markets stay shut?
• How are legal/jurisdiction risks underwritten?
• What are historical recoveries versus assumptions?