Distressed & Turnaround

Distressed investing is not “buying cheap.” It is underwriting outcomes under uncertainty—where capital structure, creditor rights, covenant enforcement, and restructuring pathways drive value. Turnaround strategies often blend operational rehabilitation with balance-sheet repair. The edge is frequently execution, not sourcing.

From an allocator perspective, this category affects:

• loss given default and recovery pathways,
• liquidity and duration risk (court timelines, extensions, restructures),
• complexity and operational capacity (legal + workout execution), and
• cycle correlation (returns often strongest during dislocation, weakest during euphoria).

How allocators define distressed & turnaround risk drivers

Allocators segment exposure by:

• Instrument: distressed debt vs rescue equity vs structured capital
• Seniority and control: fulcrum security positioning, creditor committee influence
• Process path: out-of-court workout vs Chapter/bankruptcy vs negotiated recap
• Recovery execution: collateral quality, covenant enforceability, jurisdictional realities
• Time-to-resolution: duration, legal timelines, and liquidity constraints
• Operational capability: ability to stabilize cashflows and improve fundamentals
• Cycle timing discipline: avoiding “early distress” and recognizing true capitulation
• Evidence patterns: “restructuring capital,” “special situations,” “NPL,” “workout,” “bankruptcy,” “opportunistic credit”

Allocator framing:
“Is this manager equipped to win in workouts and restructures—through rights, process, and execution—or are returns dependent on macro rebound?”

Where distressed & turnaround sits in allocator portfolios

• opportunistic sleeve within credit or special situations
• used as crisis alpha and diversification when traditional risk assets reprice
• often paired with secondaries and opportunistic credit in dislocation regimes

How distressed & turnaround impacts outcomes

• can generate strong returns when entry price, rights, and process advantages align
• can underperform if dislocation persists, legal timelines extend, or recoveries disappoint
• can produce “value traps” if capital structure is misunderstood
• can create illiquidity risk if exits depend on resolution events

How allocators evaluate managers on distressed execution

Conviction increases when managers:

• can show documented restructuring outcomes (recoveries, timelines, decision points)
• have credible legal/workout infrastructure and governance capability
• underwrite conservative recoveries and avoid optimism on turnaround speed
• demonstrate discipline in entry (not chasing early impairment with limited margin of safety)
• report outcomes as realized recoveries, not narrative-based marks

What slows allocator decision-making

• vague claims of “special situations” without restructuring evidence
• lack of transparency on seniority, rights, and process posture
• long-duration positions with unclear catalysts
• insufficient internal capability to manage multi-threaded workouts

Common misconceptions

• “Distressed always performs in recessions” → timing and entry discipline matter; early entries can be punished.
• “Cheap price equals margin of safety” → recoveries can be lower than expected if rights are weak.
• “Turnaround is operational only” → capital structure and legal process often dominate outcomes.

Key allocator questions

• What is your typical position in the capital structure and why?
• What is your track record of recoveries and time-to-resolution?
• How do you source dislocation without overpaying for “distressed brand”?
• What is your workout/legal operating model?
• How do you manage downside when restructures extend?