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By Don A. Steinbrugge, CFA, Founder and CEO at Agecroft Partners

Distressed investing is often characterized as a cyclical strategy dependent on macroeconomic factors that focuses primarily on the undervalued distressed debt of struggling companies that may require a restructuring through bankruptcy or another form of reorganization.

Benefits presented by investing in this asset class can include equity-like returns with lower volatility and risk, illiquidity premiums, differentiated return drivers and portfolio diversification opportunities. Since its inception in 1990, the HFRI ED Distressed/Restructuring Index returned 9.7% annualized with a standard deviation of 12.7%. This compares favorably to the Russell 2000 which, over the same time period, returned 8.7% annualized with a standard deviation of 18.7%, and to the Credit Suisse High Yield Index which returned 7.84% annualized with a standard deviation of 17.9%.

Current environment for distressed investing

Investor interest in distressed investing is growing rapidly and rightfully so. Nearly two-thirds of investors surveyed by Preqin in the first half of 2023 intend to increase their allocation to the asset class. While the current economic cycle has been prolonged due to high levels of liquidity, fiscal stimulus and suppressed default rates, the tides have begun to shift. Sectors including commercial real estate, hospitality and retail face higher levels of leverage and lower r......................

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