Corporate Defaults, Workouts, and the Rise of the Distressed Asset Investment Industry

Abstract

This paper examines corporate distress episodes for the United States, Western Europe, and Asia during the late twentieth century, and charts the emergence and growth of new actors in the corporate restructuring process – distressed asset investment firms. We analyse the formation and growth of these firms; including their investment focus, geographic and product expansion strategies. We find that the distressed asset investment industry is dominated by firms based in the United States, is relatively concentrated in terms of number of firms and assets under management, due in large part to early movers developing distinctive investment capabilities through participation in landmark transactions, relationship-specific resources, and scale effects. We examine empirically how the rise of distressed asset investment firms has altered the pricing dynamics in the corporate distressed market. We model the demand and supply of distressed debt over a thirty year period using historical data on loan issuances, corporate defaults and recovery rates. We find that the demand for distressed asset investment has become more responsive to supply over time with falling supply-demand ratios, implying lower investment returns. We conjecture that the emergence and growth of distressed asset investment firms has resulted in private sector workouts becoming more competitive and more efficient, especially in the United States.

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