The distressed debt market is attracting more and more attention from sophisticated investors in 2025. In an environment of economic uncertainty, high interest rates, and growing default rates across key sectors, many troubled assets are trading at deep discounts — opening a window of opportunity for those who understand how to evaluate risk and build solid investment theses.

But what exactly is distressed debt? How does this market work, and what are the main risks and strategies involved? In this article, we’ll explore the key mechanics of the distressed debt market and why it could be one of the most promising areas for institutional investors and family offices in the coming decade.

What Is the Distressed Debt Market?

“Distressed debt” refers to debt securities issued by companies or governments experiencing severe financial stress — whether due to default, restructuring, bankruptcy proceedings, or insolvency risks. In the distressed debt market, these instruments are typically traded at significant discounts, sometimes below 60% of their face value, reflecting their elevated risk but also their potential for high returns.

Buyers of these assets are usually specialized funds, often called “distressed funds,” that analyze recovery potential, legal claim priority, corporate structure, and other factors to build turnaround or litigation strategies.

Why Interest Is Growing in 2025

Several global factors have contributed to the increased interest in the distressed debt market:

• Higher interest rates: Companies that overleveraged during low-rate years are now facing refinancing difficulties.
• Persistent inflation: This erodes profit margins and cash flow, especially in real estate, retail, and tech sectors.
• Geopolitical and regulatory risks: These have destabilized operations of government contractors and public-private partnerships.
• Tighter bank lending: With traditional lenders pulling back, distressed buyers are stepping in to fill the void.

According to Bloomberg, global distressed debt volumes exceeded $1.2 trillion in early 2025 — the highest level since the 2008 financial crisis.

Main Investment Strategies

Investors in this space deploy a variety of strategies to extract value from troubled debt positions:

1. Buy & Hold Strategy

Purchase debt at deep discounts and hold until the company completes its restructuring or liquidation, profiting from any partial recovery.

2. Active Restructuring

Engage in creditor negotiations, participate in restructuring plans, and influence operational turnarounds.

3. Debt-for-Equity Swaps

Convert distressed debt into equity stakes in the restructured entity, betting on a future recovery.

4. Legal Arbitrage

Capitalize on different legal jurisdictions and creditor hierarchies to maximize recoveries.

High-Potential Sectors in 2025

Not all distressed assets are opportunities. The sectors seeing the most interest from distressed funds this year include:

• Real Estate Development: Especially firms with high inventory and inflation-indexed loans.
• Retail Chains: Struggling with post-pandemic shifts and consumer belt-tightening.
• Energy & Infrastructure: Projects affected by delayed regulatory approvals or cost overruns.
• Education: Private institutions facing high dropout rates and defaulted student loans.

The market for non-performing loans (NPLs) from mid-sized banks and fintech lenders is also growing, particularly in Latin America.

Risks Involved in the Distressed Debt Market

While the distressed debt market offers outsized returns, it also carries substantial risks:

• Legal Complexity: Bankruptcy and recovery processes are often lengthy and unpredictable.
• Liquidity Risks: These assets are not easily resold and may require a long holding period.
• Information Asymmetry: Reliable data on the borrower and asset quality is often limited.

This type of investing is best suited for qualified investors with access to legal counsel, financial modeling expertise, and a long-term mindset.

Is There a Unique Opportunity in Emerging Markets?

As credit markets shift and many companies face tighter liquidity, emerging economies like Brazil may experience a “supercycle” in distressed debt over the next 10 years. Declining asset values and credit scarcity have created compelling scenarios for local and international funds.

Firms like Jive Investments, XP Asset, and Starboard are already raising billions in dedicated distressed vehicles. According to Valor Econômico, over R$300 billion in defaulted or stressed credit is currently available for private acquisition.

How to Invest in Distressed Debt

If you’re a qualified investor looking to enter the distressed debt market, here are your main entry points:

• Private Credit Funds with Distressed Mandates
• NPL-focused FIDCs or SPVs
• Direct acquisition of legal credit portfolios

Due diligence, legal structuring, and long-term positioning are crucial in this niche market.

Conclusion: Where Others See Risk, Some See Value

The distressed debt market is a landscape filled with hidden gems for investors with the right tools. In the middle of market turmoil and tightening credit conditions, well-structured plays on distressed assets can offer exceptional asymmetric returns.

With the right strategy, legal protections, and analytical discipline, troubled assets can transform into high-value opportunities — but only for those ready to take on the complexity.