Is It Time to Become a Distressed Lender? How PE Sponsors Can Pivot to a Bankruptcy‑Lending Strategy While Managing Attendant Risks

As its impact continues to expand, the coronavirus outbreak is likely to threaten a wide range of industries given the complexity and intricacy of the global economy. Certain industries (e.g., retail, hospitality and travel) are already suffering due to decreased economic activity and supply chain disruptions. Every industry will undoubtedly face tremendous challenges as it attempts to recover from the pandemic, the full effect and timing of which are largely not yet understood. Although established PE strategies such as leveraged buyouts, venture capital and mezzanine investing are not completely dependent on general economic cycles, their returns are often positively correlated to economic trends. As such, finding investment opportunities during an economic downturn with an appropriate risk profile may prove challenging for traditional investment vehicles. The reverse is true of distressed lending, however, as a weak economy typically generates increased investment opportunities. In a guest article, Lowenstein Sandler attorneys Robert M. Hirsh and Phillip Khezri describe opportunities available to PE sponsors to pursue substantial returns with managed risk through distressed lending. Specifically, the article outlines several approaches to distressed lending before undertaking a deeper dive into the relative merits and issues with post-petition debtor financing, as well as certain considerations when raising a distressed fund. See our two-part series on direct lending funds: “Structural Approaches to Address Liquidity Considerations and Ensure Regulatory Compliance” (Dec. 3, 2019); and “Five Structures to Mitigate Tax Burdens for Various Investor Types” (Dec. 10, 2019).