A private equity fund which mainly target financially troubled companies. More specifically, a distressed investment fund takes positions in the stock and fixed-income securities of companies that are currently in financial distress or on the verge of going bankrupt or are coming out of bankruptcy. In this sense, distressed investment funds are the opposite of venture capital funds: the latter gain as the companies grow and develop, while the former profit at the end of companies’ life cycles.
Distressed investment funds, in general, follow two main strategies:
- “Distressed-to-control” strategies: the fund purchases debt securities in an attempt to control a distressed company’s equity.
- “Turnaround” strategies: the fund makes debt and equity investments (that is, “rescue financing”) in companies encountering operational or financial problems.
A distressed investment fund is sometimes nicknamed a “vulture fund“.
