A seismic shift is reshaping how distressed debt is governed in 2025, moving beyond the traditional dominance of elite law firms like Kirkland & Ellis and Weil Gotshal. A new mix of players—private equity firms, hedge funds, and alternative legal service providers—are redefining value creation in distressed markets by combining financial engineering with operational expertise and technological capabilities. The result is a post-Big Law era where courtroom battles are not the sole path to restructuring success.
The operational turn in distressed debt hinges on blending governance with hands-on management. Instead of merely buying distressed debt at discounts, many buyers are pursuing distressed-to-control strategies that aim to convert debt into equity through active, operational management. Private equity and hedge funds are leading the way, repurposing underperforming assets into high-yield businesses such as logistics hubs and multifamily housing. In this framework, returns can be substantial, with internal rate of return targets often exceeding the 25% mark for well-executed transformations.
Distressed private equity’s rise is especially pronounced. Firms like KKR and TPG are increasingly deploying Chief Restructuring Officers to stabilize companies during bankruptcy processes, a role historically filled by legal teams. The Marelli case—an automotive supplier backed by KKR that filed for Chapter 11 in mid-2025—illustrates how restructuring now demands not only legal acumen but deep expertise in supply chains and tariff dynamics, competencies that private equity firms are cultivating in-house.
Technology is accelerating this transition. AI-driven tools such as Kira Systems and Luminoso are expediting due diligence by allowing teams to sift through thousands of documents in a matter of hours, reducing reliance on traditional legal labor and shortening restructuring timelines. By 2025, a growing share of law firms—roughly four in ten—are incorporating alternative legal service providers into their workflows, signaling a broader erosion of traditional Big Law’s dominance.
New, out-of-court mechanisms are also gaining traction. Restructuring Support Agreements (RSAs) and Assignments for the Benefit of Creditors (ABCs) offer streamlined paths to restructuring without heavy court involvement. For example, Wellness Pet, a Clearlake Capital-backed company, pursued a distressed exchange in mid-2025 using ABCs to limit reputational damage while maximizing creditor recoveries.
For investors, the rise of distressed-debt specialists presents compelling opportunities, underpinned by private credit funds delivering flexible financing and tailored solutions that can outperform more traditional bank lending. At the same time, technology-enabled players—ALSPs with AI-powered tools—are becoming attractive investment targets due to their role in accelerating and de-risking workouts. Yet the landscape is not without risk: overleveraged assets, regulatory hurdles around AI adoption, and the cyclical nature of distressed markets require disciplined capital allocation and rigorous due diligence, especially in regulatory-heavy sectors like healthcare.
Looking ahead, prudent strategies for capitalizing on this new era center on three pillars:
– Private credit funds offering adaptable financing structures to stabilize distressed companies.
– Specialized ALSPs leveraging AI-driven tools to enhance due diligence and efficiency in restructurings.
– Real estate REITs, exemplified by players like Prologis, repurposing distressed retail assets into logistics hubs to meet growing e-commerce demand.
A more permissive regulatory stance in 2025 could further accelerate these dynamics, though immediate restructuring needs will demand agility. As healthcare reimbursement models evolve, the demand for operational expertise in distressed situations is likely to rise, reinforcing the trend toward blending capital, technology, and governance.
In short, the post-Big Law era in distressed debt is taking root as a structural shift rather than a fleeting trend. Those who combine financial flexibility, operational discipline, and cutting-edge technology stand to create significant value in a market where bankruptcy can serve as a catalyst for reinvention rather than a dead end.
Additional value points and context for readers:
– Operational governance is becoming a core competency in restructurings, not just a supplement to legal processes.
– The integration of AI and ALSPs is changing the cost and speed dynamics of workouts and reorganizations.
– Investors should watch developments in RSAs and ABCs as potential accelerants for efficient restructurings outside traditional court proceedings.
– Real estate strategies that repurpose distressed assets into logistics or essential-use facilities could continue to outperform in an era of rapid e-commerce growth.
Summary: A broad shift is redefining distressed debt governance, with private equity, hedge funds, and ALSPs driving operational turnarounds alongside traditional legal pathways. Technology, new restructuring tools, and proactive asset repurposing are accelerating timelines and expanding value creation beyond courtroom battles, suggesting a durable evolution in how distressed markets are managed.
Positive takeaway: This evolution promises more efficient restructurings, better creditor recoveries, and innovative use of assets, underscored by smarter financing, sharper operational focus, and advanced technology.