Distressed equity refers to stock or equity interests in financially distressed companies — including post-reorganization equities — representing some of the highest-risk, highest-reward opportunities in special situations investing.
At CRAGSI, we define distressed equity as equity interests — common stock, preferred stock, partnership interests, or LLC membership interests — in companies that are in, or emerging from, financial distress. Distressed equity investing can take several forms: purchasing the equity of a distressed company at depressed prices; acquiring equity through a debt-for-equity exchange in a restructuring; or buying newly issued "post-reorganization equity" distributed to creditors as part of a plan of reorganization.
Post-reorganization equity is particularly compelling: companies that emerge from Chapter 11 typically do so with dramatically reduced debt loads and renegotiated agreements, but their newly issued equity often trades at prices that don't yet reflect the improved balance sheet — because many institutional investors cannot hold equity that emerged from bankruptcy. This creates persistent mispricing that patient, specialized investors can exploit.
Distressed equity is the highest-risk position in any insolvency: equity holders are last to be paid, meaning distressed equity often goes to zero in liquidations — but in successful reorganizations, it can generate exceptional returns. At CRAGSI, we have experience on both sides: advising companies seeking to preserve equity value for founders and existing investors, and evaluating distressed equity opportunities for institutional clients.
Related CRAGSI services: Turnarounds & Restructurings · Valuations