Skip to main content
The COVID-19 pandemic has expanded the universe of companies in financial distress, creating a buyer’s market for distressed debt funds.

The end to the coronavirus health crisis is in sight, however, it may take much longer to recover from the economic slowdown that it caused. The loss of revenue attributable to COVID-19 and stay-at-home measures resulted in many companies taking on significant debt, which could create stressed scenarios if revenues fail to recover. Bloomberg recently analyzed 3,000-listed U.S. companies and concluded that nearly 20% may now qualify as “zombies,” businesses with insufficient earnings to cover their interest expenses after adding an extraordinary $1 trillion of debt to their balance sheets during the pandemic.1

The result is a favorable dynamic for distressed investors with the global opportunity set nearly 2.5x larger than the capital targeting it — approximately $140 billion of capital is seeking to invest in a $320 billion universe. Distressed fund capital deployed during previous market dislocations – the Global Financial Crisis (“GFC”) and the dot com bubble bursting (“Dot Com crash”) – delivered historically high returns, suggesting that 2020, and even 2021, could be strong vintages.

Undead Debt

Zombie firms are sitting on an unprecedented $2 trillion of obligations

Source: Bloomberg, as of September 2020. For illustrative purposes only.


To mitigate the negative economic effects of the COVID-19 pandemic, Congress and the Fed – along with other governments and central banks across the globe – injected unprecedented fiscal and monetary stimuli. These included the $2.2 trillion CARES Act; an expansion in the eligibility of quantitative easing and existing stabilization programs by over $3 trillion; and a reduction in interest rates to near zero.

While the Fed’s toolkit eased the initial liquidity crunch, businesses still face a deeper, long-term solvency crisis. Companies able to access financing either drew down on their revolving credit facilities or took out new debt to help weather the initial storm caused by the abrupt reduction in revenues. This provided many with a sufficient liquidity runway for the first or even second half of 2020 and delayed the onset of widespread distressed opportunities. However, many of these businesses may now find themselves over-levered, with difficulty servicing their additional debt load in the face of reduced revenue capabilities in 2021 and beyond. Highly levered companies (those with debt multiples of 6x or higher of EBITDA) that were not part of the Fed’s stimulus package are particularly vulnerable, affording distressed investors an opportunity to provide rescue financing loans, or acquire a claim on a company’s assets through a restructuring or distressed-for-control transaction.


Overall, distressed investors in this cycle are expected to benefit from compelling supply-demand dynamics. The lower-rated corporate debt market is vast, representing $4.6 trillion of assets2 ($3 trillion in the United States3). Using Moody’s projected default rate of 7%-8%4 (down from an initial projection of 11%-12%), the anticipated default wave is approximately $320 billion to $370 billion ($210 billion to $240 billion in the United States). Although lower than during the GFC, this represents a massive opportunity set. The pace of these defaults is expected to rise through 2021, with Moody’s projecting a peak in March 2021.

This supply of distressed opportunities is expected to exceed the capital targeting the sector. In addition to the $68 billion of distressed dry powder as of June 2020, distressed funds in the market were seeking to raise an aggregate $70 billion in capital, much of which has been closed on in the last few months.5 Together, this translates to approximately $140 billion of capital targeting a global opportunity set of $320 billion or more — an attractive imbalance in favor of distressed investors. While other investment types, such as hedge funds and other forms of private credit, may also selectively target distressed debt opportunities, the supply-demand imbalance is significant and should favor experienced managers.

We believe that the distressed debt market cycle is still developing, and it is a compelling time to invest in the asset class. Historical data from past market downturns supports this view, as distressed funds raised during both the GFC and the Dot Com crash outperformed their counterparts from other vintages, as well as other private debt funds. Given zero interest rates, however, the returns on the new funds may be lower than earlier funds. Vintage 2008 distressed funds generated a median net IRR of 15%.6 In the years following the Dot Com crash, the HFRI Distressed Index was up over 100% in the five years post-2000.7 If we are entering a similar slowdown period that affects multiple aspects of the global economy, then we may be in the early phases of a distressed opportunity set that lasts for several years.

For more on the current state of the distressed debt opportunity, see our paper, Is It Too Late for Distressed?

Was this article helpful?


(1) Source: Bloomberg, “America’s Zombie Companies Rack Up $2 Trillion of Debt,” November 2020.
(2) Source: Oaktree, September 2020. Represents non-investment grade debt outstanding.
(3) Source: Source: S&P Global, “Credit Trends: Global Corporate Debt Market: State Of Play In 2020,” June 2020.
(4) As of Q4 2020.
(5) Source: Preqin, “Record Number of Distressed Debt Funds in Market amid Downturn,” June 2020.
(6) Source: Institutional Investor, “History Suggests Distressed Debt Funds Raised This Year Will Outperform,” October 2020.
(7) Source: eVestment, as of November 2020.


This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by Institutional Capital Network, Inc. or its affiliates (together “iCapital Network”). Past performance is not indicative of future results. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed, and iCapital Network assumes no liability for the information provided.

Products offered by iCapital Network are typically private placements that are sold only to qualified clients of iCapital Network through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity.

Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc. (d/b/a iCapital Network). These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. iCapital and iCapital Network are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

© 2021 Institutional Capital Network, Inc. All Rights Reserved.

Back to Private Credit
Nick Veronis

Nick Veronis

Nick is Co-Founder and one of the Managing Partners of iCapital, where he is Head of Fund Management. He is also a member of the company's Operating Committee. Nick spent 11 years at Veronis Suhler Stevenson (VSS), a middle market private equity firm where he was a Managing Director responsible for originating and structuring investment opportunities. He holds a BA in economics from Trinity College and FINRA Series 7, 79, and 63 licenses. See Full Bio.

Tatiana Esipovich

Tatiana Esipovich

Tatiana is a Senior Vice President on the Investment Products and Research team at iCapital, focusing on private capital strategies. Prior to joining iCapital in 2017, Tatiana worked at DB Private Equity (part of Deutsche Asset Management) in New York. Tatiana started her career at Deutsche Bank in London. She received an MA in Modern Languages from Oxford University.