Special Situations Private Equity
Buy troubled businesses well, recapitalize them, and transform operations
- Difficulty
- Expert
- Time to result
- ~months to results
- Steps
- 8
- Confidence
- 97%
The framework begins by finding a viable business whose excessive leverage, maturity pressure, or operational neglect has created distress. Instead of bidding for its equity in a competitive auction, the investor acquires discounted debt or negotiates directly with stakeholders, using the restructuring to obtain control at an attractive basis. Control alone is insufficient: the investor must recapitalize the company, reduce leverage, strengthen management, and build a value creation plan. Additional capital then funds operational improvements, expansion, or strategic repositioning. Returns come from repairing and transforming the underlying business rather than merely waiting for distressed securities to recover in price. The method therefore combines credit analysis, restructuring execution, governance, operational expertise, and patient ownership.
Origin
Victor Khosla said Strategic Value Partners developed this approach after 2008, when intermittent distressed-debt cycles pushed the firm beyond liquid trading and toward controlling and operating businesses.
Core principles
- 01Acquire control at a discount rather than through a competitive auction
- 02Treat control as the beginning, not the investment thesis
- 03Reduce leverage so a good underlying business can recover
- 04Strengthen management before demanding operational change
- 05Invest for growth instead of relying only on cost cuts
How to run it
- 1
Find Viable Businesses in Financial Distress
Look for companies with defensible operations, customers, assets, or market share whose problems arise primarily from excessive leverage, maturities, or undermanagement.
Pro tip Distinguish a damaged capital structure from a permanently broken business model.
Watch out A low debt price does not make an economically obsolete company attractive.
- 2
Establish the Reorganization Value
Model the restructuring period, required cost and capital changes, sustainable cash flow, and the value of the repaired business. Use that estimate to determine a disciplined purchase price.
Pro tip Compare going-concern value with liquidation value before committing capital.
Watch out Do not assume the bankruptcy process will be quick or operational performance will remain stable.
- 3
Buy Control Efficiently
Acquire enough discounted debt to gain control through restructuring, or negotiate a bilateral equity purchase outside a conventional auction.
Pro tip Seek situations where complexity or urgency limits competition and improves the entry price.
Watch out Winning control without a credible operating plan can turn the investor into the owner of an unsolved problem.
- 4
Repair the Capital Structure
Recapitalize the company, reduce unsustainable leverage, extend maturities where appropriate, and inject enough new capital to support recovery.
Pro tip Give management sufficient financial headroom to make decisions beyond immediate survival.
Watch out Leaving the company thinly capitalized can erase operational gains during the next setback.
- 5
Strengthen Leadership
Assess the board and management team, retain strong performers, and recruit missing leadership capabilities before launching major changes.
Pro tip Match executives to the transformation ahead rather than the company that existed before distress.
Watch out Financial restructuring alone will not correct weak execution or exhausted leadership.
- 6
Build the Value Creation Plan
Define the operational initiatives, investments, strategic priorities, owners, milestones, and performance measures that will transform the company.
Pro tip Include growth investments and commercial improvements rather than relying solely on cost reduction.
Watch out A generic turnaround plan without accountable owners will not produce fundamental change.
- 7
Execute Hands-On Transformation
Work with management to improve operations, dispose of distracting assets, invest in the core business, and pursue credible expansion opportunities.
Pro tip Use dedicated industry operators when the assets require specialized technical or regulatory expertise.
Watch out Do not place the asset on autopilot after gaining control.
- 8
Exit After Value Is Proven
Sell or otherwise realize the investment once the repaired capital structure and operational improvements are visible, sustainable, and valued by the market.
Pro tip Document recurring revenue, stronger management, and completed improvements before beginning an exit process.
Watch out Exiting before the transformation is evident can surrender much of the created value.
In the wild
Cory combined a strong London waste-to-energy operation with troubled landfill and garbage-collection businesses and too much debt. After taking control, SVP repaired and sold the weaker operations, hired a new chairman, CEO, and management team, and invested in the core plant. It increased the proportion of output covered by long-term contracts from 55% to 70% and developed expansion and adjacent data-center plans before selling the company several years later.
→ The active transformation produced a successful investment rather than a passive recovery trade.
Common mistakes
Confusing Control with Value Creation
Acquiring enough debt to own the company only transfers responsibility for the problem. Value emerges from recapitalization and operational execution after control is secured.
Relying Only on Cost Cutting
Distressed companies may need efficiency improvements, but durable recovery also requires investment, stronger leadership, and a credible growth plan.
Operating Without Specialist Capabilities
Aircraft, infrastructure, and other complex assets require technical, regulatory, and operating expertise that a paper investor may not possess.
Is it for you?
Best for
It is best for experienced investors with restructuring expertise, patient capital, and the operational resources to manage complex businesses.
Not ideal for
It is not suitable for passive investors, short holding periods, or businesses whose underlying economics cannot be repaired.
From the transcript
“You've got to be able to buy it either you buy it through the debt right where you buy it through by buying debt at…”
“buy it well, but that is just step one. The step two is to go strengthen the management team, build a new business plan, often…”
“not just to take control, but to take control in our very hands on way. Right. We strengthen management, we build new business plans, we…”
From the episode
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Victor Khosla