Activist Investors, Distressed Companies, and Value Uncertainty

Abstract

Hedge funds, private equity firms, and other alternative investment funds are frequently key players in corporate restructurings. Most commentators agree that the presence of a fund can change the dynamics of a chapter 11 case. They cannot agree, however, on the impact of this change — i.e., do funds create or destroy enterprise value? This essay contributes to the dialogue by analyzing data from chapter 11 cases in which funds are in a position to influence the debtor’s exit strategy. The data shed light on what such funds might achieve in chapter 11 cases and the potential implications for debtors and their other stakeholders. Although additional research is needed, the preliminary data suggest that the value of fund participation in chapter 11 cases likely depends on whom you ask and where they sit in the particular debtor’s capital structure.

Keywords: hedge funds, activist investors, alternative investment funds, chapter 11, restructuring, distressed debt, distressed investing, reorganization, loan-to-own