What does distressed investing entail?

Distressed investing involves purchasing assets that are perceived to be undervalued, primarily due to the financial distress or operational challenges of the companies owning those assets. Investors in this space seek opportunities where the market has mispriced the risk associated with the financial troubles, allowing for potentially high returns if the assets can be turned around or if the companies can recover.

This approach often involves investing in companies facing bankruptcy or severe operational issues, which is related to the reasoning behind the choice involving purchasing shares of companies in financial distress. However, the focus in distressed investing is broader and can encompass different types of assets (e.g., bonds, real estate) that are undervalued because of these financial troubles, not just equity shares. Thus, it accurately captures the emphasis on undervaluation due to financial stress, making it the best representation of distressed investing.