Cristina Gómez Clark, Angie Pacheco, Alvarez & Marsal
This is an extract from the Fifth Edition of The Guide to Restructuring published by Latin Lawyer. The whole publication is available here.
This is an Insight article, written by a selected contributor as part of Latin Lawyer's co-published content. Read more on Insight
Introduction
In recent years, Latin America has witnessed a notable decline in the success and activity of private equity (PE) funds, which once promised to bring growth capital and strategic expertise to the region’s corporate landscape. This trend is also reflected in fundraising numbers: Latin American PE fundraising dropped sharply from US$3 billion in 2022 to just US$1 billion in 2023, underscoring the difficulties in attracting new capital to the region.[1] Despite occasional high-profile transactions, such as LATAM Airlines’ 2023 distressed-to-recovery deal valued at US$4.3 billion, the reality has been more subdued: weak exits, macroeconomic volatility, complex regulatory environments and underdeveloped capital markets have undermined the returns of traditional equity-driven strategies. As a result, many PE funds have struggled to deploy capital effectively at expected returns, while others have quietly exited the market.
At the same time, private debt funds are gaining traction, especially those focused on distressed and special situations financing. According to S&P Global’s 2023 Private Equity Outlook Survey, in Latin America, special situations ranked as the most favoured emerging investment strategy, with 42 per cent of respondents selecting it as their top choice.[2] The slow but growing interest in debtor-in-possession (DIP) financing frameworks, particularly following legal reforms in countries like Colombia and Mexico, may be providing a new, lower-risk channel for investors seeking exposure to high-yield assets. Unlike equity investments, which often require long holding periods, high operational engagement, high GP fees and uncertain exit strategies, debt instruments, especially those secured and granted super-priority status, could offer a more structured, predictable and collateralised approach to navigating corporate distress.
This shift opens the door to a broader conversation: could Latin America be on the brink of developing a functional distressed debt market, backed by legal adaptations that reduce risk and provide lenders with enforceable protections? What are the barriers holding this segment back? And what lessons can the region draw from the more mature, institutionalised distressed debt market in the United States?
This chapter aims to explore these questions. By analysing market potential, investor appetite and regulatory gaps, we will evaluate whether DIP-financing-backed distressed debt can emerge as a viable investment strategy in Latin America. To support this analysis, we conducted in-depth interviews with portfolio managers, private equity leaders, debt fund executives and other investors operating across Latin America. Their perspectives and experience offer valuable insight into both the obstacles and opportunities facing this evolving asset class. These voices help illuminate the real dynamics on the ground of capital deployment and the legal reforms needed to build a mature, resilient distressed debt ecosystem in the region.
The end of a private equity era
Over the past decade, PE was celebrated as a transformative force in Latin America’s capital markets, combining long-term capital, strategic oversight and the transfer of global best practices. Between 2015 and 2019, a record number of funds were launched in markets like Mexico, Brazil and Colombia, fuelled by expectations of middle-market growth and economic formalisation. That optimism materialised strongly in 2021 and 2022, when Latin American PE experienced a remarkable rebound in line with global markets. Favourable conditions, such as low interest rates, abundant liquidity and investors eager to channel capital into emerging economies with higher growth potential, drove record levels of deal-making across the region. In Mexico alone, the number of investment vehicles grew from 336 in 2014 to 567 in 2019,[3] illustrating the wave of optimism that defined the period.
That optimism, however, has waned considerably. By 2024, global private equity fundraising had plummeted 22 per cent, hitting its lowest level since 2016.[4] This global contraction deepened further in 2024: fundraising collapsed by 30 per cent year-over-year, reaching US$680 billion compared to US$966 billion in 2023, the lowest annual figure since 2015.[5] The number of funds closed also shrank sharply, with only 1,783 funds closing in 2024, a 40 per cent year-over-year drop from the 6,132 closings recorded in 2021.[6] Distributions to limited partners (LPs) fell to just 11 per cent of NAV in 2024,[7] the weakest payout level in over a decade.
These global pressures are magnified in Latin America, where exit markets are shallow, IPOs remain rare, and secondary liquidity is virtually non-existent. ‘Finding strategic buyers for mid-size companies in the region remains extremely difficult’, notes Fernando Concha, Founding Partner of Exium Capital,[8] highlighting the structural illiquidity that continues to undermine PE exits across the region.
This contraction is not merely cyclical; it reflects deeper structural frictions. The traditional ‘J-curve’ dynamic of PE now often feels more like a liability to investors prioritising liquidity and downside protection. In Q1 2025, global private equity exit activity dropped to its lowest level in two years, with just 473 confirmed exits totalling about US$80.8 billion,[9] a clear signal of strained exit markets. Confronted with fading IPO and M&A markets, many funds are holding companies longer, delaying cash returns and complicating performance metrics. Global PE exits plunged in early 2025, heightening scepticism among investors increasingly intolerant of prolonged capital lock-up.[10] In Latin America, the problem is even more acute, given the thinness of IPO markets and limited secondary transactions.
LP scepticism is also intensifying. According to a fund manager interviewed for this chapter, who requested anonymity, investors are no longer willing to tolerate opaque valuation methodologies or prolonged timelines. Traditional PE is increasingly perceived as a black box – capital locked up for a decade, unpredictable exits and interim metrics that are easily manipulated. These frictions are accelerating the migration of institutional allocators toward more transparent, liquid alternatives.
Yet, dismissing private equity altogether would be premature. Several voices stress that, when executed well, PE remains a viable and even attractive model. José Correa, Managing Director of Activa Alternative Assets,[11] argues that private equity still works when managers focus on operational value creation: ‘It’s not that private equity doesn’t work. It’s just harder now. You need to add real operational value, not just rely on multiple expansion.’ Similarly, René Castillo, Portfolio Manager of Larraín Vial,[12] emphasises that Chile’s market remains active, with local investors still committing capital, albeit with stricter governance standards and shorter commitment horizons.
Guillermo Pereira, Founding Partner of Ithaca Asset Management,[13] underscores the potential of equity investments, stating that they can be consistently successful by implementing differentiated and disciplined strategies:
Ithaca invests a smaller ticket than traditional PEs and looks for special situations that create market dislocations, resulting in attractive entry multiples. Moreover, the firm does not commit to a specific holding period, in order to (i) execute divestments in an opportunistic rather than a forced manner; and (ii) have a long-term vision that reduces the need for aggressive initiatives that sacrifice short-term cash flows in exchange for uncertain long-term expectations. LPs want real cash returns, not just write-ups on paper; this is possible with conservative capital structures that allow consistent dividend distributions.
Crucially, recent experiences shared by a leading regional fund underscore the resilience of private equity when managed with discipline. As its manager explained, ‘Our distributions to LPs have been consistently strong, returning capital with compounded returns that still beat public benchmarks.’ This reinforces the point that, even amid systemic headwinds, PE strategies built on operational improvements, well-defined exit routes and rigorous governance can still deliver competitive and contractual returns.
The rise of private credit
As private equity dominance begins to wane, private credit has emerged as the clear beneficiary of a broader reallocation of institutional capital. In 2024, private credit was the only alternative asset class to experience net fundraising growth, posting a 3 per cent year-over-year increase even as every other major strategy – buyouts, venture capital, real assets – declined. Globally, the asset class surpassed US$1.5 trillion in assets under management and is projected to reach US$2.8 trillion by 2028.[14] This growth reflects a structural repricing of risk, liquidity and return expectations. LPs are now prioritising contractual cash flows, seniority in capital structure and shorter durations, particularly in volatile macro environments where equity exits are difficult to execute.
Latin America exemplifies this shift. The LATAM Debt Investor Market Map 2025 by Cascade Debt[15] identifies over 40 active private debt investors across Mexico, Brazil, Colombia, Chile and Argentina. These funds are diversifying across asset-based lending, venture debt, revenue-based financing and structured corporate credit. In 2022 alone, venture and private credit financing reached US$1.3 billion, an all-time high for the region’s debt ecosystem.[16] What is more striking is the rising prominence of hybrid debt structures even within venture capital. According to Entrepreneur LATAM, in 2024, nearly 5 per cent of VC funding, equivalent to US$144 million, was raised through convertible or revenue-linked instruments.[17] This shift suggests that entrepreneurs themselves are beginning to favour debt-based capital to minimise dilution and manage downside risk in uncertain growth environments.
Investor interviews further validate this transformation. Fernando Concha described how private debt has allowed them to ‘customize terms, build collateral packages, and deliver returns faster than equity.’ Similarly, Fredy Saquiché,[18] Special Collections Unit Official of Oikocredit,[19] highlighted that even mission-driven funds are turning to structured credit to protect capital and promote financial inclusion. These instruments are perceived as ‘more aligned with Latin American realities’, especially where legal enforcement can be slow but is improving, and where short-term predictability often trumps long-term equity upside.
The momentum behind credit is not only market-driven but also legal. As restructuring laws modernise, particularly in Mexico and Colombia, opportunities for DIP financing are beginning to emerge. For instance, US-style DIP mechanisms are increasingly being mirrored in cross-border proceedings, allowing for court-approved super-priority loans.[20] This is a game-changer for private lenders. These structures offer downside protection, collateral rights and enforceability within insolvency regimes, a rare combination in emerging markets. As Guillermo Pereira observed, ‘credit today is not just about yield; it is about control and timing to execute the initiatives that lead to a successful turnaround. DIP deals often have both.’ At the same time, regulatory changes have accelerated the shift. As René Castillo emphasised, the implementation of Basel III rules has constrained the ability of traditional banks to engage in complex financing, opening the door for private debt funds to step in and capture opportunities that banks are no longer able or willing to pursue due to stricter capital requirements.
The case for DIP financing and the distressed debt opportunity
DIP financing has long been a staple of the US Chapter 11 playbook, offering distressed companies the capital needed to survive reorganisation while providing lenders with super-priority status and court-sanctioned protections. Over time, US Chapter 11 has solidified a robust ecosystem for DIP financing, underpinned by deep jurisprudence, consistently enforced standards (such as super-priority liens and automatic stays) and courts staffed with judges specialised in complex restructurings. These mechanisms create predictability and confidence, enabling lenders to engage knowing how their claims will be treated.
Yet in Latin America, DIP financing remained largely theoretical until recently, more aspirational than actionable. That is beginning to change. In Mexico, reforms to the Commercial Bankruptcy Law (Ley de Concursos Mercantiles) first introduced priority for DIP loans, while Colombia’s post-pandemic regulatory updates have strengthened its insolvency framework. Chile has also taken meaningful steps: under Act No. 20.720 (2013), DIP loans receive repayment priority over other creditors, reducing lender risk, subject to creditor approval for material transactions and oversight during restructuring. These legal updates align the region more closely with international standards, helping reduce the uncertainty that has historically discouraged institutional investors from deploying capital in restructurings.
This regulatory evolution is unlocking a strategic opportunity. As Guillermo Pereira noted, ‘distressed companies in Latin America are often still operationally viable; they just lack liquidity and refinancing options.’ In such cases, DIP financing becomes a precision instrument: a tool to inject life-saving capital with strong downside protection and legal priority. While DIP loans are not immune to post-restructuring or reputational risks, they typically benefit from being repaid ahead of most creditors and are often secured against hard assets. Fernando Concha echoed this sentiment, describing DIP as ‘the only viable bridge in certain restructurings, especially when traditional banks have walked away’.
Moreover, the use of DIP structures is fostering an entirely new layer of market sophistication. Courts in Mexico and Colombia have begun approving prepackaged restructurings and granting liens on collateral with increasing regularity, signalling a readiness to embrace investor-friendly practices. According to Juan Pablo Gómez, Director of Altra Investments,[21] their experience working across multiple jurisdictions has shown that ‘there are precedents in reorganizations seeking cross-border oversight with US bankruptcy processes involved as the typical balance sheet restructuring or the sale of assets (section 363) with ancillary local protection.’ This cross-pollination between US Chapter 11 and Latin American courts is already visible in complex restructurings such as those involving regional subsidiaries of multinationals or infrastructure projects with dollar-denominated debt.
Yet this emerging market also demands caution. As José Correa warned, ‘legal risk remains asymmetric, and the legislation that grants foreign investors control or subordinates local creditors is still relatively new, which means there is limited clarity on how it will operate in practice.’ Transparency, governance and local alignment remain essential. Still, for funds with legal expertise, risk appetite and restructuring experience, the opportunity is compelling. In a world of declining equity multiples and slow IPO pipelines, DIP financing offers a rare combination of yield, security and influence, allowing value to be realised without waiting for a public exit.
What is missing for a mature distressed debt market in Latin America?
Despite growing interest in DIP financing and distressed debt investing, Latin America still lacks the structural foundations needed to sustain a deep and scalable distressed debt ecosystem. As Juan Pablo Gómez warns, ‘Capital is available, but execution conditions still do not allow us to deploy it effectively: judicial systems are slow, processes are opaque, and there is little predictability regarding cramdown tools to ensure successful reorganization procedures.’ This creates a paradox: appetite for distressed strategies is rising, but the legal infrastructure remains too fragile or fragmented to channel that capital efficiently. Even in jurisdictions like Colombia and Mexico, where DIP-like mechanisms have been introduced, there is little jurisprudence to give investors the confidence they need, and judicial specialisation remains limited.
Fixing these bottlenecks requires more than patchwork reforms. The region needs a coordinated push for legal harmonisation across jurisdictions, inspired by UNCITRAL[22] principles or select elements of Chapter 11, but adapted to Latin America’s unique realities. The goal for Latin America should not be to replicate the US model wholesale, but rather to develop clear rules, specialised judges and predictable procedures adapted to the region’s realities of informality and capital scarcity. Specialised restructuring courts, like Brazil’s business reorganisation chambers, should be scaled across the region and staffed with judges who understand finance and insolvency. Credit registries must be digitised and modernised to track collateral and seniority claims in real time. Without these tools, even the most sophisticated funds will remain cautious.
Moreover, building a distressed debt market demands stronger signalling mechanisms and public-private collaboration. Fredy Saquiché proposes that multilateral development banks and public institutions take a catalytic role by co-investing in early DIP transactions to build case law and demonstrate replicability. Institutions like the IDB and CAF could also help create standardised scoring systems for DIP loans, enabling securitisation and syndication in a region with underdeveloped secondary markets. Without such infrastructure, the distressed debt space will remain niche and illiquid. Moreover, institutional investors prefer to deploy capital with experienced managers, yet in Latin America there are few specialised distressed fund managers, and international players are often deterred by the relatively small ticket sizes.
Crucially, distressed debt should not be seen merely as a ‘safe harbour’ for capital, but as a lever for systemic modernisation and sustainable growth. By channelling capital into structured reorganisations, investors can incentivise companies to formalise governance, improve reporting and adopt international standards. Well-designed credit packages could even pool multiple exposures into single vehicles where several investors share risk, collateral and governance frameworks. This would help overcome the small-ticket barrier that discourages large institutions from entering the space, while creating diversified vehicles that could later be securitised or sold in secondary markets.
Ultimately, the opportunity lies not just in resolving crises, but in creating value from them. In the words of one fund manager who requested confidentiality, ‘Insolvency processes can be engines of transformation, but only if they are well-structured. Otherwise, they just perpetuate value destruction.’ Latin America has the chance to turn insolvency from a bottleneck into a lever for growth. By embedding creditor protections into judicial proceedings, digitising asset registries and incentivising institutional innovation in structured credit, the region can unlock billions in private capital, help viable companies recover and lay the foundation for a truly modern distressed debt market.
Recommendations for Latin America
Latin America cannot afford to leave the development of distressed debt markets to chance. Policymakers, judges and legislators must take an active role in institutionalising these mechanisms, ensuring legal harmonisation, judicial specialisation and digitised credit registries across the region. Multilateral institutions like the IDB and CAF should act as catalytic players – co-investing in early DIP transactions, promoting standardised frameworks and helping to generate jurisprudence that builds trust. For lawyers and policymakers, the message is clear: scaling these reforms is no longer optional, but urgent, if the region’s companies are to access the capital they need to survive and modernise.
If these reforms are pursued decisively, Latin America has the chance to transform its perception. The region could move from being seen as a ‘limited and high-risk’ market to becoming an ‘emerging laboratory of innovation in distress financing’. The combination of operationally viable but liquidity-constrained companies with a rising class of flexible debt investors is unique, and if supported by credible rules and institutions, it can generate a virtuous cycle of capital deployment, corporate restructuring and market deepening. In other words, insolvency can evolve from a stigma and a bottleneck into a lever for sustainable growth. The region stands at a crossroads: either remain trapped in inefficiency and fragmented frameworks or seize the moment to lead in designing restructuring solutions tailored to emerging market realities.
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