The bursting of Japan's bubble economy and the ensuing Asian crisis of 1997-98 created an entirely new asset class in Asia: distressed debt. Companies that were once healthy and viable filed for bankruptcy, creating a large investing landscape for specialised investors.

Distressed debt arises when a company is experiencing financial difficulty, and has defaulted on its debt obligations. To align the capital structure with repayment capability, the company must reduce debt by either restructuring its balance sheet or by liquidating some of it asets. Distressed debt investors scour the market for undervalued debt securities of such companies, purchase the debt at deeply discounted prices, and adopt various strategies to enhance the debt's value. With a global market size of US$4 trillion, the space is occupied by a diverse group of investors, including investment banks, buyout private equity firms, distressed debt hedge funds and turnaround investors. Private equity and hedge fund investors are the most active distressed debt investors, with many of the world's major investment banks' proprietary investment desks also invloved.

Today, in some circles, distressed debt has replaced venture capital as the hotspot for investment.

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