The Declining Influence of Big Law in Bankruptcy: A Structural Shift in Distressed Debt Markets

The U.S. bankruptcy landscape is undergoing a seismic transformation. From 2023 to 2025, legal disintermediation—defined as the circumvention of traditional legal hierarchies in favor of pre-negotiated restructurings and liability management exercises (LMEs)—has reshaped capital allocation dynamics. This shift is not merely procedural; it is structural, favoring nimble alternative debt managers over entrenched law firms in distressed scenarios. For investors, understanding this evolution is critical to navigating the new era of distressed debt markets.

The Rise of Disintermediation: Flexibility Over Formalism

Legal disintermediation has accelerated as stakeholders prioritize speed, cost efficiency, and control. Traditional Chapter 11 bankruptcy, once the default mechanism for corporate restructurings, is being replaced by out-of-court solutions such as pre-packaged restructurings, restructuring support agreements (RSAs), and double-dip LMEs. These strategies allow borrowers to restructure debt without the rigidity of the Absolute Priority Rule, enabling layered recovery structures that prioritize key creditors while preserving critical assets.

For example, liability management exercises (LMEs)—which include up-tier exchanges and drop-down transactions—have become a staple in middle-market and real estate restructurings. These transactions allow borrowers to offer higher-priority claims to creditors, often bypassing the need for formal bankruptcy. While LMEs have faced legal challenges (e.g., non-participating creditors contesting terms), they underscore a broader trend: stakeholders are increasingly favoring collaborative, pre-negotiated frameworks over adversarial court proceedings.

The Decline of Big Law's Dominance

Traditional law firms, long the gatekeepers of Chapter 11 processes, are seeing their influence wane. Firms like Holland & Knight and Morrison & Foos remain active in high-profile cases—such as the crypto bankruptcies of Cred Inc. and Voyager Digital—but their role is increasingly confined to complex litigation and cross-border insolvencies. For simpler restructurings, clients are turning to alternative legal service providers (ALSPs) and specialized debt managers that offer faster, cheaper solutions.

Quantitative data from the Thomson Reuters Institute's ALSP 2025 Report reveals a stark shift:
- ALSP market size reached $28.5 billion in 2023, with a 18% CAGR since 2021.
- Traditional law firms' share of outside legal spend dropped from 90% in 2015 to 86% in 2023, with ALSPs capturing the lost ground.
- 40% of law firms plan to increase their use of independent ALSPs in 2025, while only 1% anticipate a reduction.

This erosion of market share is not limited to legal services. In distressed debt markets, private credit funds and private equity sponsors are outpacing traditional banks in capital allocation. These entities offer rescue financing with investor-friendly terms (e.g., PIK interest, preferred equity kickers) and leverage their operational expertise to revitalize struggling companies. For instance, private equity firms are increasingly acquiring distressed assets via bolt-on acquisitions, integrating them into existing portfolios to unlock synergies.

Capital Allocation in the New Normal

The structural shift is most evident in real estate and retail sectors, where rising interest rates and expiring government assistance programs have triggered a wave of defaults. Investors are capitalizing on this by:
1. Purchasing non-performing loans at discounts, then negotiating consensual transfers or foreclosing on properties.
2. Repurposing commercial real estate (e.g., converting office buildings to multifamily housing) through adaptive reuse projects, which offer higher rental yields and stronger occupancy rates.
3. Leveraging rescue financing with aggressive terms, such as prepayment penalties and higher interest rates, to secure favorable returns.

For example, private credit funds have become key players in the distressed real estate market, offering bridge financing to stabilize assets before selling them at a premium. This contrasts with traditional banks, which often lack the flexibility to structure such deals.

Investment Implications: Where to Allocate Capital

The rise of legal disintermediation and alternative debt managers presents clear opportunities for investors:
1. Private Credit Funds: Firms like Apollo Global Management (APO) and Blackstone (BX) are expanding their distressed debt portfolios, leveraging their agility to outperform traditional lenders.
2. Specialized ALSPs: Companies such as Kira Systems and Luminoso are gaining traction in restructuring support, offering AI-driven tools to streamline due diligence and contract analysis.
3. Real Estate REITs: Firms focused on adaptive reuse (e.g., Prologis (PLD) for logistics-to-industrial conversions) are well-positioned to benefit from the repurposing trend.

Conclusion: A New Era of Distressed Investing

The decline of Big Law's dominance in bankruptcy is not a temporary trend but a structural shift driven by technological innovation, regulatory flexibility, and evolving stakeholder priorities. As legal disintermediation accelerates, investors must reallocate capital toward alternative debt managers, private credit providers, and tech-enabled legal solutions. Those who cling to traditional models risk being left behind in a market where speed, adaptability, and collaboration now reign supreme.

For investors seeking to capitalize on this transformation, the message is clear: embrace the disintermediation revolution and position portfolios to benefit from the rise of nimble, non-traditional players in distressed debt markets.