The Rise of Distressed Debt Specialists Amid Big Law's Decline in Bankruptcy

From 2023 to 2025, a seismic shift has reshaped the legal and financial landscapes. Big Law firms, once the gatekeepers of Chapter 11 bankruptcy, are ceding ground to a new breed of players: distressed debt specialists, alternative legal service providers (ALSPs), and private credit funds. This structural transformation is not merely a cyclical downturn but a fundamental reordering of how capital and legal services are allocated in distressed scenarios. For investors, this represents a golden opportunity to capitalize on agility, innovation, and capital efficiency—traits that traditional law firms are struggling to match.

The Decline of Big Law in Bankruptcy: A Structural Shift

Big Law firms have long dominated bankruptcy cases, leveraging their expertise in adversarial court proceedings. However, the rise of legal disintermediation—a term describing the circumvention of traditional legal hierarchies in favor of pre-negotiated restructurings—has eroded their market share. According to the Thomson Reuters Institute's ALSP 2025 Report, the ALSP market size ballooned to $28.5 billion in 2023, growing at an 18% compound annual growth rate (CAGR) since 2021. Meanwhile, traditional law firms' share of outside legal spend has fallen from 90% in 2015 to 86% in 2023.

The root cause? Stakeholders now prioritize speed, cost efficiency, and control. Out-of-court solutions like pre-packaged restructurings, restructuring support agreements (RSAs), and liability management exercises (LMEs) allow companies to restructure debt without the procedural rigidity of formal bankruptcy courts. These methods are faster, cheaper, and less adversarial, aligning with the preferences of creditors, debtors, and investors in a high-interest-rate environment.

The Rise of Distressed Debt Specialists: Capital Efficiency Wins

Private credit funds and specialized debt managers are now the new kings of distressed investing. Entities like Apollo Global Management (APO) and Blackstone (BX) have outpaced traditional banks in capital allocation, offering rescue financing with terms like PIK (Payment-In-Kind) interest and preferred equity kickers. These structures provide flexibility and investor-friendly returns, making them ideal for sectors like real estate and retail, where distress is rampant.

For example, in the real estate sector, private credit funds are repurposing distressed assets through adaptive reuse strategies—converting commercial properties into residential units or data centers. This approach not only stabilizes assets but also unlocks value for investors. Similarly, in retail, pre-negotiated restructurings are enabling companies to avoid the stigma and costs of Chapter 11, preserving brand equity and operational continuity.

ALSPs: The Legal Infrastructure of the New Normal

Alternative legal service providers (ALSPs) are the unsung heroes of this transition. Firms like Axiom (AXIM) and UnitedLex are offering modular, tech-enabled legal services that undercut traditional law firms' pricing models. By automating document review, leveraging AI for due diligence, and deploying specialized teams for LMEs, ALSPs are delivering legal services at a fraction of the cost.

The data is clear: 40% of law firms plan to increase their use of ALSPs in 2025, while only 1% anticipate a reduction. This shift is not just about cost—it's about adaptability. ALSPs can scale quickly to meet demand, a critical advantage in a market where distress is becoming the new normal.

Sector-Specific Opportunities: Where to Invest

1. Private Credit Funds: Apollo (APO) and Blackstone (BX) are leading the charge in distressed debt. Their ability to structure rescue financing and operational turnarounds positions them to capture market share from traditional banks and law firms.
2. ALSPs: Axiom (AXIM) and UnitedLex are prime candidates for growth as legal spend continues to migrate to alternative providers. Their tech-driven models are a perfect fit for the speed and efficiency demands of modern restructurings.
3. Real Estate REITs: Firms specializing in adaptive reuse, such as Digital Realty (DLR) or Prologis (PLD), stand to benefit from the repurposing of distressed commercial assets.
4. Distressed ETFs: Instruments like the Direxion Distressed Companies Bull 3X ETF (DDC) offer leveraged exposure to companies navigating restructurings, capitalizing on the inverse relationship between economic health and bankruptcy demand.

The Investment Thesis: Agility Over Hierarchy

The decline of Big Law in bankruptcy is not a temporary setback but a structural shift driven by technological innovation, regulatory flexibility, and evolving stakeholder priorities. For investors, this means betting on agility, capital efficiency, and collaboration. Traditional law firms are being pushed to the periphery in simpler restructurings, while their role is increasingly confined to complex litigation and cross-border insolvencies.

The winners in this new ecosystem are the distressed debt specialists and ALSPs—entities that can deliver solutions faster, cheaper, and with more flexibility. As the market continues to evolve, investors who align with these trends will find themselves at the forefront of a redefined legal and financial landscape.

In conclusion, the rise of distressed debt specialists is not just a story of disruption—it's a blueprint for the future. For those willing to embrace the shift, the rewards are substantial. The key is to act now, before the market fully reorders itself.