What Attracts Investors to Distressed Asset Markets?

This World Bank Group study examines what makes distressed asset markets work — and how governments can create the right conditions for private sector engagement. It provides policymakers, regulators, and financial institutions with a practical framework to assess market readiness, identify policy and regulatory gaps to support growth, and design reforms that can unlock private capital for market development.

The note offers:

• A discussion of how distressed asset markets contribute to financial stability, access to finance, and, ultimately, credit supply.
• An overview of the benefits that distressed asset markets bring for lenders, distressed borrowers, and financial sector regulators.
• A conceptual framework based on the Five Pillars that can be used to assess the potential for market development in a particular country.

Because of its emphasis on the initial stages of development of a market, the note targets emerging market and developing economies (EDMEs) in which distressed asset markets are yet to flourish.

Why are Functioning Distressed Asset Markets Important for Financial Stability?

In many emerging markets and developing economies (EDMEs), banks face rising levels of distressed assets, including nonperforming loans (NPLs), written-off loans, and loans with increased risk of default that constrain lending, weaken financial stability, and slow economic recovery. Functioning distressed asset markets not only enable banks to off-load nonperforming assets but also help viable borrowers regain solvency, supporting broader financial stability and economic growth. Attracting private investors to participate in resolving these assets is essential to restoring credit flows and strengthening the resilience of financial systems.

What are the Five Key Pillars for Attracting Investors to Participate in Distressed Asset Markets

Drawing on lessons from global experience, the study identifies five key pillars that underpin investor participation:

1. Sufficient Volume: A significant volume of assets is needed to justify the due diligence expenses investors incur before making an investment.
2. Asset Transferability: The market's foundation is the ability to efficiently transfer distressed assets from a financial institution to a non-bank, non-licensed entity.
3. Limited Price Gap: The difference between the seller's asking price and the investor's offer must be minimal. A large price gap, often caused by overvalued or under-provisioned loans, will prevent sales.
4. Investment Structure and Servicing Capacity: A suitable investment structure is needed to fund the purchase and manage returns. Investors also depend on local servicing capacity for expertise in collection practices and implementing recovery strategies.
5. Efficient Insolvency and Enforcement Frameworks: A predictable and timely legal framework for debt enforcement and insolvency is necessary. Shorter recovery procedures increase the net present value of assets and can lead to higher purchase prices.

Developed by experts from the IFC Distressed Asset Recovery Program (DARP) and the World Bank’s Finance, Competitiveness and Investment (FCI) Global Practice, the publication offers actionable insights, country examples, and diagnostic tools to guide reforms that foster sustainable investor participation.

Related Links

• IFC's Work on Distressed Asset Resolution
• IFC DARP Factsheet
• DARP — Creating Distressed Assets Markets: Lessons Learned Since the Global Financial Crisis and Opportunities for Investors in EMDEs.
• Principles for Effective Insolvency and Creditor/Debtor Regimes.
• How Insolvency and Creditor-Debtor Regimes Can Help Address Nonperforming Loans.