Explain how special situations are investigated and valued before capital is committed

Diligence starts with the legal map: the capital structure, intercreditor agreements, covenants, security and the insolvency regime of the relevant jurisdiction. Then come business viability, liquidity runway, management and other stakeholders' incentives. Valuation compares going-concern enterprise value, from DCF or multiples, with liquidation value, then runs the recovery waterfall by priority under several scenarios weighted by probability. Suppose enterprise value is 300, senior claims are 200 and junior claims 150. Seniors recover in full and juniors recover 100 ÷ 150 ≈ 66.7%, which makes the junior tranche the fulcrum. Expected return compares these weighted recoveries with the purchase price over a realistic timeline. The trap is ignoring legal costs and delay, both of which erode recovery and IRR.