美国经济分化的数据｜Andrew Milgram访谈

As much as the infomercial that is CNBC wants to convince you that everything is great in the economy, it’s just clearly not. I can make a pretty strong argument that public companies will actually benefit from the tariff regime.

This is a full-contact version of distressed investing: acquire assets that are troubled, reimagine what they could and should be, and then apply force to make that happen.

Andrew, I think you and I have talked about doing this for 5 years.

On and off, I think that’s right.

You don’t do this a lot, or ever?

1. Understanding the K-Shaped Economy

I don’t. I love the category of guests who are the first and only interviews of this type, and so I’m excited to do it with you. I’m especially excited because your style is so distinctive. We’ll talk about a million things related to how you invest and your personal story in getting here, but I thought a framing exercise would be a great starting place.

2. The Taxi Medallion Investment Story

You have this notion of the K-shaped economy. You do something that’s very specific, and we’re going to talk about all aspects of it, but I want to start broad. Tell us what the K-shaped economy is from your perspective.

Everybody in the U.S. economy, at least, has this underlying sense that there are some parts of our economy that are doing exceptionally well. But at the same time, they have this internal notion that there are other parts that are just worse than they seem—that there’s a nagging slowness or lagging underperformance to the economy in broad areas.

They can’t quite put their finger on it because they look at CNBC and Bloomberg, and they read The Wall Street Journal, and there are green arrows in the ticker-tape economy. Those companies and those wealthy individuals who have access to capital and resources can drive unbelievable profits and great outcomes.

But there’s a broad part of the economy, and I think we see this in the political sector being expressed pretty acutely, that’s dissatisfied with its earnings power and its ability to benefit from the promise of the American economic system. That discrepancy is really hard for people to understand. But when we say “K-shaped economy,” it immediately resonates with people because they see it themselves. They feel it in real time.

Yeah. They understand intuitively that there are those who are having fabulous success, but they also understand that there are people and companies that are just not getting their piece of the pie.

There’s this amazing data set that you’ve just spent time exploring. I want you to explain the data set and then all the findings. What I want you to focus on is this: if you think about the K-shape, we all know the upper part. It’s the S&P 500, or as we’re calling it now, the FAANG stocks or whatever, AI companies. We know the story that’s going well.

3. Middle Market Analysis & Data Insights

So, maybe talk about this investigation that you’ve done recently about what’s going less well, why, and what you learned.

I’ll start with this: at Marblegate, we focus on the middle market. The reason we focus on the middle market is, first, it’s roughly 1/3 of the U.S. economy. By the way, over time, it has represented something north of 2/3 of all restructurings, bankruptcies, and so on. So, it’s the area of the most action.

It’s also the area of the economy people know the least about. The companies there don’t file their financial statements publicly. They typically aren’t listed on stock exchanges. So, the only people who really have insight into how the middle market is doing are individual lenders to individual companies or individual owners of individual companies.

A lot of the talk about the middle market tends to be anecdotal and self-referential. It’s inferred, but there’s not a great data set that gives us good insight into a broad section of the U.S. middle market.

A good friend of mine ran a company called Rapid Ratings. Rapid Ratings does credit-counterparty risk assessment for the Fortune 500. They’ll assess the supply chains, vendor relationships, and trade relationships of large companies. They rate those vendor relationships and other supply relationships, and create a financial health score that the Fortune 500 company then uses to determine terms of trade and how it’s going to deal with that supplier or trade counterparty.

We worked with them, taking that anonymized data and winnowing it down to the U.S. middle market. For us, that’s companies between $100 million and $750 million of total enterprise value. We said, “Okay, let’s strip out everything that isn’t a U.S. company with those characteristics.” We were left with a data set of just over 1,200 companies.

We’ve been looking at this data now for several years. We measured it during the pre-COVID period and then over the past 3 or 4 years. In those 3 or 4 years post-COVID, what we’ve seen is a real decline in the earnings power of the U.S. middle market.

We look at a lot of factors. We look at EBITDA, margins, pure cash flow, leverage, and liabilities. Importantly, we focus on interest coverage because, at the end of the day, companies can remain insolvent for a long time. My first boss on Wall Street used to say, “Nothing so focuses the mind like a coupon payment,” and that is very true.

When you have to make that contractual payment, which is generally speaking non-negotiable, you get to a point where you have to make a hard decision: do I need to restructure, or can I persist?

When we looked at the data set over time, we saw a few important characteristics. Middle-market EBITDA essentially deteriorates every year. It just gets worse and worse.

We compare that data with public filers and look at the Russell 3000. In that same period, those companies had public-market access, so they tended to be better capitalized. They had broader management teams and more access to resources. Those companies have done persistently and consistently better.

EBITDA is strong and growing. Margins are steady, generally in the mid-teens. In the middle market, EBITDA is challenged. There’s no other way to put it. Over the measurement period, in the most recent data, EBITDA has been down approximately 20% to 25% since 2019. That’s a really difficult place to exist.

Margins in the middle market are also much narrower. If the public market, on average, has a mid-teens starting EBITDA margin, in the middle market we’re talking about mid-single digits. There’s just less room for maneuvering and less room for error.

Those companies also tend to have structurally constrained or more difficult balance sheets. They’re strapped up more by their lenders. The middle market tends to access bank finance rather than broadly syndicated loans or private credit, which will have more flexible covenants and characteristics in the credit agreements. So, it’s a tighter, less flexible capital structure to start with.

When we look at cash flow in those 2 areas, we see net profits after tax in the public market as strong and persistently growing. When we look at the middle market, we see that net profits after tax are down almost 200% over the measurement period. That means it has been consistently negative over the past 2 years.

4. Challenges Facing Middle Market Companies

It’s a troubling place for the middle market. Like I said earlier, there’s this nagging feeling that everyone has that there’s trouble in the economy. What we do in that data set is put some numbers to it.

We can illustrate to people, “Look, we understand what you’re seeing in the ticker-tape economy. We understand what you see when you turn on Jim Cramer and he’s screaming, ‘It’s a buy, buy, buy.’ But we also understand that when you go home at night and you’re thinking about the world, you have this feeling that things are tough.”

There’s a third of the economy that has this aggregate problem.

Yeah. I have 3 questions. You can take them however you want. One is, who owns these things? Who owns the equity in these companies? Why is this happening? And what does it mean prospectively?

It’s a mix. It tends to be smaller sponsors, families, and some individuals. These are companies that a lot of the management teams have grown up inside. Maybe they’re families that control them, maybe not. If they do have professional management teams, these are often not management teams that went through the GE training program.

As a consequence, they’re making intuition-based decisions or pattern-recognition-based decisions. They’re not relying on what you and I might think of as data-driven decision-making.

Why is this happening? You get this hollowing out of a third of the economy. In fact, that’s the exact language we use. There’s all this decline in EBITDA, declining cash flow, and higher interest burdens—scary-sounding stuff. What are the couple of reasons driving that, if you had to narrow it down?

I think market power.

Middle-market companies typically don’t serve the end consumer. They typically serve the larger public company.

Yep.

These larger public companies, which have pricing power with their customer, who tends to be the end consumer, also have pricing power over their supply chain. So, they’re pushing costs and financing down onto those middle-market companies while taking that margin.

It’s like a corporate class system.

It is. There’s no other way to understand it: the rich are getting richer and the poor are getting poorer. Again, I go back to seeing this expressed in the political sphere.

Because people are looking for some kind of outlet, some sort of expression of this frustration, because they feel it in their everyday lives, their businesses, and how they go about work. These companies just have fewer resources, they have less to stand on, and so they have less bargaining power.

What do you think it means? Is this just an inexorable trend that's going to keep going, with the rich getting richer? We'll talk about the workouts and bankruptcies and all that fun stuff next. But before we close the chapter on what's going on, what's to be done about this, if anything?

So, look, there are a few different ways this can resolve itself, but it probably will resolve itself with a bang in some way. That bang can be a long, drawn-out process, something that looks like the early 2000s, where we had just years of persistent restructuring across large portions of the economy. It could also look like the late '80s and early '90s, where we had a real credit contraction as people dealt with overleverage from the leveraged lending crisis, or what some people call the S&L crisis.

That sort of feels like the world we're heading into. There are other scenarios you could imagine that are more punctuated. Let me go back to what I said earlier about debt-service coverage. Interest coverage is a funny problem because, again, you've got to make that coupon payment. If you're unable to make the coupon, you have a couple of options: You can go to your lender and try to work something out, or, as a last resort, you can petition the courts for protection.

In the 2023 data, we saw that almost 25% of the companies in the data set couldn't meet their debt-service coverage. Surprise, surprise, in 2024, business bankruptcies hit a 14-year high. Fast-forward, and the 2024 data that we're living with now in 2025 showed that another 20% of the data set couldn't meet their debt-service coverage. Based on the data we see to date and the bankruptcies that we've already seen in 2025, we would expect 2025 to show a persistent and possibly higher number of business bankruptcy filings.

We're also, interestingly, starting to see some larger companies suffer from that as well. So, as much as the infomercial that is CNBC wants to convince you that everything's great in the economy, it's just clearly not.

Yeah. The reality is that the data is pretty clear. In each and every year, there is some portion of the economy that's running at 2 to 3 times the average default rate in the system. That is to say, there are several sectors, a handful of sectors, that have a much higher-than-average default rate. That can be a consequence of sector risks, some sort of factor input that impacts broadly across that sector, a change in consumer preferences that impacts a number of companies, or a change in government policy. What is it today? What are a couple of examples of those sectors?

Unfortunately, today, it's everything. The most acute is, of course, tariff risk.

By the way, we have some data and some thoughts about what that might look like for companies. But the uncertainty around tariffs is a real issue. Somebody said to me recently, “Well, Christmas is canceled.” “Why is Christmas canceled?” “Well, you have to put your orders in now.” If you're a business trying to make a decision about what your Christmas book is going to look like, how do you even make that choice today?

I think there are lots of challenges in the economy and lots of things that people are having to make big bets on when they don't know which way anything's going to go. Are you going to be able to have your supply chain continue to be in China? Are we going to have a persistent trade problem with them? Our data looks across the middle market, and then we look at the public market and say, what are the likely impacts? How does this work through the balance sheet, and what would you suspect happens?

I can make a pretty strong argument that public companies will actually benefit from the tariff regime. Again, I'm going to assume that the West Wing is being thoughtful in its analysis and its deal-making strategy, and they've probably come to a similar conclusion. I think the Treasury Secretary speaks pretty confidently and directly about this, and I agree with their assessment.

For the ticker-tape economy, the tariffs are not going to be terrible. In fact, they could be constructive. For the middle market, though, anything above 5% or 6% tariff will have a devastating impact on margin and, consequently, on the ability to service their debt stack. Any persistence of tariffs will crush the U.S. middle market.

And so, I like your definition of distressed investing that we talked about earlier, which is basically just capital where there's no supply of it.

That's right.

Say a little bit more about what it feels like to do your style of investing. Maybe even lay out a little bit more about Marblegate and how you prosecute things, because obviously this style might be really useful and important in the workout that you're talking about. But for people who are interested in returns, it could also be a source of high returns, especially if there's limited capital chasing it. Say a bit more about Marblegate and what you do, and then we'll talk about some fun examples.

Marblegate started in 2008 and 2009. In 2008, my business partner, Paul Arway, called me up. He was at Bear Stearns, and I was at another distressed investing firm called Epic Asset Management. He said, “Look, all great distressed investment firms are born out of crises, and this one's ours.” We sat down and talked about how we would go about building an investment firm and accessing investment opportunities in the distressed market.

Paul and I had done a lot of business together over the years, and we liked focusing on the same types of businesses. We saw this middle-market area as being wildly underinvested. As we grew up in the business—and I oftentimes refer to Paul and me as the youngest of the old guard of distressed investors—what we saw were the Oaktrees and the Apollos and those folks who had cut their teeth investing in distressed getting bigger and bigger and bigger.

A lot of that mimicked or mirrored the growth in the LBO market. We oftentimes refer to the LBO business, or the private equity business, as our manufacturing division, because they will produce a certain amount of problems pretty consistently. As the LBOs got bigger, a lot of the investors who had been built to invest in their problems similarly got bigger.

But that left an entire portion of the market just underinvested, under-prosecuted, underlooked at, and underanalyzed. We saw it as pretty rich pickings. So, when we sat around to build Marblegate, we said, “Look, we're going to focus on that middle market.”

At the time, we were convinced that there was going to be good opportunity. We couldn't have imagined that it would persist for as long as it has. Our focus in accessing that is around the U.S. banking system. The middle market continues to get most of its capital out of the banking system.

We hear a lot about private credit. At Marblegate, we talk a lot about private credit, think a lot about it, and have a lot of views on it. We think about the broadly syndicated market also.

We think about all sorts of forms of corporate credit, but the reality is that we access most of our investment opportunities out of the banking system. We built Marblegate with the idea that we would go talk to banks and source our product directly from them. So, we built a sourcing team, and our sourcing team goes out and talks to hundreds of lenders across the United States. I like to say that we are the number 1 buyer of steak dinners in the middle market and in middle America.

We also built, of course, an analyst team. We have in-house financial restructuring. Today, a lot of the folks that call themselves distressed investors—I view them as buying cheap high-yield and participating as pure financial investors and portfolio traders—will outsource all of that critical thinking. At Marblegate, we say there is no outsourcing of critical thinking. So, we think about the financial restructuring in-house.

We also built an operational restructuring team in-house. Again, as Paul and I watched the market evolve, we saw those covenants widening and the businesses deteriorating. We knew that when we were taking control of them, or inserting ourselves into their capital structure and their ongoing operation and resolution, we needed to bring resources to bear.

There are some great firms out there—FTI, Alvarez & Marsal, and AlixPartners—that specialize in doing that. Again, particularly on behalf of the portfolio investors who are more traders in this space than investors. But those firms are large, they have large cost structures, and they're generally more than a middle-market firm can bear.

And you're very much a roll-up-your-sleeves guy. I think you've had personal security at times because you're dealing with things that are really hard. This is a full-contact version of distressed investing. I want to talk about all aspects of it, but I want to start with a story. The 1st story you ever told me—I don't know if it's the best one, but it's the 1st one you told me, and I remember it viscerally—was you buying some crazy percentage of the taxi medallions in New York City. Can you tell that story as a representative example of the sort of thing that you do?

My partner Paul came into my office and said, “I'm talking to a bank that wants to sell some loans against New York City taxi medallions.” And I said, “That is the worst idea I've ever heard.” He said, “Okay,” and we went about our way. A few weeks later, he came back to my office and said, “You know, I just spoke to that same bank again, and they want to know if we would be willing to look at those loans against taxi medallions.” It remained the worst idea I've ever heard.

This was peak Uber ascension.

It was 2016. Uber had come to New York in 2015 in a big way and had made a huge push into the market through 2015 and 2016. They were subsidizing every ride. The real problem, by the way—and this is super interesting—was that there was a perception that they were taking riders away from taxis, and that was not at all the case. The data was super clear: They were expanding point-to-point car service in New York.

They were taking drivers away from yellow taxis. So, yellow taxis were stacking up and parking themselves, not generating revenue, as a driver went to Uber. The driver was going to Uber because Uber was subsidizing every ride, so the driver's earning power was accelerating. People were making rational choices.

By the way, more people were switching into Uber from other modes of transportation—bus, private car service, and subway—because Uber was subsidizing New York. New Yorkers are the most sophisticated, price-sensitive consumers in the world. They were getting brand-new cars because all the drivers were going out and buying new cars. They were getting brand-new black cars and subsidized service. New Yorkers were saying, “This is a deal. Yeah, I'll do this every day.”

Uber was having a tremendous amount of success, and they were pulling those drivers away. The interesting thing is that when we started doing our research—and, by the way, we spent 2 years researching it before we ever did anything—we spent a lot of time in Queens, going garage to garage, learning about the market and learning about how it works, because it's a pretty complicated ecosystem, to be honest.

It's emerged over 100 years and employs literally thousands of people in New York City. It also is an important on-ramp to American commerce for the immigrant population. When I got my taxi driver's license, you have to do a pretty complicated and long set of classes. It's no London, but it's still demanding and expensive. I was the only native-born American in the room. Everyone else had come to the United States in search of a better opportunity.

So, it's an important spot for New York commerce in particular. By the way, what people don't realize is that the bulk of New York City taxi medallions are owned by individuals who are driving the taxi. So, it's a small business in and of itself.

Pre-Uber coming to town, taxi medallions had been worth over $1 million. They peaked at $1.2 million.

For 1 medallion?

For 1 medallion. And, again, if you look back and look at it purely on a cash-flow basis, given where interest rates were and the alternatives, it wasn't the craziest thing to have happened. You or I would never have done it, but I can understand why somebody might have made that decision. Again, not a decision I would make, but not the craziest thing.

That being said, the average unpaid principal balance of a taxi medallion loan ended up being about $550,000. So, the average taxi driver owed $550,000 on their medallion loan.

Crazy.

It was a lot of money. We did a bunch of survey work, and we came up with our own understanding of what an Uber driver's net earnings were. What also became pretty clear to us is that Uber was taking advantage of an information asymmetry. They understood that a driver didn't really understand the full picture of their cost structure and that they were making a very cash-based decision, but Uber was pushing a lot of those non-cash or non-immediate cash costs onto the driver. They were taking those liabilities on.

Ultimately, when you adjusted earnings for all of that, the driver was really under-earning what they should. You also saw a lot of turnover in those days because I think drivers were coming to the conclusion over time that their own individual return on invested capital wasn't sufficient. We started to understand that.

In fact, when I was out with a 70-year-old garage owner who I think had grown up as a taxi driver—his father, I think, had bought medallions in the 1930s—he said to me, “Andrew, the reality is nobody's reinvented the economics of driving a car yet. Until that happens, taxis remain the most durable cash flow in the system.”

Over time, we proved that out to ourselves, at least. We convinced ourselves and, obviously, our investors that what was available here was an unbelievable market that, for lots of reasons, had been underinvested in terms of operations. There had been lots of leverage put into the system. I would say that the folks who had owned medallions and operated fleets had been extractive. They hadn't been investing in the business, and they hadn't treated the driver the way they should.

I used to begin every conversation with somebody in the space the same way: “Tell me who your customer is.” Do you know what the answer was from 100% of them?

What? Well, who would you say?

“I don't know, the rider.”

Right? That was the answer everybody gave.

Yeah. As the medallion owner, I have absolutely no economic relationship with the rider. The driver pays me. My customer is the driver. Everyone gave me the exact same answer: They gave me the passenger as the answer. I said, “But the driver pays you.” “Well, okay, sure, I guess.”

But they weren't treating their customer the right way. They were being—I don't want to say abusive.

Yeah.

I mean, it was obvious what was going on. So, there were really negative relationships in the industry. The industry was, as a consequence, set up as combative. Even though all this capital had gone in—and it was literally billions of dollars of capital—there were 13,587 New York City taxi medallions. If I told you what the average unpaid principal balance was, the math is pretty easy.

Yeah. Right? So, you're talking about billions of dollars of capital that had gone in and, by the way, fleet owners on yachts and taking helicopter services out to the Hamptons while the drivers were struggling to make ends meet. It was just the worst setup imaginable.

Didn't you also, at some point, go into some government office and ask for some data set, and they said, “Yeah, no one's ever asked for this before”?

The TLC has been a great agency inside city government. At the time, the commissioner was Meera Joshi, who later went on to become deputy mayor in New York. The current TLC commissioner is David Do, who's terrific to work with.

But we went to the commissioner and said, “Can we get some of the data you have on the taxi market and Uber and Lyft and all of these guys?” And she said, “Sure, just put in a FOIL request.”

“We’re happy to serve,” she said. “But what are you looking for?” I said, “Well, all of it.” “What do you mean, all of it?” I said, “Everything.” She said, “Nobody’s ever asked us for all of it.”

She gave us terabytes and terabytes of data. We had ride-level data—ride by ride, the entire data set. It was a lot of data. We tried to load it into Excel, and Excel was like, “You’ve got to be joking me.”

We had a couple of data scientists on staff at Marblegate. They ingested the data into various data systems, and we started to cut it up. What we found, again, was that there were some immediate insights. The one I mentioned earlier, where Uber wasn’t taking rides, they were taking drivers, popped out immediately.

We also saw some really interesting data about when people were making the choice to take Ubers versus taxis. I think every New Yorker has an algorithm in their head: time of day, where am I going, what am I wearing, what’s the weather, what do I think the traffic pattern looks like, day of the week. With that algorithm, they make a decision: am I going to take a taxi, an Uber, a bus, the subway, a private car, or am I going to drive myself? They’re figuring that out in real time.

What popped out really quickly was that if you were going to go east-west in Manhattan, you were almost always going to take a taxi. If you were going to take a ride on a Saturday night from the Upper West Side to TriBeCa for dinner, you were probably going to call an Uber. When we looked at the data, what I love about data analysis in companies and sectors is that when you really dig into it, the truth pops out.

And it’s obvious. It makes sense. You relate to it intuitively. You saw how New Yorkers were making decisions.

Exactly.

And so you saw how New Yorkers were making decisions. Like I said earlier, it squared with the economic reality that Uber’s going to subsidize my Friday night date. Great. Let’s do that.

How New Yorkers were making decisions and how drivers were making decisions was also super interesting, because we could track individual driver behavior. We could tell that successful driver behavior looked schematic. It was symmetrical. They were following almost predetermined patterns.

Not the same pattern—each driver had their own system that they had developed—but it was thoughtful and looked intentional. Drivers who were under-earning looked like a Rorschach test. It was just a scattergram of behavior. As a consequence, they were under-earning relative to what we thought they could and should.

By the way, fast-forward to later, when we set up our own operation. We ran a bunch of experiments with drivers where we said, “Look, you’re likely to make, let’s say, $200 a day net at that point. We’ll guarantee you $200, but we want you to run an experiment with us. If you’ll just follow these patterns of behavior—”

You see those as the most profitable, yeah?

Right. We’ll guarantee the $200. And, by the way, if you earn more than $200, keep it. We ran dozens and dozens of experiments. How many payouts did we make? Tons of payouts above the $200. So, we paid nothing. The driver always out-earned the $200 when they followed the data-driven decision-making.

My favorite was what I called the NASCAR loop. The data showed that if you picked up at the bottom of Broadway, you had a high probability of, around Columbus Circle, dropping off somewhere north on Broadway. I’m going to make the left turn, because the data also showed that if you picked up at the top of Broadway, you were going to drop off somewhere in Midtown, around the bottom of Broadway. So, we’d just run that NASCAR loop. Left-hand turns only. It turns out to be a super-profitable circuit.

There are lots of pockets of opportunity around New York. The other thing, by the way, is that the fleets did a terrible job of telling their drivers when there was a Knicks game. They did a terrible job of telling them when there was a Rangers game, and a terrible job of telling them when concerts were going to be held—all at Madison Square Garden, obviously.

I know you’re a Knicks fan. You’ve come out of MSG, and you wonder, “Where the hell are the cabs? Don’t they know there’s a game letting out?” The answer is, they didn’t know there was a game letting out. As I said to you earlier, most of the drivers are not native New Yorkers.

Later on, we opened what we call a taxi clubhouse. I can go into why we opened it. Pretty pedestrian reasons, but it’s been wildly successful. In there, we have TVs on. Our drivers are soccer fans and football fans. They don’t pay a lot of attention to the sports that drive Americans or New Yorkers, so there’s just a cultural divide. They don’t always know where to go.

The best drivers figure it out over time and, again, develop a system. We took all that data from the TLC and immediately got tons and tons of insights. As we got more invested in the space, we started pulling more data. As we built our own operation, we got more data. All that data goes to data-driven decisions.

Because, again, as I think about distressed investing broadly, one of the things we talk about is moving companies. Earlier, I said management teams make intuition- or pattern-recognition-based decisions. We want to move everybody—whether you’re a middle-market manufacturing company or a taxi driver—to a data-driven decision.

That data-driven decision has more persistency to it. It has a higher probability of being right because it’s informed. You can also push decisions down, where they’re not top-driven; they’re operator-driven. The operator is going to use that data to make the decision, and where they need to adjust around the edges, they can use their intuition or their pattern-based decision-making to shape it around the edges. But we’re starting from a better place.

You get this insight, and all of a sudden it goes from the worst idea you’ve ever heard to maybe feasible. Talk about the transaction or transactions to buy into the space. A bank has the loans, your counterparty is the bank, and you get comfort with the value of the medallions. So, what do you do? What are the investing steps?

Actually, our first investment was definitely—I knew at the time, but clearly in retrospect—the riskiest trade that we did. As we went around and talked to banks, they would say, “Well, there haven’t really been any transactions.”

Like many markets, one good indication that a sector or a company is going to topple over is that it gets super-illiquid in its securities or loans or whatever. The taxi market had gotten super-illiquid. There were no medallion transactions happening. Buyers and sellers had moved too far apart, so nothing ended up happening. One of the all-time great indicators that something is going to move sharply is that there have been no transactions.

The banks were saying to us, “Look, there are no transactions happening. We’ll give you a discount because we know it’s not great out there, but we think maybe $350,000 per medallion is where we would exit them. We’re not going to pay that today, and we think you’re going to have to restructure large portions of this market.”

There was a lot of work and time that was going to go into it. Both of those things—we and our investors—were going to need to be compensated for. We were walking around talking to all these banks, and really nobody wanted to transact with us.

Then God smiled on me one day. A guy by the name of Gene Friedman, whom the Post used to like to call the taxi king of New York, had gotten in a fight with his lender, which was Citibank. Citibank had exercised remedies against him, seized his collateral, and was going to auction it off.

The auctioneer was a guy out in Brooklyn whom we knew. We called him up and said, “Hey, do you have a stalking-horse bidder for these medallions?” By the way, they were outright medallions, not loans—outright medallions. He said, “Stalking-horse bidder? We’re going to go to the Airport Marriott and open-outcry this.”

I said, “Listen, call the lender up and tell them that I’ll be the stalking horse.” He said, “Okay, what price?” I gave him a price that was way, way, way below $350,000 per medallion: $150,000 per medallion.

He said, “Well, they’ll never do that.” I said, “Well, it’s a free option. I’m the backstop. We’ll do the open outcry. We’re your backstop.” He said, “Okay, well, I’ll call them up.”

About an hour later, he called me back. He said, “They won’t do a penny less than $160,000.” I said, “Great, you’re done.” We went through the auction.

The way the auction rules worked, you kind of had to buy all of the medallions, or it really didn’t satisfy the lenders’ needs. The truth was, the combination of the way we structured the bid and the auction rules was such that it was going to be really hard for anybody other than Marblegate to win the auction.

We walked away with 48 outright medallions. Most importantly, we had created a mark that we then hand-delivered to every lender in the space. They now had direct evidence of a meaningful number of medallions transacting at a level way below where they had previously estimated it would.

By the way, we did that to them at the very end of November, beginning of December. So, they were looking at a year-end mark that didn’t feel so great.

Yeah. Surprise, surprise.

Come January, the conversation became pretty serious with a number of the lenders we had talked to. They wanted to engage at much more reasonable levels. We ended up buying the largest portfolio available from a federally chartered bank.

It’s important to understand, when you’re dealing with banks, what their regulatory scheme is. State-chartered banks, credit unions, and federally chartered banks all have slightly different ways they operate and how they’re regulated.

Because at the end of the day, banks always make decisions for 3 reasons: regulatory, regulatory, and regulatory. People think of banks as economic actors; they're not. They're regulatory actors.

This compromised their regulatory position. For a federally chartered bank, those tend to be much larger banks. This was a very small piece of their portfolio, and so they could more quickly get to a place—both from an earnings-power impact and a balance-sheet impact—where they would dispose of the portfolio at a sharp discount.

So, we went to the federally chartered banks, went to the largest portfolio, and began a negotiation with them. We moved through that pretty quickly and took that portfolio over. That automatically made us the largest independent lender into the space.

It also meant that now we had multiple transactions. The largest group of lenders into the space were the credit unions. Faced with the prospect of a sharp decline in the asset value on their balance sheets, the credit unions found themselves essentially insolvent.

Prior to 2015, and ultimately through 2018 or 2019, when this part of the story is happening, taxi medallion loans were considered gold. Because, look, they remain an important part of New York City's infrastructure. They're important when you talk to New York City, to the regulators, to the transportation department, city planners, and transportation consultants. All of them point out that New York City has a hard time operating without taxi medallions.

Also, it's a meaningful portion of the New York City budget. So, for all of those reasons, we felt like New York City would take a pretty active role in supporting it. The market understood that for years and years. So, the haircut on a credit union's loan was next to nothing.

Yeah.

If you were a credit union in New York, you could not lend to the space. It was so profitable. Now, with the sharp decline in assets, the NCUA, which is the FDIC of the credit union space, essentially seized a number of those credit unions. It ended up that the largest lender to the space was the federal government.

That allowed us to begin a conversation with the federal government, with the NCUA, about acquiring those assets. It took a long time for 1 really important reason: the NCUA wanted to make sure that the way we were going to deal with the borrowers in the space respected the dignity of the borrower and that we were not going to be rapacious.

All of these loans had personal guarantees. So, drivers who had levered up to buy a taxi medallion had really put at risk their home, their livelihood, everything. The NCUA understood that we needed to be commercial, but also wanted to make sure that we weren't going to be abusive to the borrowers.

They spent a lot of time understanding how we were dealing with problems. A part of the story I left out earlier is that we ended up with 4,500 individual line items in this portfolio. Processing that is just a huge lift.

You have to send out bills every month. You have to collect. You have to call people when they don't pay. So, there's a servicing aspect to this. We went to speak to virtually every servicer out there about whether they could help us, and the answer for 97% of them was absolutely not: They wanted nothing to do with this.

It was politically sensitive. It was a tough space with tough borrowers. Our borrowers would spend 2 or 3 months out of the country, typically going back to their home to spend time with family. It was just a setup that a lot of servicers didn't want to take on.

The servicers who were even willing to have the conversation—which there were only a couple—their pricing was itself extractive. There was no way we could do a deal. So, we actually stood up a servicer to service the space, which today has almost 30 people in it: a collection of lawyers, paralegals, phone bankers, and people calling borrowers.

As we thought about taking down the government's paper, they wanted to understand how we were doing that servicing, how we were enforcing, if that was necessary, and what our thoughts were about ultimate resolution. When we got deeper in, we ultimately became by far the largest lender in the space, by far the largest participant.

Give us a sense of the scope of that—the number of medallions, or the dollars deployed, or something.

It was over $600 million deployed into the space.

Wow.

We had over 4,000 individual assets on the balance sheet.

Out of 13,000 medallions?

13,587.

A big chunk of them. Now, you're the taxi king of New York.

Hardly. But I think one of the good pieces of advice that we got, actually, was from Risa Heller, who runs a firm called Heller Communications and has advised us throughout this. Risa had come out of Chuck Schumer's office and has great connectivity into the New York political scene generally.

5. Engaging with Regulators and Stakeholders

She said to me very early, "You need to go explain everything you're doing and plan to do to every regulator and politician who touches this or is interested in this." So, we spent a lot of time going and seeing individual council members and individual regulators. We went to the mayor's office.

We laid out for them, "Look, these are the problems we see. This is what we think the solution set looks like. We think it's going to be difficult, but we think the outcome looks like the following." By being transparent about what our plans were, even though we weren't advertising ourselves or what we were doing broadly, we were making sure that the people who would be most interested, and the people who were going to have the most political sensitivities to this, were informed and well-informed.

By going out and getting in front of that, as we became larger, I would say we had a very constructive dialogue with everybody in the system. I think the other thing that we did, which has worked to our benefit over time, goes back to what I described earlier: There was this contentiousness in the space. Labor, operators, and capital—nobody really even talked to each other, much less liked talking to each other.

Right.

6. Building Relationships with Taxi Workers Alliance

As people figured out that Marblegate was playing a larger and larger role, one of the first things that happened—our offices are here in Greenwich, Connecticut—was that we were picketed by the Taxi Workers Alliance, which is the de facto union for the space.

One of the things I'm most proud of is that we had water and sandwiches delivered to them. It upset my team, and I actually don't even think the New York Taxi Workers Alliance knows this, but I put on a baseball cap and a T-shirt, went out, and marched with them. I talked to the drivers.

Showed them your license?

I grabbed a sign and said, "I want to understand what's going on. What's on your mind? Tell me what you need. Tell me what's going on." What we ultimately did was sit across the table from each other in a conference room, but the reality is you get a sense of things by really going and speaking with people, understanding what's driving their decisions, and how they really are interacting with you or the problem that they're facing.

Yeah.

By spending time with drivers in informal settings like that, but also in formal settings with the Taxi Workers Alliance, and particularly with the leadership of the Taxi Workers Alliance, I found their concerns to be completely valid and real. I thought that the pressures they were facing were obvious and unavoidable.

It was very clear to me that the system was not working for them, and in order for the system to thrive—again, they're my customer—I needed it to work for them. So, we began a really constructive conversation and relationship with the Taxi Workers Alliance.

I'm very happy to say, and I think the leadership of the New York Taxi Workers Alliance would agree, that we continue to have a very constructive, productive, and partnership-like relationship.

How do you think about that now? You're X amount of dollars in, you own 4,000-something medallions. Walk us through the end of the story, or at least the current snapshot of the story.

7. Taking the Taxi Operation Public

Actually, just a few weeks ago, we took our entire taxi operation public.

Oh, wow.

So, it should have a very durable and persistent cash flow that should be able to be valued by the market. I think there are some pretty exciting and compelling things that we can do in continuing to grow that operation and add other services and other pieces of the ecosystem, because the ecosystem does work.

It had been too disaggregated. There were too many people taking a profit margin out of it. The reality is we needed to be much more efficient, much more cost-constrained, and much more operationally focused on efficiency and delivering to the customer.

The customer wasn't getting enough value out of the relationship. The only way you can give that customer more value is if somebody else gets less value. The only way you can squeeze those margins is through consolidation and efficiency.

So, that's where this market ultimately goes. We're, I think, the obvious candidate to do it.

8. Challenges and Opportunities in the Taxi Industry

Why take it public instead of selling it to some huge private equity firm or something else?

I think there is legitimate concern about what the shape of this market looks like as we go into things like autonomous vehicles.

What does the future hold?

I think the simpleton's answer to that is, "Oh, well, you can't fight technology." The reality is, while I think autonomous vehicles pose a real threat to the livelihood of the individual driver, when I separate driver from asset and think about what New York City's interests are, I think the medallion has, again, persistency to it.

Look, the medallion system was introduced in the 1930s by Fiorello LaGuardia, the famous mayor at the time, under what was called the Haas Act. During and after the Depression, New York City's streets got super clogged because people were out of work, and they would get in their cars and drive people around as a service. LaGuardia looked at the system and said, “This is terrible. Nobody can get around. We need to shrink congestion, get cars off the street so that the city can operate.” They introduced the medallion system.

That basic intuition, that basic imperative, hasn't changed. In the world of autonomous vehicles, actually, I think it accelerates in some ways. You and I are sitting in Greenwich, Connecticut while we were doing this interview; in a fully autonomous world, theoretically, we could sit down and send our cars to do a little work in New York while we were doing this. They'd be back by a certain time. That's not great for New York City's operation.

I would also say that people with fewer scruples might say, “Go down to New York City and work, but don't take any rides north of 125th Street.” Those are things that would be absolutely repugnant operationally, but also in strict violation of New York City's operating rules around taxis and how rides can be taken and serviced. So I think the city has an ongoing vested interest in regulating the system. The method of that regulation is the medallion.

I also think there is a sort of true moral imperative to the city persisting with the medallion system. By far, we're large participants in the space, but the largest set of owners in the space continue to be individuals that own medallions. We can talk a little bit about this: We cut an unbelievably forward-looking deal with New York City to protect individual operators. The city has essentially invested a huge amount of money in protecting those drivers and their livelihood and the capital that they've put into the system.

9. Investing in Distressed Assets

If you were to completely displace that capital, it would obviate all the work and investment that the city has done. I don't think the city has a real interest in doing that. And while autonomous will probably someday displace the driver and therefore displace their earnings power, you can swap that earnings power for the ability to contribute capital. Right? So the medallion becomes a capital asset that they contribute to the system, and they can cut an individual economic relationship with whatever autonomous operator is in the system at that time.

If you look back on this relative to everything else you've done in investing, how good of an investment would you say this was?

Excellent.

Why? Is that an IRR? Is it a risk-adjusted thing? How do you measure it?

So we do think about risk-adjusted returns. The companies and assets that we invest in are distressed, right? We don't have the benefit of opening up the paper and saying, “Well, I think this Google thing's got legs. Let's put some capital in it.” We're looking at problems.

The problems that we end up chasing as investors are problems we think we can solve. We think that there are structural fixes. We think there are operational fixes. But importantly, they are fixes that we think we can tackle. These are challenged businesses. The risk is real.

And so when we insert ourselves into a company or a collection of assets and we use the rights and remedies that are afforded us, we're both using those rights and remedies to drive value, but also to contain risk. And you have to work on both legs of that. And so it is risk-adjusted return.

What are the big investing lessons that you take away from this specific story that you feel are generalizable to what makes great investments of this type possible?

Distressed assets—you said it earlier, and it's a line we use all the time—are a full-contact sport. You have to be willing to engage. If you're investing in distressed assets and you are not taking an active role in both the financial and operational restructuring, you're just taking weird and unquantifiable risk by not participating.

I would argue it's almost investment malpractice to invest in a distressed asset without taking an active operational role in addition to the financial restructuring role.

Yeah, it's an incredible story, one of my favorite investing stories. Probably no one's ever thought of the New York City medallions as an asset class or something. I'm curious how you would describe the key components, aside from the steak dinners, of interfacing well with banks.

If that's the channel through which you find everything, and they're motivated by “regulation, regulation, regulation,” what is it like? What sorts of things do you see? How do you know what to dig in on? What makes for good relationships with that key counterparty of yours?

10. Negotiation Principles & Relationship Building

Well, a good relationship with anybody is about respecting their needs and constraints.

Yeah.

11. Distressed Investing Explained

One of the things that I think we're really good at is understanding the needs and constraints of our counterparty, whether they're a bank, a borrower, a sponsor, a taxi driver, anyone. We spend a lot of time thinking about the other guy's needs.

I tell everybody I'm going to tell my kids: It's easy to know what you want. You look in the mirror and tell it to yourself every morning. The real exercise, the real effort has to be focused on understanding the other person.

That understanding can come from conversation, and that's an easy and direct way. I think it's an important way. You always have to put boots on the ground. Lots of the investments that we've made, the management teams have said, “Well, you're the first lender ever to show up and see the facility.” Crazy.

So we spend a lot of time just getting to understand how a counterparty is thinking. Again, we also spend a lot of time looking at data because people have an intuition about what they want and what they need. Data sometimes says something different.

Now, there are times when we want to share that data with somebody to help them understand their own needs. There are other times when maybe we want to keep that data to ourselves in a negotiation. But we're looking at all dimensions of how to inform ourselves about what the other person's needs are and understand what their real hard constraints are.

One thing I try to guarantee every time I deal with somebody is this: If you tell me you've got a hard constraint, and we can understand that it's true—that you have that hard constraint—we're going to respect it in the negotiation. Any negotiation, any resolution, can't be a zero-sum game. Both sides have to get something out of it.

By the way, also when we're selling assets, you have to leave something in for the next owner. If you try to extract all the value that they're going to get, then they don't want to do the deal.

Right. Trying to understand what the other guy needs is a huge portion of what we do. You've done a lot of negotiation in interesting, unique circumstances, often and, as you pointed out, in very hard circumstances for people around the table. Any other ironclad principles of negotiation, apart from the one that you just laid out, that you sort of live by?

You know that saying, “I learned everything I need to know in kindergarten”? That's really true. Treat other people with dignity, treat them with respect, be honest, be as transparent as the situation demands, right? You don't have to show all of your cards. You are playing poker to some degree, but you want to deal with people on a heads-up and honest basis.

You also want to operate at a reasonable pace. Pace is an important part of any deal discussion. People get an intuitive sense of whether or not there's something to do just by how you're engaging with them or how they're engaging with you.

That doesn't mean you need to hurry things. But if you're not moving things along, people get anxious.

Time kills deals.

Yeah.

I'd love to talk about other types of transactions that Marblegate will engage with. We were talking earlier about an example with the federal government of some credits that you were buying up. The reason I like this example, which you could tell briefly, is that it gets at understanding why the opportunity can exist.

Very often, when something sounds too good to be true, you start wondering, “Why am I so lucky that I can get such a great risk-adjusted return?” Maybe use that example as one where there is an incredible risk-adjusted return that you can walk through, but also, very keenly, the reasons why it's possible in the first place.

Usually, there are smart people like you looking for places to earn a great return, and yet it's still available.

12. Employee Retention Tax Credit Opportunity

We've been buying something called the Employee Retention Tax Credit. This is an opportunity that comes out of the CARES Act. Everybody's seen these commercials that ran almost every commercial break on every channel at one point: “Get a $26,000-per-employee payroll tax refund.”

The policy imperative at the time was to get as much money into the system as they possibly could. Now, the problem is that the federal government is a big place. The IRS is overburdened already. There are lots of changes at the IRS and lots of new agents. Now, a lot of agents are coming out. They're charged with covering a lot of territory with not a lot of resources.

This new thing was foisted on them, and there was a separate filing that had to be done by companies. The language of the legislation, which passed under the CARES Act, is that a company that had either a 20% decline in its revenue during the measurement period or had been substantially impacted by a government order.

By the way, not a federal government order—a government order. So state, local, anything qualified. That's really loose language. I think if the authors of that had the opportunity to go back and rethink it, they might have. And there have been a couple of attempts to. The problem is, getting anything done in Washington is hard these days. So it is the law that's on the books.

Companies started to apply for this. It is a separate filing. It is a paper filing. It requires you to get some sign-off from your accounting firm or your auditors. If you're going to do it responsibly, you need to put together a package that explains, should you be asked, why your claim is valid. So it's a fair amount of work.

And then the government was really slow in processing it. Again, we have an overburdened IRS and an overburdened number of people who are working there, so processing was just slow. I think when the government did this, we've heard some estimates that say they anticipated it to be a $50 billion program. About a year in, they had paid out $200 billion. Holy cow. That was a year ago.

So the numbers are unbelievable. Again, it's probably a poorly written law. We started going out to companies, tax preparation firms, people who deal in tax credits, law firms, and payroll processing firms, and saying to them, "Look, we'll buy those credits from people." The reality is, it's not a credit; it is a transfer payment. The government sends you a check.

It took us several months to design that system. It's complicated. There's a lot of paper to process. There's just so much manual labor required. And so we started processing credits, looking at individual companies and who wanted to sell us their claim.

We passed on huge numbers of them, particularly because at the beginning, the law was pretty loosely written. We said, "We want to be Caesar's wife in our underwriting here, to make sure that we're well within what we believe is reasonable." Our standard was much tougher than what the government ultimately had.

We were buying credits that we felt really, really good about, that would be noncontroversial and would get paid. We were paying about 85 or 86 cents on the dollar. One of the provisions of the law was that, from when you filed, the government owed you an interest rate while you waited for the refund. That was 6% or 7%. So we were also just earning a natural rate on the capital provided.

As a safety mechanism, we also built a system that allowed us to put back claims should they become problematic with the government, should they be disallowed, or should there be some sort of deficiency found. If we were able to put a claim back, the company owed us our capital back plus a rate.

Yeah, it's like U.S. government counterparty risk. Why would you do this? It goes back to what we were saying earlier about the K-shaped economy. Most of your sellers, if not all of your sellers, are in the middle market.

Yeah. All of them are capital-constrained and earnings-power-constrained, and they saw this asset that they could monetize. And we were relatively easy to work with, I would say. We tried to process things pretty quickly. We could have an answer turned around and documents done within 2 to 3 weeks.

I know it's kind of a similar order of magnitude of capital deployed as what we talked about with the taxis. That's a big amount of capital to go in to get, I think, a minimum return-ish of 12%, a lot higher if everything goes as you think it's going to go. The counterparty is the U.S. government. This is very different from taxi medallions. With taxi medallions at the time, of course, you tell this narrative and it's like, "Oh, God." Whereas with the U.S. government, I don't know, it's probably going to pay.

Why was this available? Why didn't Apollo do this? Why didn't some big enterprise do this? Why didn't the distressed Baupost guys do this? What makes it so that this was available, given that it was a big amount of money and what seems like a no-brainer type of return? What stopped it? Why is this possible?

Well, look, I think we do a pretty good job looking in nooks and crannies, seeing things first. We want to be detail-oriented thinkers. And I would also say, all profits emanate from the variant view. If you have the market view, you get the market return. If you want to generate an above-market or a differentiated return stream, you have to think in a differentiated way, have a variant view, and prosecute your investments in a variant fashion.

Going back to the foundation story of Marblegate, when Paul and I sat down, we said, "Look, the world has a Howard Marks and the world has a Marc Rowan. The world has a lot of things. What doesn't it have?" In order to grow our business, we've made sure to try to do things that we thought were interesting and unique.

Years ago, we did some investing in and around Native American gaming assets. The reality is, that sits on sovereign territory. How you restructure those is super complicated. And how do you generate a return that is sufficient? So we had to explore kind of new space in order to find the pathway through.

We like doing new. We like exploring ideas, bringing in new technology, finding interesting ways to look at things, and bringing that value to bear in our investing style. It keeps it interesting.

What is the hardest thing that you've ever had to pull off as part of Marblegate's entire story?

That's a great question. Look, we're constantly seeking new challenges. When we were starting, it was Paul and me, an analyst, and our CFO. We couldn't exercise a huge amount of control. We had $50 million in assets under management. It was the late winter of 2009. The world was falling apart.

The strategy that we prosecute today is the same strategy that we prosecuted then. We just do it on a slightly larger scale. In those days, we had to be clever. We had to outthink the competition in order to make an impact. So we've always maintained that framework of thinking.

In those days, locked-up capital was not available. So we started our business in an open-ended structure. It had long commitment terms, but it was essentially, at its core, an evergreen structure. And so it demanded that we have this discipline of asking, "How are we going to get that capital back to people?"

That process of getting capital allocated into a distressed situation and then finding the resolution mechanism that brings it home is built into the DNA of the firm. It's how we think about investing generally.

Now, the interesting thing about distress is, you have to use capital to get capital back. There's this cycle of capital contribution and resolution that cycles. So you're always thinking about, "How am I going to drive this investment and create something else out of it? Then I'm going to create something else out of that." You create this sort of daisy chain of opportunities.

One thing leads to another. And so, if you had to isolate the most difficult workout, or the thing that kept you up the most at night, is there one, or is there always just a component of that?

One of the things that my partner Paul always says is, "Every single investment is both a complicated business problem and a human drama." Each one of our investments has had some greater or lesser mix of those two things.

Look, to the individual in these situations, we do this for a living, and we've done it essentially our entire careers. It is familiar to us. We understand how things are going to work out and how they don't work out. We're comfortable with the level of ambiguity and uncertainty that other people generally are not.

And so each one of these is the most difficult thing that the other people are ever going to go through. Again, you have to be sensitive to that reality. It goes to their decision-making. It goes to how they engage with you, how they engage with the business or the assets.

And so each situation is difficult. It's difficult in its own way, because that human drama tends to be the unknowable thing as you're walking into a situation.

I'm curious: Since it's people going through the hardest thing they've ever gone through, how often does that spill over onto you? How often do you feel like they believe you're the villain in the story, and how do you deal with that? That would seem very stressful to me. Do you just become stoic about it? Does it happen often? Talk about that part of this whole thing.

We are the avatar of people's frustrations. And look, I don't love it. It's not—I don't wake up excited about this.

Yeah, nobody.

There's this saying that I repeat often: Nobody finds distress; distress finds you. And that's true in business; it's true as an investor. Nobody graduates from college and says, "I'm going to go into companies and be reviled by management, argued with by sponsors, and yelled at by banks." It's not something that people go into with that ambition.

It tends to find people, and it self-selects people. I think the way we deal with it is, again, back to first principles: deal with people with dignity, with respect, and with compassion for the reality that they exist in—for the fact that this is the hardest thing they're ever going to go through.

They don't like this. It's upsetting to them. It's having an impact on their home life and on their kids. It has oftentimes destroyed their life savings. It's a big deal for people. And so, they are going to be angry at you.

They are going to be angry at the decisions, the hard decisions that you're making on behalf of those assets or that company. But I always say, look, we're the eat-your-vegetables guys. We're not doing this because we have some sort of personal animus toward you. I never met most of the people that we deal with, but we are doing what's in the best interest of the asset and what we believe is in the best interest of generating a durable return and a durable business.

What motivates you? If I kept asking that question 8 layers deep, where would I get?

Good question. Look, I like the problem-solving of it. My partner Paul sometimes has said that my superpower is being able to find that intersection of needs and wants in a multiparty negotiation. I just love that problem-solving. I like finding a way through.

I like taking things that are undervalued and misunderstood and getting them back into a condition where they can again be durable, profitable, and a success.

If I were to see your whole life story in a movie or something, let's say pre-college, or something in the early part of your life, and isolate the stories or the things that were most formative, that most shaped who you are, what are those things?

Hands down. It's not a thing I talk a lot about, but my father passed away when I was very young.

How old were you?

About 11 years old. He and I were super, super close. We did everything together, including sitting together and going over the Wall Street Journal stock pages every day. We tracked certain stocks. We invested together, even though I was really young. He brought it to a level that I could understand.

My dad was an immigrant to the country. He loved the American system, loved that his son was an American, and loved participating in American commerce. He was an entrepreneur and dealt with unions and large capital projects. He used to bring me to meetings he would have.

He would come to New York on business and bring me. I grew up in a little town in Southeast Texas. We would go to Dallas, and he'd wear a suit and sit me in the corner, and I would just listen. So from really early ages, we spent a lot of time together.

He had a heart attack. We were on a Boy Scout campout. That was, obviously, a devastating time and a devastating moment. It shaped who I am, and it shaped who my sister is. It completely reshaped my mom's life and how she saw herself and what her role was. It changed our whole trajectory.

It also, by the way, showed the colors of people around us. There were people who we thought were good friends, close, and reliable counterparties. At the moment of truth, people don't like messes. They don't like difficult situations, and we saw people retreat. I took a lot away from that.

At the same time, we also saw people of real character lean in—people who to this day I consider like family because they just embraced us and took care of us. They were people who became entrepreneurs and shaped the world around them.

Very strangely, the most common pattern among people who have become entrepreneurs and shaped the world around them is someone who lost their father at a young age. So many of my mentors have this pattern.

I'm very interested in it because it's a tragic thing which nonetheless comes to define and shape people in a very unique way. The common pattern that I see is, on the other side of it, this tremendous amount of agency. It's almost like the person wakes up in that moment and realizes, “Oh, I need to be agentic. I need to shape the thing. I need to take care of business.”

I'm curious if you had that experience coming out of that tough time, and any other reflections you have on agency and the importance of agency in life.

My mom grew up in Southeast Texas. For a while as a child, she had lived in the Middle East, in Baghdad. Interestingly, when the king was overthrown, she and a lot of the American families were taken hostage. It's a super fascinating story. She, her mother, and her brothers were held hostage while the men were forced to work by the rebels.

My mom had had this really interesting life, but had married my father at a pretty young age. My father had a big personality and had a sort of interesting, colorful life himself. So when he passed away, she was 35 years old and had these 2 young kids. My sister was 7 years younger than me, so she was really a baby.

My mom really pushed us to take control of things, make decisions on our own, get out and challenge ourselves, drive ourselves to create our own outcomes, and find our own path. She really pushed us. I love my hometown. I love the community I grew up in. It was super nurturing and a really lovely childhood, with great people, other than the one we discussed.

But she really pushed us to leave. She said, “I want you to go out into the world and find your own way.” And look, I come from a good tradition of that.

My grandfather, when he was just after bar mitzvah age, was living in what is now Ukraine. It was part of Romania then. He and his oldest brother walked down to the Black Sea, caught a boat, ended up in Curacao, and would make enough money to bring each brother—and there were 5 brothers total—over.

They moved their parents into Mandatory Palestine. Ultimately, they'd go back for a shidduch, for the arranged marriage, as there were ultimately not a lot of Jewish girls running around in Latin America in those days. He had gone to Eretz Israel to get married. My father was born there, but then raised in Latin America and came to this country for education.

He couldn't get a visa. There were constraints on Jewish immigration in those days. And so he went back to Venezuela. He had met a guy here in the United States that he had gotten to be pretty friendly with, and they had this correspondence back and forth about how to start a business and what they would do.

Ultimately, my father, after several years, was able to come back to the United States, and he and his business partner went to my hometown, Beaumont, Texas. Their first business was a precast-concrete business. They grew that into a number of other businesses that ultimately serviced the oil industry.

I mean, this is the stuff of the classic American dream and story.

100%.

To map that back onto where we started with the K-shaped economy, give us your sense of things—your state of things and how you feel about it—having been a person produced by one of these amazing stories, and then a group of people that came here for that story and have challenges. I would just love your closing reflections on that.

America is the greatest system that has ever existed. It is the greatest economy, the greatest economic system, and the greatest political system that has ever existed. But countries, like companies, are delicate. They're fragile. They require care and feeding. They require respect. They require engagement. They're subject to abuse.

So look, I don't like what I see in the K-shaped economy. I don't think that it's great that we have this growing divide between the haves and the have-nots. I think that the magic of America is that anyone can make it, my father included.

I think that someone who lost his father at an early age could end up in Greenwich, Connecticut, sitting across from you, talking about the things we're talking about. I mean, that's a really remarkable opportunity that doesn't exist anywhere else in the world. I mean, it really doesn't.

My father, who came to this country in the 1950s—for him to be able to come back, we need to have a system that works for everybody. We need to have a system that provides for opportunity and access. It has to be a system where you can work hard and earn a good living, but you can also take entrepreneurial risk and be rewarded for it.

I think that when we design a system or allow a system to calcify such that the haves will perpetually have and the have-nots will perpetually not have, we stand at a moment in time where we have some hard decisions to make. And it's not, by the way, a political comment on any individual party or person or any of that. It's more of a philosophical view on where America is and where the system is.

I think we as a system, we as a country, have to have a lot of grace for each other and a desire to see not just the guy in the mirror win, but the neighbor. I mean, we need to see our neighbors win. We need to make sure that the people who make America great enjoy its prosperity.

Is there anything about the world and how it works on the investing side that we haven't talked about that you think is most surprising or interesting? Your style of investing is very different from the style I normally feature here.

I think there's lots of interesting ways that people are investing. I'm always interested in how friends, colleagues, and people I meet are allocating capital and how they're thinking about things. I would say I sense a lot of laziness out there. I think there's a lot of wash, rinse, repeat.

We do it this way because we do it this way, or we're investing to a model, or it—the only way that I can describe it is lazy. That, A, I think is intellectually bankrupt, but I also think it's worrisome because when we go on autopilot, things don't tend to work out.

I feel like large portions of the investing world are now on autopilot. Where do you see that most acutely?

Big parts of the credit market. The primary vehicle for credit creation in corporate credit over the past 10–15 years has been the CLO.

Just describe them for anyone who doesn't know what that means.

Collateralized loan obligations. These are a package of loans that are assembled as a group of assets, and then against those assets there is a stack of liabilities that are sold, with equity underneath. An individual investor will put up the equity, and then a number of lenders will provide stacked layers of capital, or orders of priority, which allow the purchase of that portfolio of assets. CLOs are a magical device.

Now, the investing relies primarily on diversification and overcollateralization as its method of risk control. There's this sort of pretend system that's going on at the moment where there are analysts looking at each individual credit, and I don't want to disparage the entire CLO industry. There are some unbelievably good CLO managers out there.

They're all smart and sophisticated and thinking very hard about how they are managing those pools of assets. But there are a lot that are not. And so you're getting this laziness that's happening.

I would also say one of the things I don't like that's happening out there is the productization of investment decisions. There's a lot of outsourcing of critical thinking: I can go to this person who will make this decision for me, and I'll go to this person who will make that decision for me. And so, again, we're bankrupting the decision-making process.

The investor—that's even what you want to call them—becomes more of a general contractor, and they're not actually doing anything. I don't think they're adding a whole lot of value other than choosing other people to do the thinking, who, by the way, are misaligned because those folks are motivated by a stream of fees rather than an investment outcome.

I don't love what is happening in the CLO system. I think that there's a big opportunity to be much more active and engaged in that. Now, it probably means that you can't have $100 billion of CLO capital thinking like that. That being said, there are people who are going to do $100 billion of CLOs who will do just fine under the system that exists.

So, I don't disparage everything that is happening, but I do think that there is an opportunity to be much more actively engaged in that portion of the market.

13. Private Credit and Equity Markets Insights

Any other commentary on private credit and private credit markets in general, and then also on equities? You have such a unique vantage point, so just a big-picture view on those 2 big spaces.

Private credit in particular is a really interesting space. In 2011, the federal government issued an update on what is called the guidelines on leveraged lending. And that is the sort of perspective on the rules out of the center, right? Because we do bank regulation in a really interesting way in this country.

Policy is set at the center. The primary policymakers are the Fed, the FDIC, and the OCC, and they issue guidance. Now, we have individual and independent Federal Reserve banks around the country that apply the guidance. So, it's up to the individual Fed regions, Fed presidents, boards, and employees as to how that regulation is applied. Policy is set at the middle.

The Interagency Guidance on Leveraged Lending that was issued in 2011 created the dynamic that pushed more leveraged credit out of the banking system. After the financial crisis, the federal government adopted, correctly, I think, the perspective that they bore the ultimate risk in the banking system. He who bears the risk makes the rules.

They said, “Look, we're bearing this risk. We don't want anything above X leverage in the system, so we want that out.” That allowed the private credit market, which has always been there, to really flourish in the aftermath of the financial crisis. There's been an immense amount of capital that has gone into the space.

Where there is over-allocation, there will be mistakes, and I think we see those mistakes rearing their head today. According to Fitch, about 82% of the private credit market exists in the single-B-minus-and-lower credit-quality space. We have 40 years of data that tells us how various credit-quality equivalents perform. Triple-Cs, for instance, default at about a 3-year, 30% cumulative default rate.

The largest portion of private credit, according to Fitch, is in triple-C equivalent. Now, show me a private credit manager who reports something north of a 1.5% default rate. How does that happen? Well, one of 2 things is true: either, in the aftermath of the global financial crisis, some private credit managers have invented a new way to underwrite credit that avoids all losses, risks, and defaults, or they're misleading you about what the actual default rate is.

And how do they do that? Defaults are the most easily manipulated statistic in the world. A default doesn't exist unless I, the lender, call it. So, if I don't want defaults in my portfolio, I simply don't call them.

I always tell people, don't ask the default rate of a private credit manager. Ask the waiver rate. Ask the amendment rate. How much are they having to put hands on their credit to reorient the documents to fit the reality of the company they're operating in?

We also have some evidence in the BDC market. BDCs, or business development companies, are essentially public direct lenders, and there's an instrument or a device in credit called PIK debt. The formal name is payment in kind. So, rather than pay you a coupon, I will pay you more debt.

We oftentimes say PIK means “payment isn't coming,” because when you look at the data, what you see is that when there's a lot of PIK in a particular instrument, typically that company is going to default, and you ultimately will not recover that PIK debt. So, it's a bit of a mirage that individual loan officers or credit committees will use to disguise maybe a less-than-fulsome credit decision.

There are legitimate uses for it, but if a company can't pay you a cash coupon, you are taking some amount of equity risk. The larger the portion of PIK debt in a particular instrument, the more equity risk you're taking in that investment. Pretty straightforward.

We see some portfolios in the BDC market that have 17% or 18% PIK debt. I mean, they're no longer lenders at that point. They're taking massive amounts of equity risk in companies that probably, again, exist mostly in that middle-market space.

They're under pressure. They start from a more difficult position, with declining margins and declining earnings power. It's not a great setup. I don't see great things ahead for large portions of the private credit market.

That being said, there are some private credit firms that are spectacular. I mean, superior. That list is pretty straightforward. Firms like Ares or, let's say, Golub are stellar at what they do, and they have great credit cultures. They have really complete teams that deal with underwriting and workouts, should they get to that.

The private credit universe used to be a direct-origination business. There is some direct origination that goes on in private credit today, but it's largely a brokered market, which is kind of a dirty little secret people don't like to talk about. Houlihan Lokey and Lincoln International are doing a huge amount of placement of private credit.

So, naturally, what are they doing? They're going to the biggest, best, most well-known lenders first: Ares, Golub, et cetera. If they pass, then they go to the next cadre, and the next cadre, and the next cadre. So, there's real tiering in terms of access.

The biggest, best-known firms do have the best portfolios because they get first choice, they have the most complete access to capital, and they have the best teams, et cetera. So, I think there are great things happening in private credit. I think there are some scary things happening in private credit.

What's your commentary on private equity, which is a key counterpart to that?

I love those guys. That's my manufacturing division.

Look, like everything, there are some people who are doing really interesting, really compelling things. The firms that I like are fundamentally value-based investors. They do what I would call scratch-and-dent-type private equity. They're buying car valves or assets that are a little unloved or difficult in some way, and then really applying force to them.

But just like in our business, if you're just a financial investor, you're in some way a traitor. If you are bringing to bear real resources to drive the company's operations forward, or to reimagine how that business operates, that, I think, is really interesting and really value-added. There's going to be a future for that kind of investing and that style of private equity.

I think the sort of standard group of great dealmakers who know some allocators or rich families that will back them in buying companies, but who don't actually do anything other than buy the company and show up for board meetings—I think those firms are troubled. I don't think they add a lot of value, and they probably don't have much of a future.

14. Personal Reflections & Motivations

Looking to the future, what do you most hope you get to do more of at Marblegate? Where will you spend your time and attention based on your interests right now?

We sit at a really interesting moment in asset management. I think that what we do in our business, in our investing, is acquire assets that are troubled, reimagine what they could and should be, and then apply force to make that happen.

I think we have to look at our own business the same way. I think we're at this moment in the asset management space where people are asking hard questions—the right questions—about who's adding what value, how should that value be compensated, and what are the collections of services that asset managers should be providing to their customers. How should we think about our relationships with our customers? Is it really a customer relationship, or should it be more of a partnership relationship?

I think that partnership model is the model going forward. I also think that we have to think about where we're accessing capital. Look, there's a big push to go into the retail channel. I can make and buy the argument that large portions of the retail market are underallocated to private markets. I think that there are large portions of the retail market that are probably not super well equipped to have a ton of exposure.

We're going to go bump in the night trying to figure out where those lines exist. There are going to be people who make mistakes. Investors will make mistakes. Asset management firms will have false starts, but I think there's product design opportunity that's exciting. There are some things that have gotten a lot of heat. Interval funds are getting a lot of attention. I think there are some strengths and some weaknesses to that.

I think that everything that's happening in the insurance space is super interesting. I think there's lots of ways to think about that. The sort of annuity-driven investing is super interesting, and it serves a real need and opportunity. I think there are other compositions of insurance assets out there that are also interesting, that are probably less well explored at the moment.

So, I think there's a lot that's going to happen. The world of asset management that I grew up in is not going to be the one that I exist in going forward. We're undergoing a lot of change, and I think people who embrace that change are going to do really well and are going to succeed. The people who sort of live a comfortable life and are happy to play golf a couple of days a week and go have big, expensive lunches, that's probably not going to be the successful model going forward.

15. The Kindest Thing

That has never been your approach. You're one of the more unique investors that I know. I love talking about investing. I think what you do is just different, and obviously it works. The proof is in the pudding. I think you know my traditional closing question for everybody: What's the kindest thing that anyone's ever done for you?

Right after my father passed away, this family that I still consider very dear to me—my mom was overwhelmed, and they used to—I'm going to tear up. They couldn't have had it easy, actually. They would take me to their house for breakfast every morning and then drive me to school. They really embraced me and provided a lot of stability to me at a really trying time. There were other families that did the same thing. That was a really, really tough moment, and they leaned in. I try to think about what I can do to pay forward that kindness.

Beautiful closing story. Andrew, thanks so much for your time.

Thank you.