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Invest Like the Best with Patrick O'Shaughnessy
Andrew Milgram - Full-Contact Capitalism - [Invest Like the Best, EP.436]
01:33:09
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- [00:00]
Patrick O' Shaughnessy
The best operators have a relentless focus on leverage, finding ways to multiply their impact rather than just working harder. But here's what I see happening in finance teams everywhere. Brilliant people getting buried in expense management. Busy work. If you think about it, you become a finance leader because you love strategic work. Modeling scenarios, optimizing capital allocation, finding the insights that actually move the business forward. But instead you're chasing receipts and categorizing transactions. It's the opposite of leverage. This is exactly why I'm so bullish on what the team at Ramp has built. Karim and Eric understood that every minute spent on manual expense management is a minute stolen from high leverage work. So they automated all of it. Automatic categorization, receipt matching, spending controls that actually work. I love the network effect that this creates. When finance teams at companies like Shopify and Stripe automate the mundane stuff, they free up cycles to think bigger, to ask bigger questions, spot patterns others miss, and make the kind of strategic bets that separate great companies from good ones. The math is simple. Get your time back, focus on what matters. Check out ramp.com invest and see what happens when you eliminate the busy work. Ridgeline is hosting their annual Basecamp conference this September 22nd through the 25th in Deer Valley, Utah. I will be there and sold over 50 top investment management firms from around the country. Now in its fourth year, Basecamp has become where the future of investment management is created. Ridgeline gets the most influential changemakers in the same room, learning and sharing ideas about the latest innovations that are drastically altering how this industry operates. It's truly a must attend event for anyone who wants to understand and be inspired by what's coming next for investment management. Again, I'll be there, but space is limited and attendance is curated. You can request an invitation by heading to ridgelineapps.com don't wait. Registration closes August 8th. As an investor, gaining an edge means having the right tools. And one platform leading the way is AlphaSense. Trusted by 75% of the world's top hedge funds, AlphaSense is the market intelligence platform that gives institutional investors access to over 500 million premium sources, from company filings and broker research to news, trade journals and more. And with its recent acquisition of Teages, it also includes the world's largest library of expert interview transcripts, over 200,000 calls covering more than 24,000 public and private companies all in one platform. So investment teams can move faster, go deeper and make high conviction decisions with confidence. Now AlphaSense is transforming the research process with the launch of its deep research tool, part of the next generation of its AI powered platform. Unlike other deep research tools, AlphaSense's version is purpose built for investment research. It runs multi step iterative analysis using AlphaSense's proprietary content, including those 200,000 expert transcripts and in minutes surfaces insights that would take multiple interviews and days of digging to uncover. It's like adding 10 analysts to your team, helping you accelerate analysis, deepen understanding and make sharper decisions. See it in action@alpha-sense.com Investor hello and welcome everyone. I'm Patrick O' Shaughnessy and this is Invest like the Best. This show is an open ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus Review, our quarterly publication with in depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts@joincolasis.com.
- [03:17]
Andrew Milgram
Patrick O' Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit Psum VC.
- [03:46]
Patrick O' Shaughnessy
My guest today is Andrew Milgram. Andrew is the founder of Marblegate Asset Management, an alternative investment firm that invests in credit opportunities and special situations. He joins me to discuss his unique approach to distressed investing in the middle market, revealing how middle market EBITDA has declined 20 to 25% since 2019, creating what he calls the K shaped economy. His investment stories are legendary, particularly his $600 million bet on new York City taxi medallions, which we go into in great detail. We discuss Marblegate's approach to negotiation, sourcing deals directly from hundreds of regional banks, and understanding the human element in distress situations. Please enjoy this great conversation with Andrew Milgram. Andrew, I think you and I have talked about doing this for five years on and off. I think that's right, you don't do this a lot. Or ever. I love the category of guests that are the first and only interviews of this type and so I'm so excited to do it with you and I'm especially excited because your style is so distinctive and we'll talk about a million things related to how you invest and your personal story and getting here, but I thought a framing exercise that would be great. Starting place would be for you to describe this notion that you have of the K shaped economy, you do something that's very specific and we're going to talk about all aspects, but I want to start broad. So tell us what the K shaped economy is from your perspective.
- [05:04]
Andrew Milgram
Yeah, so it's a notion we talk a lot about with investors and with the companies that we invest in. Everybody in the US 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 it seems, that there's a nagging slowness or a nagging 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's green arrows in the ticker tape. Economy, those companies and those wealthy individuals who have access to capital, who have access to resources and 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. There's broad pieces of the economy that are just dissatisfied with their earnings power, with their ability to benefit from the promise of the American economic system. That discrepancy, I think 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. 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.
- [06:32]
Patrick O' Shaughnessy
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 so if you think about the K shape, we all know the upper part, it's the S&P8 or as people are calling it now, Fang stocks or whatever, AI companies. We know the story that's going well. So maybe talk about this investigation that you've done recently about what's going less well and why and what you learned.
- [06:57]
Andrew Milgram
Well, I'll start with, at Marblegate, we focus on the middle market. And the reason we focus on the middle market is a, it's 1/3 of US economy. And by the way, over time it has represented something north of two thirds of all restructurings, bankruptcies, et cetera. So it's the area of the most, let's say action. It's also the area of the economy, people know the least amount about the companies there don't file publicly their financial statements. They typically aren't listed on stock exchanges. So the only people who really have an insight into how the middle market is doing are individual lenders to it, to individual companies or individual owners of individual companies. And so a lot of the talk about the middle market tends to be anecdotal, it tends to be self referential, it's inferred. But there's not a great data set that gives us a good insight into a broad section of the US middle market. A good friend of mine ran a company called Rapid Ratings. Rapid Ratings does credit counterparty risk assessment for the Fortune 500. So they'll assess the supply chains, the vendor relationships, trade relationships of large companies. They rate their vendor relationships and other supply relationships and create a financial health score that then that Fortune 500 company uses to determine terms of trade and how they're going to deal with that supplier or trade counterparty. We worked with them taking that anonymized data and winnowing it down to the US middle market. And for us that's companies between 100 and $750 million of total enterprise value. And we said okay, let's strip out everything that isn't a US company with those characteristics. We were left with a data set of just over 1200 companies. We've been looking at this data now for several years. We measured it pre Covid period and then over the past three or four years. In those three or four years post Covid, what we've seen is a real decline in the earnings power in the US middle market. Now we look at a lot of factors. We look at ebitda, we look at margins, we're looking at pure cash flow, we're looking at leverage and liabilities. And importantly we focus on interest coverage because at the end of the day companies can remain insolvent for a long time. But 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 that is, I'll say, generally speaking, non negotiable. You get to a point where you have to make a hard decision about do I need to restructure or can I persist? When we looked at the data set over time we've seen a few important characteristics. The middle market, EBITDA essentially deteriorates every year. It just gets worse and worse and worse. Now we Compare that data versus public filers and we look at the Russell 3000. So in that same period, those companies have public market access, so they tend to be better capitalized. They have, let's say, broader management teams. They have 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. I mean, there's no other way to put it. I think over the measurement period, in the most recent data, EBITDA has been down 20, 25% since 2019. That's really a difficult place to exist. Margins in the middle market are also much, much, much narrower. So if the public market on average has a mid teens starting EBITDA margin in the middle market, we're talking about mid single digits. So there's just less room for maneuvering, less room for error. Those companies do also tend to have structurally constrained or more difficult balance sheets, so they're strapped up more by their lender. Middle market tends to access bank finance rather than, let's say, broadly syndicated loans or private credit, which will have more flexible covenants and characteristics to the credit agreements. So it's a tighter, less flexible capital structure they're starting with. When we look at cash flow in those two areas, we see net profits after tax in the public market, strong, persistently growing. When we look in the middle market, we see that, that net profits after tax is down almost 200% over the measurement period. So that is consistently negative over the past two years. 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 that 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 about 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.
- [11:58]
Patrick O' Shaughnessy
So there's a third of the economy that has this aggregate problem. I have three questions. You can take them however you want. One is, who owns these things? Who owns the equity in these things? Why is this happening and what does it mean prospectively?
- [12:12]
Andrew Milgram
Who owns them? It's a mix. It tends to be smaller, sponsors, families, some individuals. These are companies that a lot of the management teams have grown up inside the companies, maybe their families that control them, maybe not. If they do have professional management teams, Oftentimes these are 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.
- [12:46]
Patrick O' Shaughnessy
Your second question was why is this happening? You get this, what sounds like a hollowing out of a third of the economy.
- [12:53]
Andrew Milgram
In fact, that's the exact language we use.
- [12:55]
Patrick O' Shaughnessy
And there's all this decline in ebitda, declining cash flow, interest burdens that are higher. Scary sounding stuff. If you had to narrow down the couple of reasons for what's driving that, what do you think they are?
- [13:07]
Andrew Milgram
I think market power. So the middle market companies typically don't serve the end consumer. They typically serve the larger public company. So those 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, they're pushing financing down onto those middle market companies while taking that margin.
- [13:32]
Patrick O' Shaughnessy
It's like a corporate class system.
- [13:34]
Andrew Milgram
It is. I mean, there's no other way to understand it in that the rich are getting richer and the poor are getting poorer. Again, I go back to. We see this expressing itself 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 and their business businesses and how they go about work. So these companies just have fewer resources, they have less to stand on and so they have less bargaining power.
- [14:00]
Patrick O' Shaughnessy
Yeah. What do you think it means? Is this just an exorable trend that's going to keep going and the rich are going to keep getting richer? We'll talk about the workouts and bankruptcy and all that fun stuff next. But just before we close the chapter on what's going on, what's to be done about this, if anything?
- [14:15]
Andrew Milgram
There's a few different ways this can resolve itself, but it probably will resolve itself with a bang in some way. Now that bang can be a long, drawn out something that looks like, I say 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, early 90s where we had a real credit contraction as people dealt with over leverage from the direct lending crisis. Some people call it the SNL crisis of the late 80s, early 90s. That 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. So interest coverage is A funny problem because again, you got to make that coupon payment. If you're unable to make the coupon, you have a couple of options. You go to your lender and try and work something out. Or your ultimate resource is you can go petition the courts for protection. In the 2023 data, we saw that almost 25% of the companies in the data set couldn't make their debt service coverage. So surprise, surprise, in 2024 business bankruptcies hit like a 14 year high. Fast forward the 24 data that we're living with now in 25 showed that another 20% of the data set couldn't make their debt service coverage. So based on the data we see to date and the bankruptcies that we've already seen in 2025, we would expect 2025 to show persistent and possibly higher number of business bankruptcy filings. We're also interestingly starting to see some larger companies suffer that as well. So goes back to as much as the infomercial that is CNBC wants to convince you that everything's great in the economy, it's just clearly not. How do we resolve it? I think there is broad based weakness in this economy. We can spur growth, get everybody buying. There are some macro things you could do. You could pump more liquidity into the economy. Of course you risk an inflationary spiral which we're probably on the cusp of again. You can do some sort of wholesale debt restructuring and try to get through it quickly. That would be recasting a resolution trust company type idea. I don't know that there's even the beginning of the political will or discussion to do that at the moment. So I go to the meander solution is way this probably goes where we just slowly work through this over time and we solve problems one by one.
- [16:45]
Patrick O' Shaughnessy
It's a good time to ask for your definition of distressed investing.
- [16:49]
Andrew Milgram
It's a great question. Look, distressed investing covers a lot of things. The term has been, I would say, abused in recent years. When I got into the business, it meant buying the debt stock of an individual company and then exercising the rights and remedies under the credit agreement to drive an outcome that generally involves some amount of operational improvement. Back when I got into the business, credit agreements were tighter and so companies got themselves into tougher spots in a narrower range. The covenants were such that if your performance started to decline, bat it back into the middle of the fairway or deal with the problem. Today, covenants are much wider. And as a consequence, when you violate a covenant or get to a Place where you need to restructure one way or another. The business is just worse off generally and needs a much bigger operational reworking. So when we think about distressed investing, it is provisioning capital into difficult situations that are capital constrained. Now, some people look at distressed investing as when the market pukes out, we're going to step in and buy and watch it ride back up. That happens every 10 years. There's a big puke out. That's a tough investment strategy to price for. Yeah, yeah, yeah. The reality is that the data is pretty clear. In each and every year there is some portion of the economy that is running at a two to three times the average default rate in the system. So that is to say there's several sectors, a handful of sectors that have a much higher than average default rate that can be as a consequence of sector risks or some sort of factor input that impacts broadly across that sector can be a change in consumer preferences that impact a number of companies, change in government policy, all sorts of things.
- [18:38]
Patrick O' Shaughnessy
What is it today? Just like ground people. And what are the couple examples of those?
- [18:41]
Andrew Milgram
Unfortunately, today it's everything. The most acute is of course, the tariff risk. And by the way of some data, we have some thoughts about what that might look like for companies. But the indecision of tariffs. Yeah.
- [18:53]
Patrick O' Shaughnessy
The uncertainty. Yeah.
- [18:54]
Andrew Milgram
Think about it. Somebody said to me recently, well, Christmas is canceled. Why is Christmas canceled? Well, you have to put your orders in now. So 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 it's a really tough time to be a corporate manager. I think there's lots of challenges in the economy. People are having to make big bets where you 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? Tariffs, our data looks at again across the middle market and then we look at the public market, we say what are the likely impacts and 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. And 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 a 5 or 6% tariff will have a devastating impact on margin and consequently on the ability to service their debt stock. So any persistency to tariffs will crush the US middle market.
- [20:25]
Patrick O' Shaughnessy
I like your definition of distress that we talked about earlier, which is basically just like capital where there's no supply of it.
- [20:30]
Andrew Milgram
That's right.
- [20:30]
Patrick O' Shaughnessy
And so to say a little bit more about what it feels like to do your style of investing, maybe even this, lay out a little bit more about Marblegate and how you prosecute things. Because obviously this style one might be really useful and important in this workout that you're talking about. But also for people that are interested in returns, could also be a source of high returns, especially if there's limited capital chasing it. So say a bit more about Marble Gate and what you do and then we'll talk about some fun examples.
- [20:55]
Andrew Milgram
Sure. So Marble gate started in 2008. 2009. 2008. My business partner, Paul Arroway called me up. He was at Bear Stearns, I was at another distressed investing firm called Epic Asset Management. And 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 would we go about building an investment firm and how would we go about accessing investment opportunities in the distressed market. Now, 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 I as the youngest of the old group of distressed investors. What we saw were the oak trees and the Apollos and those folks who had cut their teeth investing in distress, getting bigger and bigger and bigger. And a lot of that mimicked or mirrored the growth in the LBO market. And 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. So 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, underanalyzed, and 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 with as much duration as it has now. You also our focus in accessing that is around the US Banking system. The middle market continues to get most of its capital out of the banking system. We hear a lot about private credit, and at Marblegate, we talk a lot to 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 we access most of our investment opportunities out of the banking system. So we built Marblegate with the idea that we would go talk to banks, 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 one buyer of steak dinners in middle America. We also built, of course, an analyst team we have in house financial restructuring. So today, a lot of the folks that call themselves distressed investors, again, I view them as buying cheap, high yield and participating as pure financial investors and portfolio traders, but they will outsource all of that critical thinking. At Marblegate, we say there is no outsourcing of critical thinking. And so we think about the financial restructuring in house. We also built an operational restructuring team in house as well. Again, going back as Paul and I looked at the market evolve, we saw those covenants widening and the businesses deteriorating. And so we knew that when we were taking control of them or inserting ourselves into their capital structure and their ongoing operation and resolution that we needed to bring to bear resources. Now, there are some great firms out there, FDI Alvarez, Alex Partners, that specialize in doing that again, particularly on behalf of the portfolio investors, who are more traders in this space than investors. But a, those firms are large. They have large cost structures and they're generally more than a middle market firm can bear.
- [24:40]
Patrick O' Shaughnessy
And you're very much a roll up the sleeves guy. Like, 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. And so I want to talk about all aspects of it, but I want to start with maybe a story. So the first story you ever told me, I don't know if it's the best one, but it's the first one.
- [24:58]
Andrew Milgram
You told me, and I remember it.
- [24:59]
Patrick O' Shaughnessy
Viscerally, was you buying some crazy percent of the taxi medallions in New York City. Can you tell that story just as a representative example of the sort of thing that you do?
- [25:08]
Andrew Milgram
Sure. My partner Paul came into my office and said, I'm talking to a bank who wants to sell some loans against New York City taxi medallions. And I said, that is the worst idea I've ever heard. And he said, okay. And we went about our way. A few weeks later, he came back to my office and said, I just spoke to that same bank again and they want to know if we'd be willing to look at those loans against taxi medallions remains the worst idea I've ever heard.
- [25:34]
Patrick O' Shaughnessy
This is peak Uber ascension.
- [25:36]
Andrew Milgram
Exactly. It was 2016, and so Uber had come to New York in 2015 in a big way and had made a huge push into the market through 15 and 16. They were subsidizing every ride. And the real problem, by the way, this is super interesting, there was this 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, and so yellows were stacking parking themselves, not generating revenue. As a driver went to Uber and the driver was going to Uber because Uber was subsidizing every. Right. So the driver's earnings 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, 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 every day. So Uber was having a tremendous amount of success and they were pulling those drivers away. The interesting thing is when we started doing our research, and by the way, we spent two years researching it before we ever did anything. I mean, my favorite party trick actually is as part of that research, I became a New York City taxi driver and I still go out and drive.
- [27:12]
Patrick O' Shaughnessy
That's funny.
- [27:12]
Andrew Milgram
Yeah, well, you have to stay connected to the market. But we spent two years researching the space. A lot of time in Queens, going garage to garage, learning about the market, learning about how it works. Because it's a pretty complicated ecosystem, to be honest. It's emerged over a hundred 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 did 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, but 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. And by the way, what people don't realize is the bulk of New York City taxi medallions are owned by individuals that are driving the taxi. So it's a small business in and of itself. By the way, pre Uber coming to town, taxi medallions had been worth over a million dollars. They peaked at $1.2 million.
- [28:21]
Patrick O' Shaughnessy
For one medallion?
- [28:22]
Andrew Milgram
For one medallion. And by the way, again, if you look back and look at it purely on a cash flow basis and where interest rates were and alternatives, it's not 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. Not a decision I would make, but not the craziest thing. Now 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. It was a lot of money. We did a bunch of survey work. We came up with our own understanding of what an Uber driver's net earnings were. And what also became pretty clear to us is that Uber was taking advantage of an information asymmetry. So 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 they were pushing a lot of those non cash or non immediate cash costs onto the driver. They were taking those liabilities on. And ultimately when you adjusted earnings for all of that, the driver was really under earning what they should. And 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. So we started to understand that. In fact, when I was out talking to one 70 year old garage owner who I think had grown up as a taxi driver, his father, I think had bought medallions in the 30s. He said to me, Andrew, the reality is nobody's reinvented the economics of driving a car yet. And until that happens, taxis remain the most durable cash flow in the system. And 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. So there'd been lots of leverage put into the system. I would say that folks who had owned medallions and operated fleets had been extractive. So they hadn't been investing in the business. 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, and you know what the answer was from 100% of them, who would you say?
- [30:50]
Patrick O' Shaughnessy
I don't know. The rider.
- [30:52]
Andrew Milgram
Right. That was the answer everybody gave. I, as the medallion owner, have absolutely no economic relationship with the rider. The driver pays me. My customer's the driver. Everyone gave me the exact same answer. They gave me the passenger as the answer. I said, but the driver pays you? Oh, well, okay, sure, I guess. But they weren't treating their customer the right way. They were being abusive. It was obvious what was going on. So there's really negative relationships in the industry. The industry was, as a consequence, sort of set up as combative, even though all this capital had gone in, and it was literally billions of dollars of capital that had gone in. There are 13,587 New York City taxi medallions. And if I told you what the average unpaid principal balance was, the math's pretty easy. 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.
- [31:53]
Patrick O' Shaughnessy
Didn't you also, at some point go into some government office and ask for some data set? And they're like, yeah, no one's ever asked for this before. Can you tell that part?
- [32:01]
Andrew Milgram
So the tlc, who's a great agency inside of city government, and at the time, the commissioner was Amira Joshi, who later went on to become deputy mayor in New York. The current TLC commissioner is David Doe, 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 FOIA request and we're happy to, but what are you looking for? I said, well, all of it. What do you mean, all of it? I said, everything. Nobody's ever asked us for all. So she gave us terabytes and terabytes of data.
- [32:37]
Patrick O' Shaughnessy
Ride level data. Right.
- [32:38]
Andrew Milgram
Ride by ride, the entire data set. It was a lot of data. We tried to load it into Excel. Excel was like, you gotta be joking me. So we have a couple of data scientists on staff at Marble Gate Ingested the data into various data systems and we started to cut it up. And what we found, again, there were some immediate insights. The one I mentioned earlier, where Uber wasn't taking rides, they were taking drivers. That popped out immediately. We also saw some really interesting data in when people were making choices to take Ubers versus taxis. 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, subway, a private car, am I going to drive myself? They are figuring that out real time. What popped out really quickly was if you were going to go east west in Manhattan, you're 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're probably going to call an Uber. And when we looked at the data, what I love about data analysis in companies and sectors is when you really dig into it, the truth pops out and it's obvious. It makes sense. You relate to it.
- [34:03]
Patrick O' Shaughnessy
Uber's killing all taxes.
- [34:04]
Andrew Milgram
Exactly. And so you saw how New Yorkers were making decisions. And like I said earlier, it's squared with the economic reality. Uber's going to subsidize my Friday night date. Great, let's do that. So how New Yorkers were making decisions, how drivers were making decisions was also super interesting because we could track individual driver behavior so we could tell successful driver behavior looked schematic. It was symmetrical. They were following almost predetermined patterns. Now, not the same pattern. Each driver had their own system that they had developed. But it was thoughtful and looked thoughtful and looked intentional. Drivers who were under earning looked like a Rorschach test. It was just a scattergram of behavior. And as a consequence, they were under earning what we thought they could and should. By the way, fast forward 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 at that point, net, we'll guarantee your $200, but we want you to run an experiment with us. So if you will just follow these patterns of behavior, what we see as the most profitable, 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?
- [35:30]
Patrick O' Shaughnessy
Tons of payouts. Above the 200.
- [35:32]
Andrew Milgram
So we paid nothing. The driver always out earned when they followed the data driven decision making. I mean my favorite was what I called the NASCAR loop. So the data showed that if you picked up at the bottom of Broadway, you were high probability around Columbus Circle. You were going to drop off somewhere north on Broadway, make the left turn. Because the data also showed if you picked up at the top of Broadway, you were going to drop off somewhere midtown around the bottom of Broadway. So we just run that NASCAR loop, left hand turns only and turns out to be a super profitable circuit. And there's lots of pockets of opportunity around New York. The other thing by the way is the fleets did a terrible job of telling their drivers when there was a Knicks game. Did a terrible job telling them when there was a Rangers game. Terrible job of telling when concerts were going to be all at msg obviously. And I know you're a Knicks fan, you've come out of out of where the hell are the caps? 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. We later on 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, football fans. They don't pay a lot of attention to the sports that drive Americans or New Yorkers. So there's just like a cultural divide. They don't know all the time 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 we immediately got tons and tons of insights as we got invested into the space. We started pulling more data as we built our own operation. More data. All that data goes to data driven decisions because again as I think about stressed 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 because it's informed. It also you can push decisions down where they're not top driven, they're operator driven and the operator is going to use that data to make the decision and where they need to adjust around the edges, then 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.
- [38:08]
Patrick O' Shaughnessy
So you get this insight and all of a sudden it goes from the worst idea you've ever heard to like, oh, maybe feasible talk about the transaction or transactions to buy into the space. So a bank has the loans, your counterparty is the bank and you get comfort with the value of the medallions. And so then what do you do? What are the investing steps?
- [38:27]
Andrew Milgram
So 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, hasn't been really any transactions. Like many markets, one of the good indication of when a sector or a company is going to tipple over is 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 move too far apart. Nothing ends up happening. And one of the all time great indicators of when something's going to really sharply move. So there had been no transactions and the banks were saying to us, well, look, there's 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. So not going to pay that today. And we think you're going to have to restructure large portions of this market. So there's a lot of work and time that's going to go into it. Both of those things we and our investors are going to need to be compensated for. So we were walking around talking to all these banks and really nobody wanted to transact with us. And then God smiled on me one day. A guy by the name of Gene Friedman, who the Post used to like to call the taxi king of New York, had gotten in a fight with his lender, which was Citibank. And Citibank had exercised remedies against him, seized his collateral and we're going to auction it off. Now the auctioneer was a guy out in Brooklyn that we knew and we called him up and said, hey, do you have a stocking horse bidder for these medallions? By the way, it was 48 outright medallions, not loans, outright medallions. I said, stalking horse better. We're going to go to the Airport Marriott and open outcry this. I said, listen, call the lender up and tell him that I'll be a stalking horse. He said, okay, what price Now? I gave him a price that was way, way, way below $350,000, $150,000 per medallion. And he said, well, they'll never do that, but it's a free option. I'm the backstop. We'll do the open outcry where you're backstop. So 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. So I said, great, you're done. We went through the auction, and the way the auction rules worked, you had to buy all of the medallions or really didn't satisfy the lender's needs. And the truth was, the combination of the way we structured the bid and the auction rules were such that it was going to be really hard for anybody other than Marblegate to win the auction. So we walked away with 48 outright medallions. But most importantly, we had created a mark that we then had hand delivered to every lender in the space. Now they had direct evidence of a meaningful number of medallions transacting at a level way below where they had previously estimated it would. And by the way, we did that to them at the very end of November, beginning of December. So they're looking at a year end mark that didn't feel so great. Surprise, surprise. Come January, conversation becomes pretty serious with a number of the lenders we had talked about, and they wanted to engage at much more reasonable levels. We ended up buying the largest portfolio available from a federally chartered bank. It's an important understanding when you're dealing with banks, what their regulatory scheme is. State chartered banks, credit unions, federally chartered banks, they all have slightly different ways they operate and how they're regulated. Because at the end of the day, banks always make decisions for three reasons. Regulatory, regulatory and regulatory. People think of banks as economic actors. They're not. They're regulatory actors. So 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 can more quickly get to a place from an earnings power impact and a balance sheet impact that they would dispose of the portfolio at a sharp discount. So we went to the federally chartered banks. We went to the largest portfolio and began a negotiation with them, moved through that pretty quickly and, and took that portfolio over. That automatically made us the largest independent lender into the space also. Now you have multiple transactions. The largest group of lenders into the space were the credit unions. The credit unions, faced with the prospect of a sharp decline in the asset value on their balance sheets found themselves essentially insolvent because prior to 2015, or ultimately 2018, 19, when this part of the story is happening, taxi medallion loans were considered gold because they remain an important part of New York City's infrastructure. When you talk to New York City, to the regulators, to transportation departments, city planners, transportation consultants, all of them point out 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. 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. So 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. That took a long time. For one 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, that we were not going to be rapacious. All of these loans had personal guarantees, and so drivers who had levered up to buy a taxi medallion had really at risk their home, their livelihood, everything. And 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. And so they spent a lot of time understanding how we were dealing with problems. Now, a part of the story I left out earlier is that we ended up with 4,500 individual line items in this portfolio. Prosecuting 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 could they help us. And the answer for 97% of them was absolutely not. We want nothing to do with this politically sensitive, tough space, tough borrowers. Borrowers will spend two, three months out of the country, typically going back to their home to spend time with family. 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 self 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, people sort of calling borrowers. Anyway, as we thought about taking down the government's paper, they wanted to understand how we were doing that servicing and how we were enforcing, if that was necessary, and what our thoughts were about ultimate resolution. So when we got deeper in, so we ultimately became by far the largest lender in the space, by far the largest participant.
- [46:27]
Patrick O' Shaughnessy
Give us a sense of scope of that, the number of medallions, what's the dollars deployed or something?
- [46:32]
Andrew Milgram
So it was over $600 million deployed into the space.
- [46:35]
Patrick O' Shaughnessy
Wow.
- [46:35]
Andrew Milgram
We had over 4,000 individual assets on.
- [46:39]
Patrick O' Shaughnessy
The balance sheet out of 13,000 medallions.
- [46:42]
Andrew Milgram
13,587.
- [46:44]
Patrick O' Shaughnessy
Now you're the taxi king of New York.
- [46:48]
Andrew Milgram
But I think one of the good pieces of advice that we got actually from Risa Heller, who runs a firm called Heller Communications, who has advised us throughout this. And Risa had come out of Chuck Schumer's office and has a great connectivity into the New York political scene generally. She said to me very early, you need to go explain everything you're doing and plan to do to every regulator and politician that touches this or is interested in this. And so we spent a lot of time going and seeing individual council members, individual regulators, went to the mayor's office, sort of lay it 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. And 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. So by going out and getting in front of that as we became large, we, I would say, had a very constructive dialogue with everybody in the system. I think the other thing that we did, again, I think that has worked to our benefit over time. I described earlier, there was this contentiousness in the space labor operator capital. Nobody really even talked to each other, much less liked talking to each other, 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. We were picketed by the Taxi Workers alliance, which is the de facto union for the space now, one of the things I'm most proud of is we had water and sandwiches delivered to them. It upset my team. And I actually don't even think the Taxi Workers alliance knows this, but I actually put on a baseball cap and a T shirt and went out and marched with them and talked to the drivers and showed them your license, grabbed a sign, it goes to driving a taxi. I want to understand. Yeah, we're on your mind. Tell me what you need, tell me what's going on. We ultimately did do that 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 and understanding really what's driving their decisions and how they really are interacting with you or the problem that they're facing. And by spending time with drivers in informal settings like that, but also 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. And 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 Taxi Workers alliance would agree, we continue to have a very constructive, productive and partnership like relationship.
- [50:03]
Patrick O' Shaughnessy
How do you think about that now? So you're X amount of dollars in you own 4000 something odd medallions. Walk us to the current snapshot of the story.
- [50:11]
Andrew Milgram
Actually, just a few weeks ago, we took our entire taxi operation public.
- [50:16]
Patrick O' Shaughnessy
Oh, wow.
- [50:17]
Andrew Milgram
That business will persist. It should have a very durable and persistent cash flow that should be able to be valued by the market. And I think there's some pretty exciting and compelling things that we can do in continuing to grow that operation. Add other services, other pieces of the ecosystem in, 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 needed to be much more efficient. We needed to be much more cost constrained, needed to be 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 that somebody else gets less value. And the only way you can squeeze those margins through consolidations and efficiency. So that's where this market ultimately goes, where I think the Obvious sort of candidate to do it.
- [51:10]
Patrick O' Shaughnessy
Why take it public instead of sell it to some huge private equity firm or something else?
- [51:15]
Andrew Milgram
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 almost simpleton's answer to that is, oh, well, you can't fight technology. And 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 I think about what are New York City's interests, I think the medallion has again, persistency to it. The medallion system was introduced in the 1930s by Fiorello Laguardia, the famous mayor at the time, under what was called the Haas act. Because in the days during and after the Depression, New York City streets get super clogged because people were out of work and they would get in their car and drive people around as a service. LaGuardia looked at the system, 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. Look, that basic intuition, that basic imperative hasn't changed in the world of autonomous. 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're 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 less scruples might say, go down to New York City and work, but don't take any rides north of 125th Street. Things that would just 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 and vested interest in, in regulating the system. The method of that regulation is the medallion. I also think, look, there is a true moral imperative to the city persisting around the medallion system by far. Look, we're large participants in the space, but the largest set of owners in the space continue to be individuals that own medallions. So the city, and we can talk a little bit about this. We cut an unbelievably forward looking deal with New York City to protect individual operators. Citi 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. 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 displacement the driver and therefore displace their earnings power, you can swap that earnings power for the ability to contribute capital. So the medallion becomes a capital asset that they contribute into the system and they can cut an individual economic relationship with what other autonomous operator is in the system at that time.
- [54:20]
Patrick O' Shaughnessy
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 and why is that an irr? Is it a risk adjusted thing? How do you measure it?
- [54:29]
Andrew Milgram
So we do think about risk adjusted returns. The companies and assets that we invest in, they're distressed. I always say to our investors, 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, there are fixes that we, 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 contain risk. And you have to work on both legs of that. And so it is risk adjusted return.
- [55:18]
Patrick O' Shaughnessy
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?
- [55:29]
Andrew Milgram
So distressed assets, you said it earlier, and it's a line we use all the time. It's 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 that you are not participating in. I would argue it's almost like investment malpractice to invest in a distressed asset. Not taking an active operational role in addition to the financial restructuring role.
- [56:00]
Patrick O' Shaughnessy
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. Maybe to zoom out a little bit, 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 that 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?
- [56:28]
Andrew Milgram
Well, a good relationship with anybody is about respecting their needs and constraints. 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 at Marblegate, I 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. And that understanding can come both 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 spent 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, what they need. Data sometimes says something different. Now, there are times where we want to share that data with somebody to help them understand their own needs. There are other times. Maybe we want to keep that data to ourself in a negotiation. Negotiation. But we're looking at all dimensions of how to inform ourselves about what the other person's needs are, understand what their real hard constraints are. And one of the things that every time I deal with somebody, I try to guarantee them is you tell me you've got a hard constraint and we can understand that that is 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. It has to be that 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, well, then they don't want to do the deal. So trying to understand what the other guy needs is a huge portion of what we do.
- [58:31]
Patrick O' Shaughnessy
You've done a lot of negotiation in interesting, unique circumstances. Often 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?
- [58:44]
Andrew Milgram
Yeah. So 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 so 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 on a reasonable pace. And pace is an important part of any deal discussion. People get an intuitive sense whether or not there's something to do just by how you're engaging with them or how they're engaging with you. So that doesn't mean you need to hurry to things. But if you're not moving things along, people get anxious.
- [59:29]
Patrick O' Shaughnessy
Time kills deals.
- [59:29]
Andrew Milgram
Time kills deals.
- [59:30]
Patrick O' Shaughnessy
Yeah. I'd love to talk about other types of transactions that Marvel Gate will engage with. We were talking earlier about an example with the federal government of some credits that you were buying up. And the reason I like this example, which you could tell briefly is 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? So 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 when usually there's smart people like you looking for places to earn a great return and yet it's still available.
- [60:08]
Andrew Milgram
We've been buying something called the employee retention tax credit. And so now 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 $26,000 per employee payroll tax refund. Because the policy imperative at the time was get as much money into the system as they possibly could. Now the problem is like the federal government is a big place. The IRS is overburdened already. And there's lots of changes in the irs, lots of new agents. Now a lot of agents coming out. They're charged with covering a lot of territory with not a lot of resources. So they got foisted on them this new thing where 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 who had either a 20% decline in their 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 opportunity to go back and rethink it, they might have. And there's been a couple of attempts to. Problem is, getting anything done in Washington's 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 go get some sign off from your accounting firm or your auditors. You have to, 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, 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 that 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.
- [62:15]
Patrick O' Shaughnessy
Holy cow.
- [62:17]
Andrew Milgram
That was a year ago. So the numbers are unbelievable. Again, it's probably a poorly written law. So we started going out to companies, to tax preparation firms, people who deal in tax credits, law firms, payroll processing firms, and saying to them, look, we'll buy those credits from people. Now the reality is it's not a credit. It is a transfer payment. The government sends you a check. It took us a while, 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. We started processing credits, looking at individual companies who wanted to sell us their claim. Now we passed on huge numbers of them, particularly because at the beginning it was pretty loosely written law. And 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. So we were buying credits that we felt really, really good about that would be non controversial and would get paid. We were paying about 85, 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, it was 6 or 7%. So we were also 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 there be some sort of deficiency found. And if we were able to put back, the company owed us our capital back plus a rate. So you might ask yourself, well, why US government counterparty was to do this? It goes back to what we were saying earlier about the K shaped economy. Most of our sellers, if not all of our sellers, are in the middle market. All of them. Capital constrained, earnings power constrained. 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 two to three weeks.
- [64:29]
Patrick O' Shaughnessy
And I know it's 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 a minimum return ish of 12%, a lot higher if everything goes as you think it's going to go. Counterparties, the US government, this is very different than taxi medallions. Taxi medallions at the time, of course you tell this narrative was like, oh God. Whereas the US government, I don't know, probably going to pay. Why was this available? Why didn't Apollo do this? Or why didn't some big enterprise, why didn't distressed outpost 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, why is this possible?
- [65:07]
Andrew Milgram
Well, look, a. I think we do a pretty good job looking in nooks and crannies.
- [65:11]
Patrick O' Shaughnessy
Yeah, seeing things first.
- [65:12]
Andrew Milgram
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 Mark Rowan. The world has a lot of things. What doesn't it have? And in order to grow our business, we've made sure to try to do things that we thought were interesting, unique. The other thing is we like the intellectual challenge. We like to think about things other people haven't thought about. Years ago we did some investing 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? And so we had to explore new space in order to find the pathway through. We like doing new, we like exploring ideas, bringing new technology, interesting ways to look at things and access that value to bear in our investing style. It keeps it interesting.
- [66:33]
Patrick O' Shaughnessy
What is the hardest thing that you've ever had to pull off as part of Marble Gate's entire story?
- [66:39]
Andrew Milgram
We're constantly seeking new challenge. When we were starting, it was Paul and I and 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. And so we've always maintained that framework of thinking. We also, in those days locked up. Capital was not available. So we started our business in an open ended structure. Now, 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 how are we going to get that capital back to people? And that process of getting capital allocated into a distress 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, capital contribution resolution that cycles. And 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. And you create this daisy chain of opportunities. One thing leads to another.
- [68:14]
Patrick O' Shaughnessy
If you had to isolate the most difficult workout or the thing that kept you up the most at night, is there one or there's just always a component of that?
- [68:21]
Andrew Milgram
One of the things that my partner Paul always says is every single investment is both a complicated business problem and a human drama. And each one of our investments has had some greater or lesser mix of those two things 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, how they don't work out. We're comfortable with a level of ambiguity and uncertainty that other people generally are not. And so each one of these are the most difficult thing that the other people in it are ever going to go through. And again, you gotta 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. Each situation is difficult in its own way because that human drama tends to be the unknowable thing. As you're walking into a situation, I'm.
- [69:21]
Patrick O' Shaughnessy
Curious since it's people going through the hardest thing they've ever gone through, how often that spills over onto you? How often do you feel like they believe you're the villain in the story and how do you deal? That's would seem very stressful to me. Do you just become stoic about it? Does it happen often? Talk about that part of this whole.
- [69:38]
Andrew Milgram
We are the avatar of people's frustrations. I don't love it. It's not, I don't wake up nobody.
- [69:44]
Patrick O' Shaughnessy
Not excited about this.
- [69:45]
Andrew Milgram
Yeah. There's a 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 it's like, you know, I'm going to go into companies and be reviled by management and argued with by sponsors and yelled at by banks. It's not something that people go into.
- [70:09]
Patrick O' Shaughnessy
It's not the ambition.
- [70:09]
Andrew Milgram
Yeah. So it tends to find people and it self selects people. The way we deal with it is again, back to first principles. Deal with people with dignity, with respect, compassion for the reality that they exist in. Compassion for the fact that this is the hardest thing they're ever going to go through and that they don't like this. It's upsetting to them. It's having an impact on their home life, on their kids. It 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 personal animus to you. I've 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.
- [71:10]
Patrick O' Shaughnessy
What motivates you? If I kept asking that question eight layers deep, where would I get.
- [71:15]
Andrew Milgram
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 multi party negotiation. I just love that problem solving. I like finding a way through. I like taking things that are undervalued, misunderstood and getting them back into a condition where they can be again, durable, profitable and a successful.
- [71:45]
Patrick O' Shaughnessy
If I was to go see your whole life story in a movie or something, let's say pre college 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?
- [71:58]
Andrew Milgram
Hands down, and it's not a thing I talk a lot about. But my father passed away when I was very young.
- [72:03]
Patrick O' Shaughnessy
How old were you?
- [72:04]
Andrew Milgram
I was about 11 years old. He and I were super, super close. We did everything together, including we used to sit together and go 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, loved the American system, loved that his son was an American, loved to participate in American commerce. He was an entrepreneur and dealt with unions and dealt with large capital projects and used to bring me the meetings he would have. He would come to New York on business, he would bring me. I grew up in a little town in southeast Texas. We would go to Dallas and he'd wear a suit, he'd sit me in the corner and I would just listen. So from really early ages we spent a lot of time together. So when he passed away, he had a heart attack. We were on a Boy Scout camp out. And that was obviously a devastating time and devastating moment. And it shaped who I am, 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. So there were people who I would say we thought were good friends and close and reliable counterparties. And at the moment of truth, people don't like messes, they don't like difficult situations. And we saw people retreat and 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 family because they just embraced us and took care of us.
- [73:50]
Patrick O' Shaughnessy
People who have become entrepreneurs who have shaped the world around them. Very strangely, the most common pattern is someone that lost their father at a young age. So many of my mentors have this pattern. And so 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. And the common pattern that I see is on the other side of it, this tremendous amount of agency. Almost like the person wakes up in that moment and realizes, oh, I need to be agentic. I need to take care of business. And 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.
- [74:31]
Andrew Milgram
So 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 and her mother and brothers, while the men were forced to work by the rebels. So my mom had had this really interesting life, but had married my father at a pretty young age. And my father had a big personality and himself had an interesting, colorful life. So when he passed away, she was 35 years old and had these two young kids. My sister's seven years younger than me, so she was really a baby. And my mom really pushed us to take control of things and to make decisions on our own and get out and challenge ourselves and 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 really a lovely childhood in all ways other than the one we discussed. Great people. But she really pushed us to leave. She said, I want you to go out into the world and find your own way. 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. But 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, five brothers total, over. They moved their parents into Mandatory Palestine, and then ultimately they'd go back for a shiddock for the arranged marriage. And because there were ultimately not a lot of Jewish girls running around in Latin America in those days. And so he had gone to Eretz Israel to get married. My father was born there, but then raised in Latin America, came to this country for education, couldn't get a visa. There were constraints on Jewish immigration in those days. And so went back to Venezuela, 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 would they do. And 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 and started their first business was a pre cast country business. And they grew that and they grew that into a number of other businesses that ultimately service the oil industry.
- [77:11]
Patrick O' Shaughnessy
This is the stuff of the classic American dream and story to map that back to where we started with the K shape economy. Give us your just sense 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. Love your closing reflections on that.
- [77:34]
Andrew Milgram
America, the greatest system that has ever existed. It is the greatest economy, it's the greatest economic system, 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 and 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. And I think that it is magical that a kid from Beaumont, Texas 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. So in order for the next Abe Milgram, my father, who came to this country in the 1950s, in order for him to be able to come back as the next whomever, 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. 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, that's a system that is doomed. And it's not the American way. It's not the American system. And I think that we stand at a moment in time where we have some hard decisions to make. By the way, this is not a political comment on any individual party or person or any of that. It's more 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. We need to see our neighbors win. We need to make sure that the people who, who make America great enjoy its prosperity.
- [79:51]
Patrick O' Shaughnessy
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.
- [80:03]
Andrew Milgram
I think there's lots of interesting ways that people are investing. I'm always interested in how friends, colleagues, people I meet are allocating capital, 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 model, or it's just 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 onto autopilot, things don't tend to work out. And I feel like large portions of the investing world are now on autopilot.
- [80:46]
Patrick O' Shaughnessy
Where do you see that most acutely?
- [80:48]
Andrew Milgram
In big parts of the credit market.
- [80:50]
Patrick O' Shaughnessy
Say more about that.
- [80:51]
Andrew Milgram
So the primary vehicle for credit creation and corporate credit over the past 10, 15 years has been the CLOs. So CLOs are a magical device.
- [81:00]
Patrick O' Shaughnessy
Just describe them for anyone that doesn't know what it is.
- [81:03]
Andrew Milgram
So collateralized loan obligations. So 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. So an individual investor will put up the equity and then a number of lenders will provide stacked layers of capital. So orders of priority which allow the purchase of that portfolio of assets. The investing relies primarily on diversification and over collateralization as its method of risk control. There is this 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 that are smart and sophisticated and thinking very hard about how they are managing those pools of assets. But there are a lot that are not. 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 because I can go to this person that'll make this decision for me and I'll go to this person who'll make that decision for me. And so again, we're bankrupting the decision making process. The investor, if that's even what you want to call them, becomes more of a general contractor and they're not actually doing anything. And I don't think 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 be $100 billion of CLO capital thinking like that. That being said, there are people who are going to do $100 billion of CLO that will do just fine under the system that exists. So I want to 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.
- [83:18]
Patrick O' Shaughnessy
So any other commentary on private credit and private credit markets in general and then also on equities, Such a unique vantage point. So just big picture view on those two big spaces.
- [83:28]
Andrew Milgram
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 perspective on the rules out of the center. Because we do bank regulation in a really interesting way in this country. So policy is set at the center. Primary policymakers are the Fed, the FDIC and the occasional 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 and boards and employees as to how that regulation is applied. Policies set at the center and the guidelines on leverage lending that were issued in 2011 created the dynamic that pushed more leveraged credit out of the banking system. Because after the financial crisis, the federal government adopted correctly, I think, the perspective that they wear the ultimate risk in the banking system. And so he who wears the risk makes the rules. They said, look, we were wearing 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, but really to flourish in the aftermath of the financial crisis. And 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. Look, we have 40 years of data that tells us how various credit quality equivalents perform. Triple C's for instance, default at about a 3 year 30% cumulative default rate. So the largest portion of private credit according to Fitch is in triple C equivalent. Show me a private credit manager who reports something north of a 1 1/2% default rate.
- [85:33]
Patrick O' Shaughnessy
How's that happen?
- [85:34]
Andrew Milgram
Well one of two things is true. Either in the aftermath of the great financial crisis we have some private credit managers have invented a new way to underwrite credit which avoids all losses, risks and defaults or they are misleading you about what the actual default rate is.
- [85:50]
Patrick O' Shaughnessy
And how do they do that?
- [85:51]
Andrew Milgram
Well, 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, 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 have some evidence in the BDC market. The BDC market. So business development corporations are essentially public direct lenders. And there's an instrument or a device in credit called PIC debt. Are you familiar with that at all?
- [86:32]
Patrick O' Shaughnessy
You could explain it, but yeah, the.
- [86:33]
Andrew Milgram
Formal name is payment in kind. So rather than pay you a coupon, I will pay you more debt. Now we oftentimes say PIC means payment isn't coming because when you look at the data, what you see is when there's a lot of pick in a particular instrument, typically that company is going to default and you ultimately will not recover that PIC debt. It's a bit of a mirage that individual loan officers or credit committees will use to disguise maybe a less than, let's say fulsome credit decision. Or by the way, 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. So the larger the portion of pick 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, 18% pick debt. They're no longer lenders at that point. They're taking Massive amounts of equity risk in companies that are probably again, they exist mostly in that middle market space. So they're under pressure. They start from a more difficult position with declining margins, 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 Aries or let's say Gallup 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 a dirty little secret people don't like to talk about. The Houlihans or the Lincolns 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. Aries, Golub, et cetera. If they pass, then they go to the next cadre and the next cadre and the next cadre. So there's a real tiering in terms of access. The biggest, best known firms do have the best portfolios because they get first choice and they have the most complete access to capital and the best teams, et cetera. So I think there is great things happening in private credit. I think there are some scary things happening in private credit.
- [89:09]
Patrick O' Shaughnessy
What's your commentary on private equity, which is a key counterpart to that?
- [89:14]
Andrew Milgram
I love those guys. That's my manufacturing division, 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. So they're buying carve outs or assets that are a little unloved or difficult in some way and then really applying force to them. But I think 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 and there's going to be a future for that kind of investing in that style of private equity. I think the standard group of great deal makers who know some allocators or rich families that will back them in buying companies, but they 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.
- [90:23]
Patrick O' Shaughnessy
Looking to the future, what do you most hope you get to do more of that? Marblegate becomes where will you spend your time and attention based on your interest? Right now we sit at a really.
- [90:33]
Andrew Milgram
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 that 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 and 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 is it 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. There's a big push to go into the retail channel. I can make and I buy the argument that large portions of the retail market are under allocated into 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. They're going to be. People will make mistakes, investors will make mistakes, asset management firms will have false starts. But I think there's product design opportunity that is exciting. There are some things that have gotten a lot of heat. Interval funds are getting a lot of attention. There are some strengths and some weaknesses to that. Everything that's happening in the insurance space is super interesting. I think there's lots of ways to think about that. The annuity driven investing profile is super interesting and it serves a real need and opportunity. I think there are other composition 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 are undergoing a lot of change and I think the people who embrace that change going to do really well are going to succeed. And the people who 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.
- [92:56]
Patrick O' Shaughnessy
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 different and obviously it works. 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?
- [93:10]
Andrew Milgram
Right after my father passed away, this family that I still consider very dear to me, my mom was overwhelmed. Tear up. They could have had it, actually. They would take me to their house for breakfast every morning and they'd drive me to school and 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.
- [93:43]
Patrick O' Shaughnessy
Beautiful closing story. Andrew, thanks so much for your time.
- [93:46]
Andrew Milgram
Thank you.
- [93:48]
Patrick O' Shaughnessy
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