Andrew Milgram - Full-Contact Capitalism - [Invest Like the Best, EP.436]

I'll start with Marblegate. We focus on the middle market because it constitutes one-third of the U.S. economy. Historically, it has also accounted for over two-thirds of all restructurings and bankruptcies, making it a highly active sector. Despite its significance, it's the least understood economic area. Companies in this market don't publicly file financial statements or list on stock exchanges. Consequently, insights into the middle market's performance are primarily held by individual lenders or company owners. Discussions about the middle market often remain anecdotal and self-referential, as there isn't a comprehensive data set providing broad insight into this segment of the U.S. economy.

Our data analyzes both the middle market and the public market. We assess the likely impacts and how these work through the balance sheet. What do you suspect happens? I can argue that public companies will actually benefit from the tariff regime. I assume the West Wing is thoughtful in its analysis and deal-making strategy, and they've likely reached a similar conclusion. The Treasury Secretary speaks confidently about this, and I agree with their assessment for the ticker tape economy. Tariffs won't be terrible; in fact, they could be constructive. However, for the middle market, anything above a 5% or 6% tariff will devastate margins and, consequently, the ability to service debt. Therefore, any persistent tariffs will crush the U.S. middle market.

When I entered this business, it involved purchasing a company's debt stock and then using the rights and remedies within the credit agreement to achieve a desired outcome, typically involving operational improvements. Back then, credit agreements were stricter, meaning companies faced difficulties within a narrower range. Covenants required them to address declining performance promptly. Today, covenants are much broader. Consequently, when a covenant is violated or restructuring is needed, the business is generally in a worse state, requiring more significant operational changes. Distressed investing, therefore, involves providing capital to capital-constrained situations.

We leveraged all the data from the TLC, gaining immediate insights as we delved into the space. As we built our own operation, we continued to gather more data. This data informs our data-driven decisions. In distressed investing, we aim to transition companies from intuition-based decisions to data-driven ones. Whether you're a middle-market manufacturing company or a taxi driver, we want you to make data-driven decisions. These decisions are more persistent and have a higher probability of success because they are informed. This approach also allows decisions to be made by operators, not just top management. Operators use this data to make decisions, and if adjustments are needed, they can then apply their intuition or pattern recognition. This ensures we start from a stronger position.

A good relationship with anyone involves respecting their needs and constraints. We excel at understanding the needs and constraints of our counterparties, whether they're a bank, a borrower, a sponsor, or even a taxi driver. We dedicate significant time to understanding the other person's needs. I always tell everyone at Marble, and my kids, that it's easy to know what you want; you see it in the mirror every morning. The true effort lies in understanding the other person. This understanding can stem from conversation, which is a direct and important method. You must always be present on the ground. Many management teams of companies we've invested in have remarked, "You're the first lender to actually visit our facility." It's surprising.

I'm always interested in how friends, colleagues, and people I meet are allocating capital and thinking about investments. However, I sense a lot of laziness out there. There's a lot of "wash, rinse, repeat" mentality: "We do it this way because we always have," or "We're investing to model." It's simply lazy. This approach is intellectually bankrupt and worrisome. When we operate on autopilot, things rarely work out. I feel large portions of the investing world are now on autopilot.

Defaults are the most easily manipulated statistic. A default only exists if I, the lender, declare it. So, if I want to avoid defaults in my portfolio, I simply don't call them. I always advise people: don't ask a private entity's default rate; instead, ask their waiver or amendment rate. How often do they need to adjust credit terms to match the company's reality? We see evidence of this in the BDC market. Business Development Corporations are essentially public direct lenders. There's a credit instrument called PIK debt. Are you familiar with that?