Invest Like the Best• Aug 5, 2025• 1:39:26Interview

The Data on America's Economic Split | Andrew Milgram Interview

From Invest Like the Best

Andrew Milgram•Investor, MarbleGate

Executive Summary

economy is exhibiting a "K-shaped" recovery, where large public companies are thriving while the U.S.
middle market is in significant distress.
Data analysis of over 1,200 middle-market companies shows a 20-25% decline in EBITDA since 2019, a nearly 200% drop in net profits, and a quarter of firms unable to meet debt service coverage in 2023.
This middle-market weakness, driven by a lack of pricing power and narrower margins, is leading to a 14-year high in business bankruptcies, a trend expected to persist.
The speaker's firm, MarbleGate, exemplifies an activist distressed investing strategy, as shown by their acquisition and restructuring of over 4,000 NYC taxi medallions, which involved deep engagement with regulators, politicians, and labor unions.

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Concerns Raised

The severe and worsening financial health of the U.S. middle market, which represents a third of the economy.
The potential for a significant increase in business bankruptcies to persist or accelerate.
Hidden risks in the private credit market, particularly low credit quality and the use of PIK interest to obscure non-performance.
The devastating impact a new tariff regime could have on already-strained middle-market companies.

Opportunities Identified

Investing in distressed middle-market companies where operational and structural changes can unlock value.
Acquiring complex, politically sensitive assets like NYC taxi medallions that other investors avoid.
Publicly traded companies may benefit from a new tariff regime due to their superior market power.
The evolving asset management landscape presents opportunities for firms that can offer innovative products and partnership-based models.

Key Themes

The K-Shaped Economy

The U.S. economy is bifurcated. Large, publicly traded companies (the top of the 'K') are experiencing strong growth in earnings and margins, while the U.S. middle market (the bottom of the 'K'), which constitutes one-third of the economy, is facing severe financial deterioration.

This divergence explains the conflicting public sentiment about the economy and highlights a significant, often overlooked, area of systemic risk and investment opportunity in the distressed middle market.

U.S. Middle Market Underperformance

Middle-market companies are suffering from declining EBITDA, negative net profits, and an inability to service their debt. Unlike larger corporations, they lack market power to pass on costs, operate on much thinner margins (mid-single digits vs. mid-teens), and have less flexible capital structures.

This segment accounts for over two-thirds of all corporate restructurings and bankruptcies, and its continued decline signals persistent economic headwinds and a fertile ground for distressed debt investors.

Activist Distressed Investing

The episode details a hands-on, "full contact" approach to distressed investing, exemplified by the NYC taxi medallion case. This strategy involves not just financial restructuring but also operational turnarounds, building new servicing platforms, and proactively managing complex political, regulatory, and labor relationships.

This approach demonstrates that value creation in deeply distressed situations requires more than capital; it demands operational expertise and the ability to rebuild an entire ecosystem, offering a model for complex turnarounds.

Hidden Risks in Private Credit

The speaker raises concerns about the private credit market, noting that a vast majority (82%) of loans are rated single B or lower (CCC-equivalent). He suggests that managers may be masking defaults by using Payment-in-Kind (PIK) interest, creating a distorted picture of portfolio health.

As private credit has grown into a major asset class, these underlying credit quality and reporting issues pose a significant risk to investors who may be underestimating the potential for future defaults and losses.

Regulatory Influence on Market Structure

Government actions have profoundly shaped market opportunities and risks. The 2011 'Guidelines on Leveraged Lending' pushed high-leverage credit out of banks and into the private credit market, while potential future tariffs could devastate the middle market but benefit larger public companies.

Understanding the direct and indirect consequences of government policy is critical for investors to anticipate market shifts, identify vulnerabilities, and position their portfolios accordingly.

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Topics

K-Shaped Economy U.S. Middle Market Distressed Investing Private Credit Bankruptcy EBITDA Debt Service Coverage NYC Taxi Medallions Regulatory Risk Activist Investing Leveraged Lending Tariffs Asset Management Credit Quality Corporate Restructuring

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