Episode summary
Private Equity Chased Software. Big Tech Is Chasing AI. Are They Making the Same Mistake Twice?
Excess Returns
· · 57 min · Hosts: Kai Wu · Guests: Dan Rasmussen
Summary
Dan Rasmussen argues that private equity is working through a classic unwind after becoming a consensus trade: too much money chased too few deals, prices got bid up, leverage was piled on, and now exits are clogged. He says continuation vehicles and other financing tricks are only slowing the recognition of losses, not fixing the underlying problem, and he thinks the debt side of the capital structure is better positioned than the equity because it still gets cash flow back.
He also describes how private equity migrated from old-economy buyouts into software and health care technology, with as much as 40% of new capital in that period going to those businesses. But he is skeptical that many of those niche software assets had durable moats, especially once AI weakened the moat of code itself. He argues that debt financing for software, including ARR loans, helped fuel the boom, even though the mismatch between leveraged debt and technology obsolescence is now becoming more visible.
The conversation then turns to AI capex and the risk of overinvestment. Rasmussen says the bullish camp combines futurism with rationalist expected-value thinking, but that history usually rewards the patient buyer after the crash, not the first mover who pays up today. On value investing, he agrees that the U.S. is unusually intangible-heavy, while Japan still behaves more like a tangible, 1960s-style market where buying below book can work because companies are pushed to return excess cash and assets to shareholders.
Key takeaways
- Dan Rasmussen thinks private equity is in the late stages of a painful unwind, with leverage and stalled exits making equity the weakest part of the capital stack.
- He says publicly listed PE vehicles now trade at large discounts to NAV, implying the market is finally pricing in the volatility that quarterly marks used to hide.
- Rasmussen estimates that by 2021 roughly 40% of private equity money was flowing into software or health care technology, often at inflated valuations.
- He argues that AI weakens the moat of code and raises obsolescence risk for software-heavy businesses, especially when they are highly levered.
- He remains constructive on Japanese small caps because many trade below tangible book and face explicit pressure to return cash and sell non-core assets.
- He sees U.S. value investing as hampered by an intangible-heavy economy, while Japan still offers a more traditional book-value opportunity.
Notable quotes
“and I think the whole thing has become a massive train wreck. Um, and I think it was eminently predictable”
“if I had to bet which is going to do better over the next five years, private credit or private equity, I'd be putting my money in private credit”
“if your if your moat was your code, then I'd be worried about you”
“the primary thing that has to happen is that every company that trades below book value needs to get to book value”
How the episode opens
Our guest today is Dan Rasmusen, the founder and managing partner of Verd Advisors and the author of the humble investor. Among his many accomplishments, Dan and his colleagues at Verd published one of the most thoughtful research letters in the investing combining quantitative investing, financial history, and a willingness to challenge conventional wisdom across public and private markets. Dan and I actually go way back.
Um we were classmates at Harvard uh rode a crew together and later independently found our way into the esoteric field of quantitative investment management. Uh Dan, it's great to see you and welcome to the intangible economy.
Thanks Kai. Delighted to be on. This will be fun.
Yeah, I've been looking forward to this. Um so yeah, we we've done a couple chats together over the past year. Um and I know going back even further, you've been a you know really early um skeptic of what's going on in private markets, private equity, private credit.
And it took some time, but you know, over the past year or so, things are really starting to to change. Um, and so, you know, I' I'd love if you'd start off just with a quick update on where things stand. You know, we last spoke in January, so about six months ago.
You know, what material developments have unfolded since then? Um, you know, what should listeners be be aware of um in terms of where we now stand in the cycle? Yeah, I mean I I think the the private markets um uh story is sort of a classic one in in markets and I think you know you and I Kai both love studying history to try to learn the lessons uh that it can teach.
Uh and I think one of the lessons is that um investment fads rarely end well.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private equity returns
- private credit and leverage
- ai capex boom
- software moats
- biotech intangible value
Companies and tickers mentioned
- Verdad Advisers
- Sparkline Capital
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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