Episode summary
The Bubble You Can’t Exit | Dan Rasmussen on the Private Equity Trap
Excess Returns
· · Hosts: Justin Carbonneau, Kai Wu · Guests: Dan Rasmussen
Summary
Dan Rasmussen argued that private equity is running into a structural reckoning: performance has stayed poor, purchase prices were too high, and many firms own low-margin businesses that are vulnerable to bankruptcy and to AI-driven disruption. He said private credit has been financing much of the excess, especially in lower middle-market deals, and that rising bankruptcies at the small end could be a warning sign for the rest of the asset class.
He was deeply skeptical of efforts to push private equity into 401ks, interval funds, or ETFs. Rasmussen said “democratizing” and similar buzzwords should raise alarms, because these structures can hide liquidity problems, charge high fees, and leave retail investors with volatile, opaque assets that may trade at wide discounts or get gated. He also argued that the real effect may be to create exit liquidity for existing private owners rather than better access for savers.
The conversation then shifted to AI, valuation, and biotech. Rasmussen said the AI buildout looks a lot like a bubble that may still be economically useful, but he worries the biggest public beneficiaries have become worse businesses because of heavy capex and depreciation. He preferred diversifying away from U.S. concentration into cheaper international markets and said biotech is unusually hard for standard models, though his team found useful signals in cash-adjusted value, specialist ownership, and peer momentum.
Key takeaways
- Rasmussen says private equity’s weak performance, high fees, and overpriced deal structures suggest the industry is finally facing a reckoning.
- He thinks private credit stress at sub-$25 million EBITDA borrowers may be an early warning that larger private equity deals could be next.
- Rasmussen warns that putting private equity into 401ks or ETFs could expose retail investors to illiquidity, gating, and 400 to 600 basis points of fees.
- He sees AI as both a potentially productive bubble and a source of valuation risk for the Mag 7 because capex-heavy business models are getting worse.
- He favors reducing extreme U.S. concentration and sees international small value as a more compelling setup than U.S. small caps today.
- In biotech, Rasmussen says standard quant models fail badly, but specialist ownership, spending-to-market-cap, and peer momentum help explain returns.
Notable quotes
“I think finally the reckoning is arriving”
“the word democratizing like the word re-imagining should set off alarm bells”
“these companies are distinctly worse businesses than they used to be”
How the episode opens
They've done a lot of stupid things like rolling up veterinary clinics at 22 times iba da and building lawn care enterprises and you know just stuff that's just dumb. Uh and I think finally the reckoning is arriving. Um private credit which has been funding most of this um has been the next darling because at least they're getting a yield.
Uh and now you're seeing you know bankruptcies on the fringes of private credit especially the small end. Every tech innovation they've come up with has been a gold mine. And so like I'm willing to kind of give them a huge amount of robe to go out and do this.
Um uh but I look at it and I think these companies are distinctly worse businesses than they used to be. Um before they had to spend massive amounts of capex. Everyone is really fired up about investing in sort of the the hyperscalers that are building the ai models.
But like what about the value companies that are most likely to benefit from it that are sort of stealth adopters that are actually, you know, using AI in a very productive way that you wouldn't sort of realize.
Dan, welcome back to Excess Returns.
Thank you. It's nice to be back. At Verdad, you and your team are focused on putting out research and building investment strategies that are rigorous, empirical, and systematic.
And you're also known, I think, for sort of challenging the consensus narratives out there in the market with um, you know, deep research, a long-term perspective, and a willingness to go, I think, where the evidence leads, even if it's a little bit uncomfortable or contrarian in in nature. And that's kind of what I really appreciate and like about, you know, your views on the market.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private equity risks
- private credit stress
- ai capex
- biotech valuation
- international diversification
Companies and tickers mentioned
- Verdad Advisers
Watch the episode
Watch “The Bubble You Can’t Exit | Dan Rasmussen on the Private Equity Trap” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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