Ep. 362: Dan Rasmussen on Private Equity’s Stranded Assets, Private Credit, and the AI Bubble
Dan Rasmussen discusses how massive capital inflows into private equity and private credit have created bubbles in software and growth-focused investments, with stranded assets as a result. He also argues that AI is a capital-intensive industry heading toward inevitable overcapacity and pricing collapse, despite the technology's genuine value.
Summary
Dan Rasmussen, founder of Verdad Advisers, begins by discussing his background studying history and literature at Harvard before entering finance on his father's advice. He explains his investment philosophy of 'meta-analysis'—understanding how consensus pricing relates to individual analysis rather than analyzing companies in isolation.
Rasmussen traces private equity's evolution from buying small, undervalued companies with leverage in the 1980s-2010s to becoming a consensus-driven mega-industry. He details how institutional capital inflows—particularly from sovereign wealth funds and endowments adopting the 'endowment model'—pushed private equity toward expensive deals. The industry responded by shifting from micro-cap value to micro-cap growth, heavily concentrating in software and healthcare tech. This concentration was exacerbated by COVID-era valuations validating expensive 2018-2019 deals, creating a frenzy of software investing. However, rising rates and AI disruption have now left these software-heavy portfolios as 'stranded assets'—too small to IPO, undesirable to acquire, and impossible to refinance.
On private credit, Rasmussen applies efficient market logic: high yields indicate high default risk. He notes banks exited these markets for good reason, and private credit's lending to leveraged private equity buyouts is more risky than claimed. The floating-rate structure created borrower stress when rates rose, leading to portfolio deterioration and gate closures that resembled bank runs.
Rasmussen highlights a critical accounting issue: adjusted EBITDA has become increasingly inflated, with studies showing 35% overstatement versus realized EBITDA. This systematic overstatement guarantees year-one disappointment across portfolios.
On AI, Rasmussen argues it represents a capital-intensive industry cycle similar to shipping or fracking. He warns that massive capacity expansion will inevitably exceed demand, collapsing prices and returns on invested capital. Market pricing assumes this overcapacity scenario will never occur, signaling a bubble despite AI's genuine technological value.
For portfolio positioning, Rasmussen advocates avoiding bubble participation while maintaining reasonable diversification (10% underweight on semiconductors/AI). He recommends zero allocation to private markets since 2016-2017 given fees and valuations. For young professionals, he suggests mastering AI tools to enhance productivity rather than fearing displacement, noting that call centers haven't been automated yet despite AI's capabilities.
About this episode
Daniel Rasmussen is the founder and managing partner of Verdad Advisers, an investment firm with over $1 billion in assets under management across multiple asset classes. He is the author of The Humble Investor (2025) and American Uprising (2011). Prior to founding Verdad, he worked at Bain Capital Private Equity and Bridgewater Associates. In this podcast, we discuss: 1. Investing as Meta-analysis 2. The Evolution of Private Equity 3. Stranded Software Assets 4. The Private Credit Mirage 5. The "Adjusted EBITDA" Trap 6. Small-Cap Growth Dangers 7. The AI Capex Cycle 8. AI Productivity Mindset
Key Insights
- Private equity shifted from a micro-cap value strategy in the 1980s-2010s to a micro-cap growth strategy concentrated in software after capital inflows made small companies too expensive, with most PE firms attempting to copy successful managers like Vista Equity and Thoma Bravo
- A 2018 Preqin survey showed 91% of institutional investors expected private equity to outperform by at least 2%, with underperformance not even presented as an option, creating complete consensus that drove allocations to 40% despite private equity being only 4% of market cap
- Adjusted EBITDA used in PE deal underwriting has inflated to approximately 35% above realized EBITDA, guaranteeing that year-one actual results disappoint projections across over 90% of portfolio companies
- Banks exited private credit markets not for competitive reasons but because they assessed the risks as too high, yet private credit managers market these same deals as safe through overcollateralization, creating a logical inconsistency in the risk proposition
- Private credit gates and redemption lines created bank-run dynamics as retail investors dumped allocations after portfolio deterioration became visible, despite subordination suggesting private equity should have detonated first
- AI represents a capital-intensive industry where capacity expansion will inevitably exceed demand, causing price collapse similar to fracking in 2014 or shipping cycles, with market currently pricing this overcapacity scenario as impossible
- Size acts as an amplifier for factor premium effects in public markets, making value factors more predictive in small-cap than large-cap companies, but private markets combined small-size growth with leverage and high fees creating 'perfect storm' portfolio construction
- There is no persistence of performance in private equity unlike venture capital, making allocations to top-performing managers cyclical fads rather than systematic advantages, evidenced by shifts from energy PE (2010-2015) to software PE (2015-2023)
Topics
Transcript
[0:01] Welcome to the MacroHive Conversations podcast. [music] I'm Bilal Hafeez, head of strategy at MacroHive. Before we dive in, a quick update. Following [music] MacroHive's acquisition by the BGC Group, BGC has launched a new regulated business called MacroHive Markets. For the first time, onboarded clients can [music] also access execution services via MacroHive Markets. This new workflow will allow macro institutional investors to benefit [music] from strategy and quant insights alongside access to global liquidity. [music] Please contact Andrew Simon or Guillermo Cibrían on Bloomberg or click the link [0:34] in the description below for more details on MacroHive Markets and its service offering. Now, onto this episode's guest, Dan Rasmussen. Dan is the founder and managing director…
Full transcript available for MurmurCast members
Sign Up to Access