Private Equity Chased Software. Big Tech Is Chasing AI. Dan Rasmussen on If They Are Making the Same Mistake Twice

**SPEAKER_1** (0:00)
We are excited to announce the launch of a new podcast, The Intangible Economy with Kai Wu. AI and the broader technology revolution are changing how we live, work and create value. In each episode, Kai will sit down with investors, researchers and other experts to discuss how innovation and other intangible forces such as brands, human capital and network effects are transforming markets and investment outcomes. In this episode, Kai is joined by Verdad founder, Dan Rasmussen. They discuss private equity software bet, AI's impact on motes and CapEx and opportunities in Japan, biotech and a lot more. You can subscribe on all major podcast platforms using the links in this episode description. Thank you for listening. We hope you enjoy the new show.

**Kai Wu** (0:34)
Our guest today is Dan Rasmussen, the founder and managing partner of Verdad Advisors and the author of The Humble Investor. Among his many accomplishments, Dan and his colleagues at Verdad 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. We were classmates at Harvard, rode crew together, and later independently, found our way into the esoteric field of quantitative investment management.
Dan, it's great to see you and welcome to The Intangible Economy.

**Dan Rasmussen** (1:08)
Thanks, Kai. Delighted to be on. This will be fun.

**Kai Wu** (1:11)
Yeah, I've been looking forward to this.
So yeah, we've done a couple of chats together over the past year. And I know going back even further, you've been a really early skeptic of what's going on in private markets, private equity, private credit. And it took some time, but over the past year or so, things are really starting to change. And so, I'd love if you'd start off just with a quick update on where things stand. We last spoke in January, so about six months ago. What material developments have unfolded since then? What should listeners be aware of in terms of where we now stand in the cycle?

**Dan Rasmussen** (1:48)
Yeah. I mean, I think the private markets story is sort of a classic one in markets. I think you and I, Kai, both love studying history to try to learn the lessons that it can teach. And I think one of the lessons is that investment fads rarely end well. When everyone agrees on things, you can almost bet that those things they agree on will be accompanied by future subpar returns. And private equity became the ultimate consensus trade. Every endowment, foundation, RIA, family office said that private equity was the best performing asset class, and therefore you needed a very large percentage of it in long-term strategic asset allocation. I mean, you could literally parrot the kind of BS talking points that got fed to everybody from this sort of herd mentality group think propaganda. And so the money flowed in.
And how do those things typically end? Well, if people pay too much, the asset prices get inflated, and then those inflated asset prices take years to deflate, and that deflationary process is very bad for returns. And that's exactly what happened. So, purchase prices and private equity reached almost probably 20 times ebitda when public markets were trading at probably 15 and small caps at 12
And now multiples have kind of come in from there.
And as long as money was flowing into private equity, you know, you could sell to the next fool. But when money stopped flowing in, you had to sell it to somebody real. And turns out nobody else wanted to pay those crazy prices. And so now there's a massive backlog. They can't sell the things they bought at those prices. So they're doing continuation vehicles and all other weird financing tricks to try to hold on to the assets that they can't sell. And everybody who invested in private equity during those peak years is stuck in it and can't get out, because the private equity firms can't exit their companies, and so you can't exit your investments. And I think the whole thing has become a massive train wreck. And I think it was eminently predictable, although highly, highly non-consensus.

**Kai Wu** (3:50)
So you're saying that things are starting to unwind, but the industry is doing its best to slow things down, continuation vehicles and such.
As an observer to the industry, how would one go about trying to assess what is the true mark that these assets should trade at? How do you see the cycle unwinding? Obviously, they'll do what they can to slow down the bleed, but at some point, you would assume that these vehicles have to end, and the investors have to get back their money. So both from a standpoint of markdowns, but also in terms of liquidity and distributions, how do you see things playing out? Again, where are we in the cycle? How much more time do you think it'll take for things to get back to equilibrium?