Feb 17, 2020 · 1h 4m · capital-allocators
Dan Rasmussen – Private Equity Risk and Public Equity Opportunity at Verdad Advisers (First Meeting, EP.15)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Dan Rasmussen, founder of Verdad Advisers, who deconstructs the historical drivers and systemic vulnerabilities of private equity and private credit. Rasmussen explains how Verdad utilizes machine learning, rigorous credit underwriting, and strict capacity discipline to replicate leveraged buyout returns in deeply discounted public micro-cap equities and execute systematic crisis playbooks.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17.8% of the talking time here. How this is scored →
Ted as informed peer 4.1 Guest teaching 4.2 Guest disagreement 2.4 Ted pushing back 1.7
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 23:30 Dan Slams Private Equity Valuation Logic and WeWork
Dan forcefully rejects private market valuations, arguing that buying proforma-adjusted micro-caps at 16x EBITDA while the S&P trades at 12-13x defies logic and is destined to fail.
Hardest push from Ted ▶ 36:02 Ted Challenges Study for Conflating Share Price and Business FundamentalsTed firmly interrupts Dan's CEO pedigree conclusion by pointing out that measuring share price performance fails to test whether superior management improves actual business operations.
Biggest teaching moment ▶ 14:35 Dan Dismantles Growth-Oriented Leveraged BuyoutsDan walks through the corporate finance reality that heavily levered companies cannot fund the capex and SG&A required for growth because cash flow is drained by debt service.
Ted holds their own ▶ 36:02 Ted Exposes Methodological Blindspot in CEO Track Record StudyTed demonstrates his deep fundamental background by catching that Dan's quant study analyzed equity volatility rather than operating metrics, forcing Dan to concede the point.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Socratic Upbringing and the Juridical Mindset | 3 | 1 | 2 | 2 | Ted opens by asking if Dan's analytical skepticism stems from natural cynicism as described by Malcolm Gladwell. Dan gently reframes cynicism into a Socratic, legalistic mindset developed around the family dinner table. | |
| Transition from Humanities to Bridgewater and Bain Capital | 2 | 2 | 1 | 0 | Ted prompts Dan to explain how he entered investing from a humanities background. Dan describes his time at Bridgewater and Bain Capital, noting the contrast between academic finance literature and fundamental modeling practices. | |
| Deconstructing Historical Private Equity Returns at Bain | 3 | 6 | 4 | 1 | Dan delivers a thorough empirical deconstruction of private equity alpha, explaining that historic gains came from purchasing sub-7x EBITDA assets rather than managerial genius. He explains why high leverage and high multiples mathematically impair operational reinvestment. | |
| Operational Realities and Limits of Cost Cutting in LBOs | 5 | 5 | 4 | 3 | Ted probes operational value creation and debt refinancing optionality in private markets. Dan points out that sponsor-to-sponsor buyouts leave little room for real cost cutting, while private credit lenders obscure defaults through covenant-lite renegotiations. | |
| Recession Scenarios and the Zombie Buyout Phenomenon | 5 | 5 | 4 | 2 | Ted asks how an economic downturn plays out when immense dry powder collides with weakening fundamentals. Dan cites energy PE fund marks to illustrate extend-and-pretend zombie dynamics before explaining why he turned to public markets to find cheap levered companies. | |
| Algorithmic Screens and Machine Learning Error Detection | 3 | 4 | 1 | 0 | Ted asks how Verdad filters its universe, prompting Dan to explain their quantitative value screens and two-tier machine learning architecture that predicts debt paydown and identifies model errors. | |
| Regional Market Dynamics, Bankruptcy Risk, and Qualitative Judgment | 4 | 5 | 2 | 1 | Dan elaborates on regional screening differences, noting that corporate bankruptcy risk is effectively zero in Japan while US and European models require qualitative human checks to weed out fraudulent value traps. | |
| Empirical Testing of Executive Pedigree and Management Track Records | 6 | 4 | 3 | 6 | Dan reviews a study demonstrating that CEO pedigree and past track records have no predictive relationship with future stock price returns. Ted intervenes with sharp pushback, pointing out that Dan tested share price movement rather than underlying business operational performance. | |
| Portfolio Construction, Equal Weighting, and Capacity Discipline | 4 | 3 | 1 | 1 | Dan outlines his portfolio construction principles, stressing industry diversification, quarterly rebalancing, and capping assets under management to preserve the ability to trade illiquid micro-caps. | |
| Trading Illiquidity, Position Sizing, and Volatility Management | 5 | 3 | 1 | 2 | Ted asks about position weighting and execution friction in micro-cap trading. Dan explains the danger of buying sudden screen jumpers immediately and describes patient execution across weeks as a compensated service. | |
| Developing Credit Strategies and Analyzing Cross-Asset Signals | 4 | 6 | 2 | 1 | Dan details the creation of Verdad's credit strategy with Greg Obenshain, debunking yield chasing in favor of upgrade-prone Goldilocks debt and illustrating lead-lag momentum signals between debt and equity markets. | |
| Research Culture, Transparency, and Navigating Small-Cap Value Cycles | 4 | 4 | 3 | 1 | Ted asks how published weekly research feeds into Verdad's investment process. Dan explains that research transparency serves to align investors psychologically for the 50% of years when small-cap value underperforms. | |
| Crisis Playbook: Capitalizing on Macroeconomic Recessions | 5 | 6 | 3 | 2 | Dan presents findings from Verdad's study across eight historical recessions, demonstrating that quantitative model predictive power surges during downturns and laying out a rules-based strategy to heavily allocate when spreads exceed 600 basis points. |
Statements from this episode (35)
Most investors are story-driven rather than rule-testing
“And I find that that's actually relatively rare in investing. I think a lot of people are very story driven, and they're very idiosyncratic driven, so they're bottoms up, quote unquote. And they don't say, well, I'm gonna do X, but would X if it were applied a…”
Nobody can accurately forecast corporate earnings despite widespread industry efforts
“Kahneman directly talks, for example, about earnings forecasts. He says, look, there's a huge amount of work done in earnings forecasts. Nobody can forecast earnings. People keep trying.”
Bridgewater is an elite academic department run by a cult leader
“Bridgewater is like, take MIT and Harvard's economics department and Stanford and Caltech's comp sci department and have them run by a cult leader and shift that all together, and you've got Bridgewater.”
Private equity historically made most of its profits below 7x EBITDA
“First, it said that private equity had made the majority of its money in deals done at less than seven times EBITDA.”
Predicting corporate growth over one to five years is nearly impossible
“Not only is it impossible to predict, it's just wildly volatile. You can have a company you thought was gonna grow 15% that declines, and that's very common. Doesn't matter if you're forecasting one year away, three years away, or five years away, it's all rea…”
Heavy LBO debt prevents compounding businesses from reinvesting for growth
“Because a firm that has eight X debt to EBITDA, that is taking out all of its excess free cash flow to pay interest, can't reinvest for growth. So why buy a compounder and lever it up? In theory, you should have much higher return opportunities other than payi…”
Engineering and predicting top-line revenue growth is impossible for PE
“You can't predict revenue growth, and it's really hard to control it. Wish we could, and if it were possible, there'd be a class at Harvard Business School, how to drive revenue growth, okay? It's just impossible and unpredictable, and maybe you get things rig…”
Data shows private equity firms are highly effective at operational cost-cutting
“I think the empirical evidence would show that private equity firms are good at cost cutting. They are good at cutting the fat. They are good at streamlining operations, and we saw that a lot in the data.”
The majority of private equity acquisitions are sponsor-to-sponsor deals
“These days, if you're buying a company, the majority of private equity acquisitions are from other private equity firms.”
Private credit funds offer 8x leverage covenant-lite loans to hide defaults
“And they basically start buying market share by offering the riskiest loans. So they're offering unit tranche, eight times debt to EBITDA loans with no covenants, and basically because they don't want to show their LPs that any of their loans have defaulted, T…”
A growing share of PE LBOs cannot cover interest from cash flow
“From people I've talked to in the industry, and this is purely anecdotal, I don't have data to support this, but an increasingly large percentage of private equity LBOs are facing what they would call, quote unquote, liquidity problems. What is a liquidity pro…”
25% to 30% of LBOs would go bankrupt in a normal recession
“And so much of private equity today of LBOs is single B or triple C type quality, that I would say 25 to 30% of LBOs would go bankrupt in a normal business cycle, normal recession with normal levels of delinquency.”
Energy PE funds avoided marking down 2013-2015 vintages despite sector collapse
“Energy private equity is fascinating, because 2013, 14, and 15 vintages of energy private equity funds, when oil prices drop 70%, they've started to rebound a little bit, a huge drop in oil prices, S&P small cap energy down 70 or 80%, peak to trough, 90 plus p…”
Private equity will likely enter an extend-and-pretend zombie state
“There's this extend and pretend zombie type behavior where the money that you put into private equity never blows up, but you never get it back, you know. And I think that's probably the most likely scenario”
Cheap LBO opportunities exist in Europe and Asia, but not the US
“Now, I think in Europe or in Asia, I think there are still cheap LBO opportunities, right? So a firm like Bain or Blackstone, they're still seeing opportunities to do really attractive buyouts ex-U.S. But within the U.S., you can't.”
US private equity multiples are distorted and significantly overpriced
“Now I think private markets are much more expensive than public markets, and you can see this with the venture-backed stuff like WeWork. Private markets say it's worth seventy-five billion. Public markets say it's worthless. You can see it in the deal multiple…”
Credit rating agencies effectively forecast corporate bankruptcies
“The credit ratings agencies do a darn good job at forecasting which companies are likely to go bankrupt.”
Leveraged equities with multiple expansion deliver outsized returns
“We're going to focus on the ones that are levered because when they get multiple expansion and they're levered, that's where you really make a ton of money.”
Machine learning models finding non-regression factors are likely flawed
“So if your machine learning is finding something that standard regression models didn't find, it's probably not a good model.”
Japanese corporate bankruptcy is effectively eliminated by government policy
“And the reason you don't need anything fancy in Japan is that nothing goes bankrupt. So the Japanese government basically has eliminated bankruptcy for corporations, so you don't need any risk controls.”
CEO pedigree and elite education do not predict stock returns
“Turns out that going to business school empirically does not mean that your stock price does better. Turns out working at an investment bank or top tier consulting firm has no impact on the stock price of the company that you run. Turns out that your track rec…”
Executive compensation should not be tied to share price
“And this is more of a political point, but I don't think that executive compensation should be tied to share price. Because the share price is so volatile, and so wild, and it doesn't look like from this data that who the CEO is, is having much of an impact on…”
Quantitative stock ranking models disproportionately favor illiquid micro-caps
“Within the best ranked things, and this is true for most quantitative strategies, a disproportionate share of the most attractive things to virtually any quantitative ranking model are micro cap or small cap. And they're illiquid. So they're trading a few 100,…”
The cheapest decile of price-to-book stocks averages sub-$400M market cap
“And I think for value, if you just rank by price to book, the average market cap of the cheapest decile is going to be less than four hundred million dollars.”
Alpha comes from tedious trading that larger funds cannot execute
“Our logic, again, is that if we are doing things that other people are unwilling to do or unable to do, unwilling because it's tedious and boring, unable because of capacity issues, and we can do that, that should be where alpha is. I mean, that should be what…”
Middle-tier high-yield bonds deliver the highest expected credit returns
“And the long-term empirical research actually finds that that stuff, the sort of Goldilocks of the bond market, does better. That it actually has the highest expected returns.”
When a stock rallies but bonds fall, the bond market is right
“Let's look at trailing price momentum for the bonds and the stocks, and let's look at things where the stock went way up and the bonds went down. Who's right? Turns out, in those cases, that the bond market's right. The stock should come down.”
Small-cap value underperforms or drops in 50% of years
“If you add up the years when the market is down, and then the years that small value underperforms the rest of the market, that's 50% of years.”
The best time to buy small-cap value is after worst trailing returns
“The best time to buy small value is when it's had the worst trailing returns.”
Value investing advocates have been wrong for nine years in the US
“And all of these quantitatively educated CFA people that know the names Fama in French are saying, no, no, growth doesn't work by value. And you know what? They've been wrong now for nine years in the United States.”
Simple quantitative models have 8x the statistical power during recessions
“Simple quantitative models tend to have about eight times the level of statistical power during recessions than during times of economic growth.”
Distressed debt returns during crises have historically been disappointing
“Distressed debt doesn't do all that well. Everybody says, oh, the thing I want to do in the next crisis is buy a lot of distressed debt. Well, we have a simple rule at Verdad on both the equity side and the credit side, which don't buy things that go bankrupt.…”
High-yield spreads blowing past 600 bps marks a prime equity entry
“When high-yield spreads blow out past six, that's as good a time of any to start dumping money into equities.”
Quantitative investors leverage Twitter for superior peer feedback
“I think this is why so many quantitative investors use social media and Twitter especially, is Because the feedback on your ideas is so good, and the knowledge sharing is so good. And so I think that it's like going to the best section of business school.”