Dan Rasmussen from Verdad Advisors joins Kai Wu, guest host from Sparkline Capital, to dissect the hidden perils of private equity. A seasoned critic of this asset class, Rasmussen argues that illiquidity and stale pricing can lead to misallocated capital. They discuss the breakdown of the Yale model and the stark decline in private equity distributions, touching on the allure of small-cap value as an alternative. The conversation also explores potential opportunities in biotech and the impact of AI on economic dynamics.
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insights INSIGHT
Private Equity Targets Riskier Small Firms
Private equity largely invests in very small, highly leveraged, low-margin companies.
Allocating heavily to these companies means significant exposure to smaller, riskier businesses compared to large public firms.
insights INSIGHT
Declining Private Equity Distributions
Private equity distributions have fallen sharply to the lowest since 2008 even with the stock market high.
Difficulty in exiting investments suggests private company valuations may be overstated.
insights INSIGHT
Volatility Laundering Masks Private Equity Risk
Private equity's reported NAV volatility understates true risk, masking leverage and size risks.
Publicly listed private equity funds show real volatility closer to small-cap stocks, highlighting valuation illusions.
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In this episode of Excess Returns, Justin and special guest host Kai Wu of Sparkline Capital are joined by Verdad’s Dan Rasmussen for a deep dive into the hidden risks lurking in private equity—and why they may be more dangerous than investors realize.
Rasmussen, a long-time critic of the asset class, explains why the allure of illiquidity, stale pricing, and past outperformance has led to dangerous capital misallocations. Along the way, we explore the origins of the Yale model, the current liquidity crunch, volatility laundering, and whether small-cap value could be the better bet today. We also dig into bubbles, biotech, and whether AI will concentrate or diffuse economic power.
🔑 Topics covered:
Why private equity may not be what investors think it is
The original logic of the Yale model—and how it’s broken today
Leverage, small company risk, and the illusion of low volatility
How private equity portfolios are “money traps” in disguise
Small-cap value as public market private equity
Why biotech could be the next overlooked opportunity
How innovation bubbles spark long-term progress
AI’s capital intensity and implications for Big Tech dominance
Behavioral risks in institutional vs. retail investing
📍 Timestamps: 00:00 – Why private equity could be a money trap 03:00 – The over-allocation to small, low-margin, highly levered companies 07:25 – Why private equity’s popularity may signal poor future returns 14:30 – The Yale Model’s origin story and how it morphed 19:25 – Collapse in private equity distributions 23:34 – Volatility laundering and misleading risk metrics 27:00 – What happens when private equity goes public 31:00 – Do lockups help investor behavior—or prevent learning? 35:10 – Could small-cap value be a better alternative to private equity? 42:00 – Why biotech is the most beaten-up corner of small caps 47:00 – Bubbles, innovation, and the role of speculative excess 51:00 – AI, capital intensity, and a return to economic gravity 54:00 – Will AI empower monopolies or smaller players?
Excess Returns 
