Podcast Summary: The Bubble You Can’t Exit | Dan Rasmussen on the Private Equity Trap

Podcast: Excess Returns
Episode Date: January 29, 2026
Host(s): Jack Forehand, Justin Carbonneau, Matt Zeigler (“A”)
Guest(s): Dan Rasmussen (“B”; Founder, Verdad), Kai Wu (“C”; Sparkline Capital, guest host)

Episode Overview

This episode dives deep into the structural habits and hidden dangers of the private equity industry, the implications of extending alternative assets to retail investors (401k and ETF formats), the relationship between bubbles and innovation (especially around AI), portfolio construction in light of concentrated market leadership, and a quant-driven approach to the often-misunderstood world of biotech investing.

Rasmussen, true to form, challenges prevailing consensus with data-driven skepticism and contrarian perspectives, while Kai Wu supports and extends these themes with his quantitative and intangible-asset expertise.

Table of Contents

• I. State of Private Equity: Structural Risks and Poor Performance
• II. Institutional Investors, Agency Issues, and “Democratization”
• III. Retail Access: 401ks and ETFs—Exit Liquidity or Democratization?
• IV. Bubbles, Innovation & AI: Are We in a Good or Bad Bubble?
• V. Portfolio Construction: Mag7, International Equities, and Small Caps
• VI. Biotech: Quantitative Challenges and Factor Approaches
• VII. Notable Quotes & Memorable Moments

I. State of Private Equity: Structural Risks and Poor Performance

Main Points:

• Persistent Underperformance:

  • Private equity (PE) has delivered years of disappointing performance, contrary to rosy return projections set by managers and allocators.
  • “The performance continues to be bad and, you know, unsurprisingly. … You had virtually every investment allocator in the world thinking they were going to generate 400bps of net of fee alpha… I don't think that exists.” (Dan Rasmussen, 03:25)

• Poor Incentives and Overexpansion:

  • PE firms have doubled in number over a decade, leading to “speciation” and an eventual evolutionary reckoning. Many new entrants lack unique edge (“anyone can open a firm and talk about operational improvements”).

• Private Credit as the Next Risk:

  • Private credit funded much of the lower-quality deals, and cracks are showing.
  • “Now you're seeing bankruptcies on the fringes of private credit, especially the small end, the sub 25 million of EBITDA businesses… usually what you see is once the smaller companies are going bankrupt, the middle and big ones are next.” (B, 04:52)

• Tech-Heavy Exposure:

  • PE is “massively overweight tech—and overweight subscale, you know, subscale tech… Who knows if AI is just going to eat that stuff... 40% of PE capital… in software is going to get annihilated.” (B, 07:44)

II. Institutional Investors, Agency Issues, and “Democratization”

Key Points:

• Institutional Reluctance to Cut Exposure:

  • Most institutions only cut PE allocations when forced to, not out of waning enthusiasm.
    • “They're only reducing their exposure when they're forced to… I haven't seen that [loss of enthusiasm] yet.” (B, 08:54)
  • High dispersion in PE: Most allocators focus on keeping ‘good managers’ and learning red flags from ‘bad managers’ without challenging the aggregate asset class.

• Incentives for Maintaining the Status Quo:

  • Cutting private equity means cutting jobs; hence, there is inertia against meaningful allocation adjustments.

III. Retail Access: 401ks and ETFs—Exit Liquidity or Democratization?

Highlights:

• Caution Against “Democratizing” Alternatives:

  • “The word democratizing, like the word reimagining, should set off alarm bells… almost whatever's going to happen next is going to be bad.” (B, 13:03)

• Danger in Interval Funds and Gated Products:

  • Interval funds (offering quarterly ‘liquidity’) are risky; gates can lock investors during turmoil—as seen with BREIT vs. public REITs.
    • “It seems like there’s an exit door, but it’s very tight and easy to get locked in.” (B, 13:45)

• Structural Problems with Private Asset ETFs or 401ks:

  • London-listed PE funds serve as a warning: volatile, opaque, and often trading at 30–40% discounts.
    • “They're wildly volatile, much more volatile than large cap equities… going to put that in retirement accounts?” (B, 14:20)
  • Large fee drag (400–600 bps), hard to justify as 401k focus shifts to low cost.

IV. Bubbles, Innovation & AI: Are We in a Good or Bad Bubble?

Defining Bubbles and Their Role:

• Bubbles as Drivers of Innovation:

  • Funding waves of experiments leads to outlier successes (railroads, Internet, Tesla). “Bubbles are good... if there are bubbles in these scientific experiment progress things, it's very, very good.” (B, 17:11)

• Efficient Markets and Rational Beliefs:

  • Multiple rational future scenarios can coexist; sometimes we can’t anticipate transformative events. “Markets are sort of pricing in a spectrum of totally rational predictions of the future.” (B, 18:41)

• AI Bubble: Winners and Stealth Beneficiaries:

  • Hyperscalers attract obvious attention, but “value companies that are most likely to benefit... sort of stealth adopters, actually using AI productively” may be overlooked plays. (B, 20:37)

V. Portfolio Construction: Mag7, International Equities, and Small Caps

Market Leadership, Risks, and Diversification:

• Excessive Concentration Risk (Mag 7):

  • Mega-cap tech dominates indices and returns—potential for “growth bankruptcies”:
    “Companies that are valued at very, very high multiples... exhibit almost the same return distribution as companies that are on the verge of bankruptcy… it’s an enormous risk.” (B, 22:54)

• Changing Business Quality:

  • AI/hyperscaler capex could erode prior advantages (asset-light, high-ROA business models):
    “These companies are distinctly worse businesses than they used to be before they had to spend massive amounts of capex…” (B, 24:32)

• International: A “Easier Setup” Than Expensive US Markets:

  • “International markets are cheap… if you’re currently 80% US, take it down to 60.” (B, 25:59)
  • Don’t make reckless overweight bets, but shift closer to global index weights (e.g., from 90/10 US/international to 65/35).

• Small Cap and Style Considerations:

  • US small caps are unattractive until major leadership reversals (usually post-crisis).
  • International small value looks strong: “International small value has just done far better than international value... Right. Like don’t invest in growth when growth doesn’t happen.” (B, 29:04)

• Market Structure Changes:

  • US public company count is down; deals stay private longer and IPO late—less disclosure and transparency for regular investors.
    • “More liquid, more tradable, more transparent markets are a very, very good thing and create better price discovery.” (B, 31:36)

• Circular Financing Risks:

  • Entanglement between tech majors, hyperscalers, and their ecosystem reminiscent (though less fraudulent) of dot-com era risks.

VI. Biotech: Quantitative Challenges and Factor Approaches

Rethinking Factor Models for Biotech:

• Biotech’s Unique Risk/Return Profile:

  • Standard quantitative models fail—biotech generates idiosyncratic results, shows low internal correlation, and the median stock loses money, yet the sector as a whole can outperform.

• Redefining Value for Biotech:

  • Must adjust metrics:
    • Traditional EV (market cap plus cash) penalizes cash-rich firms—bad for biotech.
    • Instead, use spending-to-market-cap as a proxy for “intangible value” creation.
    • “A company that spent $500 million last year on clinical trials is a lot more value than a company that spent $5 million on clinical trials.” (B, 38:54)

• Specialist Ownership as Quality:

  • Use the percentage of shares owned by specialist biotech hedge funds (with PhDs/staff) as a crude quality metric.
    • “If we have a $3 billion biotech and not a single biotech specialist fund owns it, that's telling you something pretty bad…” (B, 40:34)

• Peer Momentum:

  • Returns in biotech are often “event-driven”; classic price momentum isn’t as predictive as “peer momentum” (performance of stocks with similar clinical focus via NIH mesh tree).
    • “If those companies are doing really well, you should expect your company to do really well.” (B, 44:22)

• Portfolio Construction Implications:

  • Long/short strategies are essential—many biotechs are value-destroyers.
    • “Shorting is really important… a lot of left tail in biotech. You want to capture the right tail.” (B, 48:09)

• Alpha on Both Sides:

  • Not just a matter of avoiding bad stocks; short side offers as much alpha as the long side—most biotechs are, and will remain, unprofitable.

• Cyclicality and Macro Setup:

  • Biotech underperformance sets up opportunity, especially in periods of prior capital starvation and M&A drought.

VII. Notable Quotes & Memorable Moments

On Private Equity Realism:
"I don't know, they probably believe in unicorns, too, but I don't think that exists. Finally, a reality is dawning on people that they're stuck in this stuff because the purchase prices that were paid were too high..."
— Dan Rasmussen (03:35)

On Tech Exposure in PE:
"Private equity is massively overweight tech. Massively overweight tech. And they're overweight subscale... Who knows if AI is just going to eat that stuff..."
— Dan Rasmussen (07:44)

On Interval Funds and 'Democratization':
"The word democratizing, like the word reimagining, should set off alarm bells... it's almost whatever's going to happen next is going to be bad."
— Dan Rasmussen (13:03)

On Bubbles and Innovation:
"Bubbles are good, we want bubbles... if there are bubbles in these scientific experiment progress things, it's very, very good."
— Dan Rasmussen (17:11)

On Mag 7 Overvaluation:
“Companies that are valued at very, very high multiples… exhibit almost the same return distribution as companies that are on the verge of bankruptcy.”
— Dan Rasmussen (22:54)

On Quant Failures in Biotech:
"80% of our worst outcomes from a prediction standpoint were coming from biotech, right? And we realized, like, our standard quant factor model does not predict this at all."
— Dan Rasmussen (37:49)

On Specialist Ownership as a Quality Metric:
"If we have a $3 billion biotech and not a single biotech specialist fund owns it, that's telling you something pretty bad about that company...”
— Dan Rasmussen (40:34)

On Firm Research Philosophy:
"I like to think of research velocity as a measure: how often are you doing new research and producing new ideas? ...Be open minded and humble and say, hey, we really don't know."
— Dan Rasmussen (54:26)

Compiled by an expert podcast summarizer. Timestamps are included for attribution and deeper reference. Tone and nuance are preserved for readers seeking a thorough, engaging overview even if they haven’t heard the episode.