Want Private Equity Like Returns? Try a Levered Small Cap Stock Approach.

One young hedge-fund manager says that an investor can enjoy the same hefty returns touted by private-equity firms (through the purchase, turnaround and resale of troubled companies) through buying highly leveraged small-caps stocks. That manager, Dan Rasmussen, is profiled in a recent article by Forbes’ Daniel Fisher.

Rasmussen makes the bold argument, Fisher writes, that private equity “isn’t that complicated.” With a history and literature degree from Harvard, Rasmussen was one of the first undergraduates hired directly by Bain Capital. He was assigned to a team that analyzed “what worked in private equity and what didn’t,” and after examining 2,500 deals ($350 billion in invested capital over 30 years), Rasmussen arrived at conclusions that didn’t thrill Bain executives:

Private equity, he concluded, is mostly a levered small-cap strategy. In fact, Rasmussen found that 95% of leveraged buyouts involved companies with an enterprise value below $1.1 billion. Further, he found that difference between success and failure usually came down to purchase price: When private equity firms paid more than seven times earnings before interest, taxes, depreciation and amortization (EBITDA), their probability of success plummeted.

“The 25 percent of the cheapest deals accounted for 60 percent of the profits,” Rasmussen reported. Fisher summarizes Rasmussen’s conclusion: “Private equity executives’ most important skill was finding cheap companies that could pay back the debt they loaded on.”

Rasmussen went on to attend Stanford Business school, where he built a training model based on his findings at Bain, and started managing money for friends and family. After graduating from Stanford in 2015, he founded Verdad Capital. In what Fisher characterizes as a break from industry practice, Rasmussen charges a 1.5% management fee and no performance fee (versus the usual 2 and 20). He now has about 20 clients and manages about $20 million in assets. Results have been varied over the last three years, but Fisher says “he’s up 26% this year, for a return since inception of 14.6% a year compared with 11% for the Russell 2000 small-cap index.”

Rasmussen’s goal? To become the “Vanguard of the private equity industry.”