Verdad Advisers invested over $100 million during the Coronavirus crisis and doubled his money.
Investor Daniel Rasmussen of Verdad Advisers is never short on ideas, or conviction. The pandemic-induced market plunge of 2020 turned a gut punch for the 34-year old investor into a giant opportunity.
Rasmussen, a former analyst at Bain Capital and hedge fund Bridgewater Associates, set out in 2015 to dispel a big myth on Wall Street. After studying thousands of buyout deals, he concluded that the bulk of private equity returns came from buyout artists acquiring small, cheap companies, which they then leveraged to the hilt through the LBO process. Rasmussen created Verdad Advisers with the idea of building portfolios of small cap value stocks, and deploying leverage, to mimic private equity portfolios at a fraction of the cost.
When Coronavirus hit in early 2020, Rasmussen’s flagship Leveraged Capital Fund, with well over $100 million in assets, was hammered. The plunge put its once impressive returns from a 2015 inception into the red. In May 2020, Rasmussen penned a note to investors titled, An Apology for Small-Cap Value, which lamented the worst quarter ever in the performance of small and cheap stocks. But it was not a capitulation. Instead, Rasmussen stuck to his guns.
“We feel that small value deserves such an apology because, though the past few years have been painful for small-value investors, this is perhaps a once-in-a-century buying opportunity in this deeply out-of-favor asset class,” he wrote.
In fact, Verdad’s analysts had just finished a 76-page report titled, Crisis Investing: How To Maximize Return During Market Panics, which showed that the best time to deploy money into the market was when high yield spreads were above 600 basis points, a gauge of extreme fear. Based off of the research, Verdad was raising a new fund called the Verdad Opportunity Fund, which would draw investors’ capital when junk bond spreads blew out to such levels, and invest in small, undervalued companies. Because of his flagship fund’s woeful performance at the time, Rasmussen decided to raise his fund with no management fees and a 15%-to-20% promote.
By the time the fund closed, in May of 2020, plunging markets were a flashing green light to deploy money. Rasmussen and his team of quants screened for the cheapest, most undervalued small public companies in North America and Canada, but excluded companies they thought had a risk of going bankrupt.
Verdad built a portfolio of fifty unloved companies, like teenage clothing store American Eagle Outfitters, automotive seat manufacturer Commercial Vehicle Group, Canada-based materials company Intertape Polymer, powerboat maker MasterCraft Boat Holdings, homebuilders KB Homes and Meritage, and outsourcing firm FirstSource. Rasmussen’s team studied the fundamentals of the companies popping up on their screens to add a margin of safety in the uncertain economic backdrop. For instance, they chose movie theater chain The Marcus Corporation instead of future meme stock AMC Entertainment, due to its asset rich balance sheet.
By June, Verdad had invested over $150 million from its Opportunity Fund, which limped along, until the approval of Covid vaccines caused value stocks to soar in the fall of 2020. By year-end, the fund was up over 50% net of fees and value stocks continued to rise in 2021.
In July, Rasmussen decided he’d seen enough. The crisis investing opportunity had passed, junk bond spreads were near record lows and investor Animal Spirits were back. Verdad fully liquidated its Opportunity Fund with a 84.7% net gain, according to a memo seen by Forbes, which was ahead of the S&P 500, Russell 2000 and Russell Value Index over the same time period.
“We achieved our mission. We bought in a time of crisis and the crisis looked like it was over to us,” Rasmussen tells Forbes. “We felt that no investor was going to object to getting their profits back early.”
Like a traditional private equity fund, Verdad’s investment vehicle was a drawdown fund, meaning it only called investors’ capital when it had identified investments. During the second quarter of 2020, when Verdad deployed its money, private equity deal volumes dropped precipitously. Now that stock markets and valuations are again at record highs, buyout activity is surging anew.
Rasmussen beams at having done the exact opposite. “A lot of our investors were allocating as a substitute for private equity because they couldn't put capital to work in the crisis,” he says.
Like most funds, Verdad’s flagship Leveraged Company Fund recovered from the March 2020 market plunge, surging 98% over a 12-month stretch. However, the fund’s inception-to-date returns are meager sitting at just 3.7% net as of the first quarter of 2021, about half of its benchmark the MSCI ACWI Small Value Index. When compared to the S&P 500 Index, or even the reported returns of large buyout giants, Rasmussen’s grand theory on private equity returns still leaves a lot to prove.
His Coronavirus haul—Forbes estimates Verdad generated over $25 million in performance fees—once again shows the merit of investing at times of peak uncertainty.
“Buying value really works in a crisis because it is about mean reversion. The stocks that are cheap going into a crisis tend to be cyclical and they tend to be companies driven by gross domestic product,” he says. “Not only are you buying the cheapest companies, you're actually buying the companies that grow the fastest when the economy recovers.”