Definition: Micro-cap stocks are generally defined as public companies under $300 million in capitalization, which represents the bottom two deciles of securities ranked by market capitalization.
Unique Structural Aspects: Small floats and low trading volume make investing large amounts of capital practically impossible for funds with larger asset bases. Also, many funds and brokers limit the ability to invest in companies that do not have up-to-date financial statements, are not listed on a national exchange, and/or have stock prices that trade below $5 per share.
Unique Opportunities: Investors can find overlooked, orphaned investment opportunities and benefit from value/size appreciation that can follow if these companies can execute on their business. Potential catalysts for these microcap companies include removing unwieldy capital structures, new management teams, monetizing undervalued real estate assets, and resolving legal or accounting issues.
Activist Investing: Activism can help unlock significant value creation for shareholders in these micro-cap companies. Activism can span from referring a company to an IR firm to a full-blown proxy contest to unseat a Board.
Microcap Benefits for Private Equity Investors: Microcap investments provide a level of liquidity that is not possible with private equity investments. Investors in a microcap closed-end fund have the ability to buy and sell stock daily.
Inflation: The small cap market, which includes micro-cap companies, is the only major asset class to outpace inflation during every decade since the 1930s. Following an initial rate increase, the small cap market consistently produced attractive rates of return for the 12-36 month period following.
Recommendations for Advisors: Investing in microcap stocks strategically provides higher levels of return than other equity markets, low correlation to market indices, less sell-side involvement, greater M&A activity, and is the only asset class to historically outpace inflation. Combined with a constructive activist approach to problem solving, the micro-cap market provides an extremely attractive return profile that should be a part of a broader investment portfolio.
