The abundance of private capital has made it easier for companies to avoid public markets, especially small caps. Some stats from a recent issue of Grant’s:
- Amazon, Nvidia and Netflix all spent time as small caps.
- Meta, Alphabet and Tesla never saw a small-cap index.
- In the 1990s, IPOs that raised less than $100 million (inflation adjusted) accounted for 27% of total capital raised, vs. 7% since 2000.
- In the first six months of 2024, the Russell 2000 was driven entirely by two companies: Super Micro Computer (up 188%) and MicroStrategy (up 118%). The pair has since moved on to the Russell 1000.
What does this mean for investors? Small-cap indexes rely on companies that transition from small caps to big caps for performance. Per Evan Lorenz of Grant’s, “graduations drive returns.” If the trend continues, fewer small cap stocks will make the transition, and the universe of small cap stocks will remain permanently small.
If IPOs don’t become more attractive, it could drive demand from retail investors to participate in private transactions. The challenge at the moment, is the fees associated with investment vehicles that pool retail capital for private investments. I’m curious to see how they evolve if demand increases.
Note: The article concludes with arguments for the bullish side citing a net short position of 65K contracts in Russell 2000 futures coupled with a potential reversion to EZ money.