Who buys microcap companies? More investors than most companies think. It is an amorphous and elusive audience, but one also filled with fundamental investors looking to outperform the averages by capitalizing on an inefficient sector. At IMS, we live and breathe among this group.
At the mid cap and higher market cap range, the discovery process is relatively efficient and the reason for this is pure economics. First, the companies are of a size, and trade enough volume, that larger funds can invest in them and make a difference in their fund performance. Many of these funds manage over $100 million in assets so their holdings are publicly available. Given the transparency of their holdings and style, brokerage firms are easily able to build relationships with them and sufficient capital is under management to pay for ideas. In short, there is an economic ecosystem that drives sponsorship and ownership of mid and large cap companies.
At the microcap level, this economic ecosystem does not exist. There are not enough fees to be made by brokerage firms and the compliance risk is high. Funds that invest in microcap stocks tend to have smaller assets under management, cannot pay for ideas, and hence are not “covered” by the brokerage firms. The holdings and investment styles of many of these funds are not known to most companies given they manage under $100 million and do not file their holdings.
But there is a large universe of funds, mostly small, who invest in the smallest public companies. At IMS, we talk to them every day. We set up calls on their behalf with our management teams, we help them understand the subtleties of a quarter or the reason behind a divestiture. Briefly put, we make sure they have the information they need to make an informed decision about the microcap companies we represent.
There is no publicly available database of these investors. We have gotten to know them over time through our representation of quality smaller companies and by servicing the needs of these investors. We sit at a unique intersection of the public markets — helping these “under the radar” funds understand quality “under the radar” companies.
It is very difficult to quantify the amount of capital dedicated to the microcap universe but there is certainly enough capital out there to make a difference for companies that deserve it. The competition for this capital is fierce, so microcap companies need to provide the most comprehensive information they can; offer consistent accessibility to management; and deliver transparency on all aspects of their business, so that they can generate and sustain investor interest.
John Nesbett, President, IMS