DGHM recently published a white paper on microcaps that studies microcap performance vs private equity and also analyzes microcap performance coming out of a recession. It’s important to note that for this paper DGHM defines microcap stocks as deciles 2-3 (mkt cap $275m-$894m), as decile 1 (sub $275m) contains companies that are “too illiquid” and below their breakpoint of their investable universe. Ahhh, that is a shame. Nonetheless I found the paper very well written and found value in reading it.
Microcap stocks are a unique group. They are under‐followed, illiquid and more volatile than their larger‐capitalized peers. That’s the bad news. The good news is that microcap stocks are under‐followed, illiquid and more volatile than larger companies. Generally these microcap companies are run by managers with higher inside ownership than their larger peers, and the companies’ operational success is leveraged more to the domestic economy. When compared to private equity, microcap stocks offer better liquidity and employ lower leverage. They also report returns that more appropriately represent the investments’ economic return than the Internal Rate of Return (IRR) calculations used by private equity funds, according to a recent academic paper
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