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Trends Watch: Small- and Micro-Cap Equity Investing

Mar 16, 2023

By Elana Margulies-Snyderman 

EisnerAmper's  Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Hunter Frey, Partner, Dharma Capital Advisors.

What is your outlook for investing in small- and micro-cap equities? 

Small- and micro-cap equities appear to trade at valuation levels not seen since the late 1990s, potentially displaying a structural opportunity relative to their large-cap counterparts.  We believe that focusing on companies with healthy economic margins, non-levered core cash flows and efficient capital allocation/management (especially costs of capital) remains pivotal in identifying alpha among small- and micro-cap equities amid the pending recession, higher inflation and tighter monetary policy. Thus, we perceive that micro/small-cap equities (specifically small-cap value) may provide relative outperformance in 2023.    

What are the greatest opportunities you see and why?

We believe private credit and special situation structured equity within domestic markets may present the most significant uncorrelated opportunities. Additionally, our view is that U.S. small caps and micro-cap equities within health care and diversified technology appear to have better-risk-adjusted return metrics than broader equity markets. Furthermore, distressed debt and private credit (from the lending/investment perspective) may remain attractive as traditional lending avenues dry up amid tighter monetary policy and Silicon Valley Bank headwinds. 

What are the greatest challenges you face and why?

The greatest challenge we perceive is the planning and capital management of balance sheets amid a pending recession, tighter monetary policy and structurally higher target inflation. Higher terminal rates have structurally increased the cost of capital, potentially causing operational slowdowns, earnings weakness and financing instability (possibly causing private equity/credit to inherit a higher-risk threshold).  

What keeps you up at night?

We stay up at night knowing that public markets have a personality and behavioral makeup outside trading hours that directly or indirectly impact performance dynamics. Additionally, due to this idea, knowing that private markets are a rolling endeavor to actively generate alpha/internal rate of return (IRR) keeps us busy into the late hours of the night. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.

This is not investment advice, a recommendation, or any similar guidance. Investors should conduct their own due diligence, research, and discretion for their investments or other affiliated actions.

The information in this content (interview/article/website/event) does not represent an offer or commitment to provide any product or service. The views, opinions, analyses, estimates and strategies, as the case may be (“views”), expressed in this content are those of the respective authors and speakers named and may differ from those of Dharma Capital Advisors, LLC (“Dharma Capital”) and/or its employees and affiliates. These views are as of a certain date and often based on current market conditions and are subject to change without notice. Any examples used are generic, hypothetical, and for illustration purposes only. Any prices/quotes/statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. This information in no way constitutes research and should not be treated as such. Any information related to cybersecurity provided is intended to help clients protect themselves from cyber fraud, not to provide a comprehensive list of all types of cyber fraud activities nor to identify all types of cybersecurity best practices.

Copying, re-publishing, or using this material or any of its contents for any other purpose is strictly prohibited without prior written consent from Dharma Capital. In providing this material, we have relied upon the interviewee and assumed, without independent verification, the accuracy and completeness of all information that was acquired therefrom. Any mentions of third-party trademarks, brand names, products, and services are for referential purposes only and any mention thereof is not meant to imply any sponsorship, endorsement, or affiliation unless otherwise noted. Notwithstanding anything to the contrary, the statements in this material are not intended to be legally binding. Any products, services, terms or other matters described herein (other than in respect of confidentiality) are subject to and superseded by, the terms of separate legally binding documentation and/or are subject to change without notice.

The information in this content is not advice on legal, tax, investment, accounting, regulatory, technology, or other matters and is not an endorsement of any product, service, company, or individual. You should always consult your own financial, legal, tax, accounting or similar advisors before making any financial or investment decisions or entering into any agreement for Dharma Capital products or services.  You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or content before making any decisions based any information or content.  There are risks associated with investing, which involves risk of loss. In no event shall Dharma Capital or any of its directors, officers, employees or agents be liable for any use of, for any decision made or action taken in reliance upon, or for any inaccuracies or errors in or omissions from, the information in this content. We are not acting as your or any client’s agent, fiduciary or advisor, including, without limitation, as a advisor of any kind or under any law or regulation or code under any State or Federal law.  Dharma Capital assumes no responsibility or liability whatsoever to you or any client with respect to such matters, and nothing herein shall amend or override the terms and conditions in the agreement(s) between Dharma Capital and any client or other person.

The information in this content does not include all applicable terms or issues, and is not intended as an offer or solicitation for the purchase or sale of any product or service. Our products and services are subject to applicable laws and regulations, as well as our service terms and policies. Not all products and services are available in all geographic areas or to all customers. In addition, eligibility for particular products and services will be determined by Dharma Capital, including satisfaction of applicable legal, tax, risk, credit and other due diligence, and Dharma Capital’s “know your customer,” anti-money laundering, anti-terrorism and other policies and procedures. Credit is subject to approval. Rates and programs are subject to change. Certain restrictions apply.

 The statements made in this content or during this event, or provided in materials as part of this event, are proprietary to Dharma Capital and are not intended to be legally binding. Any products and services described during these events are offered by Dharma Capital subject to applicable laws and regulations and service terms.

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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