Trends Watch: Small-Cap Investing

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 Edwin Lugo, Founder and Managing Partner, EL2 Capital.

What is your outlook for small cap investing?

Over the next 12 months it seems that small caps in the U.S. and internationally will likely be more negative than positive given the aggressive push on inflation by the central banks, particularly the U.S. Federal Reserve (rightly so), and the subsequent potential for a recession.  However, this will likely present a rare opportunity to buy smaller, successful companies with good capital allocation practices at much more discounted prices.  This lays the groundwork for higher returns longer term.

Where do you see the greatest opportunities and why?

Opportunities in companies with less than a $5 billion market cap may turn out to be a wonderful hunting ground if the markets continue to fall.  The reason is that less liquidity may drive down prices to incredibly attractive levels.  For us, we are being patient with cash on hand to take advantage, if such a scenario were to take place.  In the meantime, we are building a wish list of our favorite management teams with growing smaller companies. 

What are the greatest challenges you face and why?

The greatest challenge over the next three years for EL2 Capital is to build a strong track record given that we just started our fund in April 2022.  It is a wonderful opportunity to apply everything we learned over the last 25 years, with the goal of compounding the wealth of our partners, friends and family for the next 20 to 30 years.

What keeps you up at night?

I sleep very well, so not many things.  Sometimes when I am analyzing a company, I think about what I am potentially missing, where can I go wrong, and what are the risks; that may keep me up.  Also thinking about the business, what can I do better, which guardrails and form of concentration do I need to stay focused and not deviate from my circle of knowledge.

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