The small-cap universe has long been misunderstood, but the myths surrounding it seem to have multiplied lately, alongside investor skepticism. We often hear, for example, that the number of small-cap companies is shrinking, that quality in the public markets has deteriorated compared to private equity, or that IPOs are skipping the small-cap space altogether.

These narratives, while convenient, simply do not hold up under scrutiny. As active managers who’ve spent more than five decades navigating this segment of the market, we tell a very different story—one of renewal, durability, and persistent opportunity. Unlike some narratives, this one has plenty of data to substantiate it.

Myth 1: The Number of Public Companies Is Shrinking

It’s true that the total number of U.S. public listings has declined. The total fell meaningfully after the dot-com bust before falling again in the aftermath of the Global Financial Crisis. But here’s the reality: the bulk of that contraction occurred before 2012, driven not by private equity’s rise (as some would have it) but by regulatory shifts like Sarbanes-Oxley.

Since then, the number of small-cap public companies has remained remarkably stable, and in many respects has even expanded. There are actually more small-cap companies today than there were 15 years ago.

This fact alone should give pause to those investors who believe the opportunity set has dried up. To be sure, the small-cap market continues to refresh itself as new businesses emerge, mature, and—in many cases—get acquired. This dynamic of constant renewal is part of the asset class’s beauty (and longstanding appeal to us)—it’s perpetually relevant and uniquely inefficient, which we think fosters the perfect environment for disciplined active management.

Myth 2: Public Small Caps Are Lower Quality Than Private Equity Holdings

This is another common refrain—and is also simply not true. Yes, a higher percentage of small-cap companies currently report losses, and that imbalance often makes headlines. But it’s precisely this dynamic that creates opportunity for active investors.

Let’s look at the data:

Despite a heavier concentration of non-earners, more than half of the Russell 2000 companies are profitable—that’s more than 1,100 firms generating positive earnings. Many of these companies have strong balance sheets, disciplined management teams, and attractive runways for long-term growth.

By contrast, much of private equity’s current universe is populated by highly leveraged businesses acquired at historically elevated purchase multiples. In other words, the “quality advantage” narrative often attributed to private equity looks far less convincing when one carefully examines what’s actually on the books.

Ultimately, we see this as a question of selectivity, not scarcity. The dispersion in small-cap fundamentals is exactly what enables active managers to identify the durable, cash-generating businesses that can compound over time.

Myth 3: The IPO Market Is Skipping Small-Caps

Another popular storyline suggests that today’s IPO market is bypassing small caps entirely, depriving the universe of fresh blood and, by extension, future returns.

Again, the facts tell a different story. While the headlines focus on high-profile mega-cap IPOs, the majority of new listings each year still fall squarely within the small-cap range. Our research reveals that the average IPO over the past decade has entered public markets with a market capitalization below $2 billion—well within the Russell 2000’s scope.

Percent of Total IPOs by Market Cap
From 1/1/2014 through 10/31/2025

Source: FactSet

Equally important, there’s no shortage of performance within the existing small-cap ranks. Investors are often surprised to learn that a subset of Russell 2000 constituents have delivered triple-digit returns this year alone. The idea that small- caps lack opportunity simply does not square with what’s happening beneath the surface.

The Bigger Picture

If investors are worried that a smaller number of public listings will hurt future returns, they might look at the Russell 1000 Growth Index. From 2019 to 2024, the index’s constituents fell from 530 to 396, yet it delivered an 18.6% annualized return over that same five-year period. Fewer names didn’t equate to fewer opportunities—quality and innovation did the heavy lifting.

Likewise, small-caps continue to benefit from another longstanding structural feature: The takeout premium. Smaller, undervalued public companies frequently attract acquisition interest from private equity and strategic buyers. Volatility, often seen as a threat, can in fact be an ally—creating moments when quality small-caps trade at suppressed valuations that appeal to disciplined acquirers.

Interestingly, in this current cycle we’ve even seen some of our portfolio holdings acquiring companies from private equity—and doing so at meaningful discounts. Public markets, in other words, are providing liquidity to private ones. We think investors should ask themselves what this says about private equity’s current return environment and exit conditions.

A Case for Perpetual Renewal

We have long thought of small-caps as an evergreen asset class—one that continually refreshes itself as new companies emerge, grow, and, eventually, make way for the next generation. This renewal cycle ensures that the opportunity set is never static, never stale, and always ripe for discovery.

The notion that companies staying private longer somehow undermines the small-cap universe misses the point entirely. If anything, it’s a private equity problem, not a small-cap one. Private investors will eventually need liquidity, and public markets remain their most natural and efficient exit. For now, the disconnect seems to lie in what public markets are willing to pay versus where private valuations remain anchored.

For investors seeking exposure to entrepreneurial growth, innovation, and long-term compounding—all while maintaining daily liquidity—publicly traded small-caps remain one of the most dynamic and underappreciated asset classes available.

For long-term investors, we think that’s good news. The small-cap ecosystem continues to evolve, offering fertile ground for disciplined, active management.

Stay tuned…

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