It’s been something of an up and down year so far for non-U.S. small-caps.

Following a strong first half for quality, the third quarter saw a sharp reversal in which cyclical value surged while quality lagged. Policy easing in the world’s major economies favored economically sensitive businesses such as banks, while growing geopolitical tensions in Europe and the once looming and now ongoing U.S. government shutdown pushed many defense contractors and gold-related stocks to record highs. At the same time, rising long-term bond yields during the latter part of the quarter pressured more rate sensitive, faster-growing businesses, and a weaker foreign currency backdrop further detracted from returns.

While that mix weighed on the Fund’s near-term results, we believe it further improved the medium-term outlook: valuation and currency discounts across quality international small-caps have widened, creating a more compelling case for incremental reallocation to the asset class. Equally encouraging is the way that our companies have continued to execute against this inhospitable backdrop. As of the end of September, the portfolio in aggregate produced an average return on invested capital—or ROIC, which is one of our most important gauges of company quality—of 20% (approximately 50% higher than the benchmark).

Portfolio holdings have also maintained net cash balance sheets and are growing earnings by over 10% annually on average. Continued take-private activity—now up to 12 consecutive quarters—underscores the intrinsic value of these companies, with two holdings receiving confirmed bids, including one at a nearly 80% premium. With persistent strength in operating results and wider entry discounts, we believe we have a strong foundation for attractive multi-year returns.

Here are four companies that have the long-term confidence of our team who manage Royce International Premier Fund:

SmartCraft

Oslo-listed SmartCraft ASA is the digital toolbox for the Nordic and UK building and construction trades. Its core customer is the family-run small to medium-sized enterprises (SMEs), such as electricians, plumbers, and other craftsmen, who live with heavy regulation, burdensome paperwork, and thin margins. SmartCraft replaces pen-and-paper and generic software with purpose-built tools that save time on administrative work, sharpen planning and budgeting, and make documentation effortless. For less than the price of a phone bill (generally under $1 per user per day), SmartCraft’s 13,000+ customers gain stronger profitability and regulatory compliance. As one user puts it, “If we couldn't have the software for one day, then our whole structure would fail.”

Customers depend on SmartCraft’s solutions, so they rarely leave and are happy to pay recurring subscription-based revenues, which make up more than 90% of SmartCraft’s total revenues. Yet penetration of industry-specific software is estimated to be just 10-15%, leaving a long runway of growth as regulation intensifies, and a new generation embraces digital workflows. Backed by a debt-free, net cash balance sheet and the stewardship of Valedo, a respected Swedish private equity operator, SmartCraft has grown more than 20% annually over the past five years, earns around 20% ROIC on average, and has completed over a dozen acquisitions. We initiated our position after a cyclical dip took shares below the 2021 IPO price, even as operating earnings were roughly 60% higher than at listing. With cyclical recovery prospects, potential sponsor activity as Valedo exits, and insider buying, we see a quality compounder that remains undervalued.

JTC

We first talked about U.K.-listed JTC in our June 2024 podcast. It's one of the leading independent providers of fund and trust administration for investment managers, global companies, and wealthy families—the sort of quiet backbone business that keeps global finance running smoothly behind the scenes. What we like about JTC is its reliability: The company earns steady, recurring revenues because its work revolves around regulatory-driven compliance, reporting, and governance, tasks that have to get done no matter what is happening in the markets. And once clients come on board, they rarely leave—not because they are locked in, but because switching providers can be messy and risky. One bad NAV report or missed regulatory filing can cause real financial and reputational damage to clients. As a result, clients stay for the full life of a fund or trust, which can easily stretch a decade or more. All told, this consistency and mission-critical service has enabled JTC to deliver an impressive 37-year record of uninterrupted revenue and profit growth.

Another key attraction was the industry’s consolidation potential. Despite its leadership position, JTC still holds a low-single-digit share of a highly fragmented global market dominated by small local firms and spinouts from accounting and law practices. That fragmentation has made the industry a magnet for private equity buyers, who in recent years have acquired every listed competitor, leaving JTC as effectively the last man standing. As we noted in our podcast, while our investment process is not predicated on takeouts, and we do not invest with that outcome in mind, we would not be surprised if JTC too became a target. And that is precisely what unfolded in late August, when JTC received interest from private equity firms Permira Advisors and Warburg Pincus, validation, in our view, of the scarcity value and enduring quality of the franchise. JTC’s board rejected multiple preliminary approaches from both firms, and under U.K. takeover rules they have until November 7 to either table a firm offer or walk away. Although the shares have already re-rated on the news, we think they remain attractively valued at roughly 17.0x next year’s EV/EBITDA (enterprise value over earnings before interest, taxes, depreciation, and amortization, an important valuation metric), which remains meaningfully below previous transaction multiples north of 20.0x.

Gaztransport & Technigaz

Headquartered in France, Gaztransport & Technigaz (GTT) is the clear leader in membrane-containment systems for liquefied natural gas (LNG), with a more than 70% global market share. Its containment systems are fitted inside a vessel tank, designed to safely hold, store, and transport LNG at -163 degrees Celsius while keeping evaporation to a minimum. Poor containment performance raises boil-off and erodes cargo value; in extreme cases it can create life-threatening explosion risk, underscoring the value of GTT’s technology. GTT doesn’t manufacture tanks; it licenses its designs to shipyards and provides services—an asset-light, highly scalable model. Pricing power is reinforced by charterer specifications: large oil and gas companies often require GTT systems in vessel leases, prompting ship owners and yards to adopt that standard. GTT continues to be selected for new vessel design because of the long-term relationship that they build with oil & gas companies, who rely on GTT’s expertise to improve efficiency and get the most value from their LNG ships over time.

GTT’s compelling value proposition to its sticky customer base translates into excellent operating economics: greater than 40% free cash flow margins, net cash, and a balance sheet with shareholders’ equity near 60%. Tight global yard capacity and funded LNG projects in Qatar and the U.S. have stretched GTT’s order backlog into the first half of 2028, de-risking near-term free cash flow and supporting the dividend. We think the company’s upside remains compelling if the shipbuilding cycle extends as additional LNG projects reach final investment decisions in 2026 and as older, legacy-engine vessels are replaced. In light of GTT’s market dominance, compelling economics, and secular growth runway, the current approximately 9% forward cap rate and roughly 6% dividend yield look attractive to us.

Riken Keiki

Japanese company Riken Keiki is the unseen safety layer behind much of the world’s most dangerous worksites. Its fixed systems and wearable devices use more than 380 proprietary sensors to detect over 1,200 different gases, which keep chip fabs, refineries, and utilities both safe and operational. The equipment is built directly into site control systems, making it expensive, disruptive, and risky to tear out and recalibrate, which results in relationships that often last 10-15 years. Approximately 40% of Riken Keiki’s revenue and roughly half of its profits come from recurring and regulatory-driven maintenance services, as well as replacement sensors and other consumables, which must be replaced every 2-3 years.

These deep, ongoing ties with customers, reinforced by strict safety regulations, make Riken Keiki's revenues stable and its customer base loyal. In Japan, Riken Keiki stands as the undisputed leader, holding a more than 50% market share and an even stronger 70% share in semiconductor gas detection—and that segment accounts for roughly 40% of revenue. The company generates over 40% of revenue from overseas markets but mostly remains a challenger brand, indicating that significant room exists for Riken Keiki to gain global market share. In recent years, the company has been leveraging its deep engineering expertise and reputation for reliability to win more market share beyond Japan, most notably in the fast-growing U.S. semiconductor market, where it shipped its first-ever orders this summer.

We view Riken Keiki as a classic example of a quietly dominant Japanese industrial champion leveraging its home-market strengths to build a global franchise. Despite its mission-critical role, growing recurring revenue streams, and expanding international growth prospects, the stock still trades at an attractive 9% forward cap rate. Analyst coverage also remains limited, with just two regional brokers following the name, leaving what we think is a durable, underappreciated compounder hiding in plain sight.

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