In the Quality-Value Strategy that we use in Royce Small-Cap Total Return Fund, we typically do not participate in a lot of initial public offerings (“IPO’s”), simply because many small-cap IPO’s are often for companies that are pre-profitability and/or trading at rich valuations, in addition to the fact that many companies come to market with more limited track records for us to examine using our deep research process.

However, we have been able to add significant value by selective IPO participation over the years. Occasionally a company comes to market that checks all of our boxes for quality and value criteria. They often come public in an industry or niche that we already know well. In this piece, we discuss two holdings, one that we purchased in an IPO that fit this mold and a turnaround that is exhibiting a strong inflection in fundamentals and execution.

Andersen Group (NYSE: ANDG) came to market at the end of 2025. The company provides tax advisory, valuation, financial advisory, and related consulting services, primarily to ultra-high net worth families and private companies, a business model in which we already had considerable expertise. The company has been around in this form since 2003 and has grown revenue every year since, which speaks to the resilience of the business model. While we recognize the current concerns around white-collar work in an AI-dominant world, we view Andersen’s business model as not only resilient, but also capable of thriving as the world grows more complex. In fact, we actually think that the characteristics that have made Andersen so successful since its inception are exactly the characteristics that will make the company successful in this next era. Specifically, Andersen does not provide audit work, in order to avoid any potential conflicts of interest, and instead leans into complex areas of advisory work with a high-touch service model and where the client ROI is generally massive (often saving the client many multiples of what they pay Andersen for the services rendered). Clients give very high marks to the company for the value-add of the advice given and importantly do not view this judgement-based work as an area of advice that they would trust from an AI model. On the contrary, it is an area where the client specifically wants the human touch to lean on for particularly thorny topics where the trust factor is incredibly important.

We think other features make Andersen unique. Our research of the ecosystem showed that Andersen’s industry-leading revenue per employee metric is significantly better than its competitors, which is important for two reasons: First, it quantitatively supports the importance of the work to the client, i.e., the company is providing premium-priced advisory services that are sticky with clients. Second, it leads to a vastly superior margin structure relative to peers.

This leads to a flywheel-type business model: as Andersen expands with existing clients, its reputation drives new client wins where the value-add drives high customer retention, and the revenue per employee growth leads to continuous margin improvement, all of which drives strong free cash flow for reinvestment into growth. In addition, Andersen utilizes a quite top-heavy service approach, meaning that clients get a much higher proportion of time from managing director level talent relative to peers, which supports that high-touch element and further deepens the client relationship.

We think that Andersen has many years of industry-leading revenue growth and margin expansion ahead of it based on the attributes discussed, as well as a fantastic low-risk acquisition pipeline, all while trading at an absolute and relative valuation that we find very attractive given those quality characteristics.

We also remain excited about the opportunity and execution in the turnaround story for Advance Auto Parts (NYSE: AAP), an aftermarket auto parts retailer that serves both professional installers and do-it-yourself customers with 4,300 stores in the U.S. and Canada. Advance could be aptly described as a fixer-upper in a great and gentrifying neighborhood. (It’s important to note that auto parts retailing is Amazon-proof due to thousands of SKUs and 40 minute delivery times. The average car just hit 13 year of age, an all-time high as consumers opt to hold on to older cars for longer. The industry also has a long history of rational competition and supportive vendors.)

Advance brought in a new management team in late 2023 who have restored focus and operational discipline, as well as implementing various self-help measures within the Merchandising, Supply Chain, and Store Operations areas. These efforts are now beginning to show up in Advance’s numbers, with positive comparable store sales over the past five quarters despite a soft consumer backdrop, as well as 410 basis points of adjusted EBIT (earnings before interest and taxes) margin expansion in the latest quarter. Importantly, channel checks indicate that Advance has improved product availability, pricing, and delivery time, each of which is helping to win back business from professional installers. This bolsters our confidence in management’s goal of achieving 7% EBIT margins by fiscal 2028 even with modest comparable store sales growth and store openings over the next three years.

In summary, we believe that Advance is a well-run, financially strong business with strong line-of-sight to earnings expansion from its disciplined execution of well-conceived self-help levers by a proven operator.

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