Small-caps are Trash
The small-cap premium used to be a thing. It’s the extra return investors historically earned from owning small-cap stocks instead of large-caps — roughly 2–3% a year on average.
But if you believed in that story over the last decade, you’ve given up about 5.5% per year versus large-caps. That’s not a blip. That’s an entire factor that’s gone missing.
Sure, hindsight. But the real question is: why?
The Quality Problem
Today’s small-caps are far weaker businesses than they used to be. They’re less profitable, more levered, and less durable. Roughly one-third of the Russell 2000 doesn’t make money.
And I don’t think it’s just a cycle - it’s selection bias.
Adverse Selection
The best small companies are staying private. Stripe and SpaceX may never enter the public markets and they are multi-billion dollar companies.
In the 1990s, the only way to raise serious money or cash out was to go public. Now? You can raise from venture, private equity, or private credit without ever touching an IPO. There’s a deep secondary market for private shares, and plenty of liquidity without the headaches of public market compliance.
The median age of IPOs has doubled since the 1990s.
Public listings are down 40% over the last 30 years.
And private equity assets have grown 10x.
There has been a tremendous migration happening right in front of us.
The Migration Effect
Private markets are cherry-picking the good stuff.
If a company is profitable, scalable, and growing, private capital buys it or keeps it private.
What’s left for the public small-cap indices?
The nasty, smelly leftovers. The ones private equity passed on.
If every PE shop has looked at these companies and still let them float publicly that’s not a signal of hidden value. It’s a signal that they didn’t make the cut.
Is the Small-Cap Premium Dead?
Maybe not dead. But it’s not where it used to live.
The small-cap premium hasn’t disappeared - it’s moved. It now lives in private markets. The public small-cap universe is the hollowed-out remainder.
Maybe I’m wrong. But it makes a lot of sense to me.
