Every listed US company falls somewhere on a spectrum. The conventional way to think about that spectrum is by market capitalisation, which is just the total value of all the company’s outstanding shares.

Large-cap companies are those with a market cap above $10 billion. This is the world of the S&P 500. Apple, Microsoft, JPMorgan, Johnson & Johnson. These are businesses with global operations, decades of track record, coverage from dozens of research analysts, and enough daily trading volume that large orders can be executed without meaningfully moving the price. In 2025, the Russell 1000, the standard large-cap benchmark, returned 17.4%.

Mid-cap companies sit roughly between $2 billion and $10 billion. These are established businesses, often leaders in their specific niches, that have grown beyond startup phase but have not yet achieved global scale. They tend to be more focused on the domestic US economy than large-caps, which makes them more sensitive to US interest rates and consumer spending but less exposed to global trade disruptions.

Small-cap companies are generally below $2 billion. The Russell 2000 covers this space, and it returned 12.8% in 2025.

Now, the traditional story about small-caps is that smaller companies have more room to grow, that they are under-researched, and that patient investors can find mispricing that the market overlooks. There is truth in that story historically.

But something has changed in the last decade that the traditional story does not account for.

As private equity and private credit markets have grown enormously, many of the better smaller businesses have simply chosen to stay private. Being a public company is expensive and demanding. You need to file detailed disclosures every quarter, manage investor relations, face activist shareholders, and have your strategic decisions scrutinised publicly every three months. A lot of high-quality smaller businesses now prefer to raise capital privately and avoid that scrutiny.

The consequence is that the public small-cap universe has, on average, weaker financial characteristics than it once did. The Russell 2000 today trades at over 30 times trailing earnings, higher than the S&P 500 at around 24 times, despite having lower average profitability. That is not the obvious bargain it might sound like at first.