The microcap explosion

At PGM, we actively manage risk today while targeting outperformance tomorrow.

So no matter what investment risks concern you most, from geopolitics to inflation to liquidity, PGEM brings disciplined risk management expertise that spans 30 market cycles.

Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long-term goals.

PGEM, our investments shape tomorrow today.

Cushkin.

When we talk about stock markets, and over here on the Unhedged podcast we do that a lot, we tend to focus on a tiny handful of massive companies.

We are guilty as charged in that regard.

But there's a good reason for that, which is that plenty of US companies are bigger on their own than the entire FTSE 100 100 index of UK stocks, for example.

Apple is one of them.

But what about the tiddlers?

Today on the show, that's what we're going to talk about.

Eeny weenie companies that are suddenly rushing onto US stock markets.

Welcome to Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin.

I'm Katie Martin, a markets columnist at FT Towers in London.

Joining me down the line from New York City, we have George Steer from the markets team.

George, hello.

Hello, Katie.

How are you?

We used to work together in London.

Do you miss me terribly?

Every day.

Every day.

That's the correct answer.

And we also have from New York City, Aiden Writer from the Unhedged newsletter.

Aiden, I gather you are a little horse like a Shetland pony.

Yes.

I was at my college reunion over the weekend and I spent too much time shouting over really loud music, asking people, so what have you been up to for the last five years?

Yes, good stuff.

As long as you were having fun.

So George, you're out there in New York.

Why, oh, why are you wasting the FT's time writing about tiny companies when you could be writing about big, important ones?

Like, what's going on here?

Why is there a rush?

For the record, I do.

I have written a few times about some big companies.

But

the small companies are far more fun, in my opinion.

They're far more volatile.

They're illiquid.

And they tend to have made it onto the U.S.

stock market thanks to some interesting banks that we normally don't cover.

Yeah.

So, yeah, the traditional large-cap IPO market has been quite quiet since I arrived because of tariff stuff, mostly.

Yeah.

The small cap IPO market, on the other hand, is booming.

So IPOs for the uninitiated are initial public offerings, which is where, like, it's when a company lists on a stock exchange for the first time.

And these are like big moments for markets.

They're big moments for the companies.

It's like, woohoo, you made it.

You're on a big stock exchange.

But a lot of these things.

You get to ring a bell.

You get to ring a bell.

What could be better?

That's really fun.

But some of these companies are pretty teeny weeny and they do quite weird things.

Yes.

So we wrote a few weeks ago about microcaps, microcap stocks, which we define as any company that has listed in the US and raised less than $50 million in the process.

5-0.

5-0.

5-0, yeah.

And yeah, the market for these kinds of companies, these listings, is going gangbusters.

We've had 42 small offerings in the last three months of 2024, and there were 41 in the first quarter of this year.

That's the two busiest quarters in records back 15 years for the small cap or micro cap IPO market.

That is double weird because bankers that I speak to say that, you know, for big companies, the market has just slammed shut.

There's a tiny trickle of big companies that are listing on the stock market, which is very much not what people had expected.

People thought this was going to be a runaway, super saw away, great year for companies listing, because it was going to be a great year for markets.

That has not worked out at all.

There's a whole different set of issues that come with that.

So why?

Why do we have all of these tiddlers?

A few reasons, I think.

The first is that Nasdaq tightened its rules around which kinds of companies can list on its exchange.

The other day, they enacted a ruling that means that companies have to raise at least $15 million

when they IPO.

So knowing that this rule was coming, a lot of the smallest companies rushed to get in ahead of time.

So there was a rush that began last quarter of last year, but it hasn't really slowed since the ruling came into effect.

Obviously, the companies that would have raised less than $15 million

have dried up, but there have been plenty of deals, I think at least 15 since mid-April, involving companies that have raised between 15 million and $50 million.

So the rush wasn't just companies that didn't think they'd hit the threshold.

It was just like everybody who went for the door just in case.

I think so.

I think so.

And I think another reason why the small cap market has been doing relatively well compared with the large cap IPO market is because these sorts of listings attract different sorts of investors.

Small caps attract retail punters.

The punters do love a bit of this, but also it's quite important to note where these companies come from, right?

they're not little kind of mom and pop apple pie stores from you know rural wisconsin they are predominantly from china and hong kong right indeed indeed um but a lot of these companies are just small selling noodles or clothes or

the the range of companies is really really broad are you saying that like when i lived in china and there was a little noodle store on the corner they could just ipo in the us that's exactly what i'm saying um nasdaq is populated by stocks like that.

And a lot of them are from China and Hong Kong, yeah.

China and Hong Kong actually dominate this micro-cap IPO market.

Japan, South Korea, Singapore also account for a small chunk, but outside of the U.S., it's China and Hong Kong that provide the bulk of these listings.

So these are like small manufacturing firms,

neutral restaurant chains, little companies.

And why are they going to U.S.

markets and not to Chinese or Japanese markets?

I guess for the the same reason that a lot of UK-based companies come to the US, right?

They want access to deeper, more liquid capital markets.

US investors just like to spend cash in a way that other investors elsewhere do not.

They're willing to take a punt on that hot pot chain that might not have done so well had it listed in Beijing.

How do they even get to hear about these tiny hot pot chains?

I mean, you know, is is there a whole scene of promoting these stocks to retail investors in the States?

Well,

a lot of these companies use the same kind of cluster of U.S.

underwriters to go public.

How these underwriters source these companies is a really good question and one that I haven't quite got to the bottom of yet.

They'll have offices in Beijing and they'll have people in Beijing that scour the country for opportunities, I guess, but the rate at which they do so, the rate at which these underwriters, most of which are based in New York, find companies scattered all across China to list here is is pretty impressive.

They are on the march.

And Nasdaq is more than willing, more than happy to list these companies.

I give it to understand these companies mostly don't perform very well on the market.

What's in it for these underwriters to go hustle into China and try to find that one noodle shop that they could take public?

Aaron Powell, I guess, in a word, it's fees.

They make money every time they list these companies.

And it would be harsh to say they don't care how these companies perform.

I'm sure they would all say that they do care how these companies perform after the IPO.

But financially, they've made their money once the company goes public and the subsequent share price action is nothing to do with them, is what they might say.

And they're not all disasters, right?

No, some of them do incredibly well.

Shares in this ESG data company, Digenix, are up more than 1,000% since the company listed in January.

It got a little help along the way from a...

a big $300 million investment from a minor UAE royal.

I have to say, that's so interesting that an ESG company, which is definitely not in vogue right now, from Hong Kong, would be doing gangbusters on the U.S.

stock market.

Also, I find it interesting that a UAE royal who certainly has his money from oil is now investing in this ESG company.

Yes, none of it makes much sense.

Environmental-based investing was such big news for

Middle East royals.

Yeah.

Maybe he's diversifying.

Exactly.

Diversify.

It all just feels kind of strange, right?

So U.S.

stock markets are like they're very prestigious.

They kind of drive the bus for the rest of global markets.

How has it come to pass that we've just got all these like tiny little companies that do like quite an odd mix of things ending up on this sort of high-stakes stock market?

It just feels like something odd is going on.

Well, NASDAQ is a profit-driven company that makes money every single time a company lists on its exchange.

So it's in its own interest to have as many IPOs as possible.

It's also quite proud of having beaten the New York Stock Exchange in terms of how many listings it gets every year.

So you can see why Nasdaq might want to list this stuff, these small, these small Chinese Hong Kong-based companies, even if they do end up trading in weird and wonderful ways.

Can we go back to the moment when Katie called Americans prestigious bus drivers?

The nice the shiniest buses.

Yes, exactly.

But

let's also rewind a little bit to the kind of broader story around

US investing in China and sort of financial links between these two superpowers.

Because like Aiden, like these countries are not the best of friends in financial markets, are they?

No, they are not.

I mean, historically in financial markets, they got along swimmingly, right?

People were super excited to invest in China back in the mid-2000s, mid-2010s.

Chinese companies are generally been very excited to invest in the U.S.

And the Chinese government holds a lot, a lot, a lot of U.S.

treasuries.

So, I mean, the financial systems are inherently intertwined.

But at this current moment, we don't really know what the direction of this is going to be going forward.

Just, what, is it two weeks ago, we got the first detente, right, between the U.S.

and China since Trump started ratching up trade tensions.

So now tariffs are around 30% and they could go lower.

We don't know.

They also could go higher.

So it's kind of unclear what the direction is.

But there are rumors in Washington and elsewhere that there could be more steps taken, especially to stop Chinese investment in the US.

Aaron Powell, interesting.

Now, George, this isn't the first time you've written about all this stuff, is it?

Like you've done quite a lot of deep work in the past into

where these really massive moves in really tiny stocks come from and how people make and lose large amounts of money through it.

That's kind of some of that sounds like slightly the dark side of all this.

Aaron Powell, yeah, well, I think

us stock markets have had a

problem

with very volatile chinese micro caps in particular for a very long time going back to the mid noughties um there was a film made about this called boiler room which i'd encourage everyone to watch the problem kind of died down after 2010 after markets cooled but then came back in 2015, died down again, then reared its head again in the weird pandemic era bull market we had in 2021.

That was a weird one.

Yep.

It was a weird one.

It was a weird one.

At the time, there were hundreds of IPOs going on.

The capital markets were incredibly busy.

And a whole host of small Chinese companies were IPOing again on Nasdaq, which is where most companies tend to.

It's the most popular venue.

But there was a very obvious pattern emerged that drew the interest of a lot of investors who put me onto the story about Chinese companies IPOing

and their shares surging by stupid numbers

on their market debut, some thousands of percent,

only to crash by 98%, 99%,

sometimes the following day.

So this clearly looked weird.

What's going on?

That's not normal price action.

Stocks should not behave like that.

So yeah, during 2021, 2022, when I was reporting for AlphaVille in London, I wrote a few articles about some of these strange

price moves involving small Chinese stocks and recognized that there are a few common denominators.

A few underwriters, most of them based in New York, were behind a lot of these IPOs.

They were the underwriters on these IPOs, which means they market the shares to investors.

And it turned out that when I...

reported the story that we're talking about today, a lot of those same underwriters responsible for some of the strange IPOs during the pandemic bull market are just as active today, although there's a few new players involved, and perhaps we can talk about some of them because two of the most active underwriters are based, one of them is in Trump Tower, the other is in the Trump Building.

Oh.

That was going to be my next question.

There is, of course, a Trump angle here.

There always is.

So, this year at least, the two most prolific underwriters, US-based underwriters in the small cap IPO market are Dominari Securities and RF Lafferty.

These are two pretty small firms, both of them in New York.

They've both taken at least seven companies public this year, including a machine vision company called Leanne Sowell and that hotpot chain restaurant I referred to earlier called Master Beef.

Master Beef?

Master Beef.

Amazing.

I love it.

Sounds pretty good.

Sounds pretty good.

So R.

F.

Lafferty is headquartered in the Trump Building in New York's financial district.

Dominari Securities, which worked on that Diginex IPO we were talking about,

ESG play.

They're in Trump Tower, about four miles north in New York.

So I thought that was sort of peculiar.

Perhaps listeners will agree.

Yeah.

As you said before, there's only incentive for people to underwrite these small cap IPOs, right?

They get fees, they help them get on the market, they don't really care about the performance at the end of the day.

And your point is, it's interesting that there might be some links between the Trump organization and these underwriters.

It could just be the link is they are a renter, but there might be something more.

Is that right?

It's interesting given that Trump has made no secret of how much he wants to basically sever America's ties, economic ties with China.

And yet given that

two companies operating in buildings he owns, or at least that have his names on them, are going gangbusters, listing Chinese companies on US stock markets.

Yeah.

Perhaps it's a wild conspiracy theory.

But this whole thing with like with shares suddenly going gangbusters, you know, as you note in your piece, the US regulators have been warning about this for years and saying,

This is really funky.

You've got to be careful with these types of companies.

You might end up losing a lot of money.

I guess to me, what it comes down to is this kind of sometimes, particularly in the US, the stock market looks less like a kind of, of, you know,

majestic piece of the capital allocation process and more like a kind of just casino, like slot machines.

And, you know, it's just, oh, I'll have a go on this, and, you know, maybe it'll make me rich.

That sort of doesn't strike me as really the point of stock markets.

I guess it depends how you look at it and how you view

investing, particularly in small caps, right?

Like, there's a sense, and I've kind of picked this up very slowly since I arrived in New York in January, that caveat mTOR reigns, particularly

in this

kind of murkier part of the market.

So you pay your money, it takes your choice.

You take a risk, it's on you.

Yeah.

It's on you, exactly.

Yeah.

You know that these shares are volatile.

You know that they're not particularly liquid.

You know that they're going to move up and down on no news quite often.

Like people who invest in these stocks

often know what they're getting themselves into.

Not always.

Not always, of course.

And FINRA, which is one of the regulatory bodies in the US, and the Securities and Exchange Commission do often warn investors about the risks in investing in the small tech space.

But beyond some warnings, they haven't done much to tighten up the rules

based on the reporting I've been doing over the last few years.

And that's irked a lot of investors, a lot of former regulators who think that the SEC and FINRA should be doing more.

to either block some of these companies from listing in the first place or clamp down on some of the underwriters who are associated with many of the weird moves that we see almost every day.

I'd say it's not uncommon.

Aaron Trevor Bowie But it feels like we are in this moment though where people, investors and regulators are accepting the slot machine-like nature of markets.

Just yesterday, Coinbase, which is the crypto exchange, joined the S ⁇ P 500, which is kind of a big deal.

I mean, you're putting it with the

greatest American companies that are listed publicly, and you're saying that this company is worthy of being in the most commonly traded passive index.

And I mean like one of the best performing stocks last year at least was MicroStrategy, right?

Which Katie did an excellent film on the other day, which is basically a gamble on a gamble.

So for anyone who's missed my ritual humiliation on this point, MicroStrategy, it's actually just called Strategy Now.

is a company that started life as a software company, that didn't go terribly well, so it pivoted into Bitcoin and now all it does is buy Bitcoin and it issues bonds to get more money to buy more Bitcoin and then the company's worth more and then it issues more bonds and it buys more Bitcoin.

That's it.

That's the company.

And it's making people vast amounts of money.

And people like me who are like, oh, I just don't really see how this makes sense are being made to look very silly.

So I made a film that was basically predicated on this idea that I got it wrong and I'm a huge idiot and this is how I got it wrong and why I'm a huge idiot.

And I'm still getting emails from people saying, ooh, you got it wrong.

You're a huge idiot.

I know.

That's what the film says.

Go and watch the film.

Stop sending me these stupid emails.

I mean, you could yet still be proved very, very correct.

I could be, but it hasn't worked so far.

This is a whole other story.

George, you are doing God's work and keeping an eye on this while we all obsess over the really, really big stocks.

So, so keep it going.

I watch that stuff too, I swear.

You do.

You're a busy person.

But we're going to be back in a sec with Long Short.

Bonds are back.

And so is All the Credit, P Jim Fixed Incomes Monthly Podcast Series.

From the latest trends to long-term perspectives, you'll get timely fixed income insights from leading economists, research analysts, and investment professionals.

Whether you're new to bonds or a seasoned investor, tune in to All the Credit wherever you get your podcasts.

This podcast is intended solely for professional investor use.

Past performance is not a guarantee of future results.

Okey-doke, it's time for long short, that part of the show where we go long, a thing we love, or short, a thing we hate.

Chaps, I am led to understand that you two have not prepared anything in advance for this, so I will go first.

I am limit long, Caroline Crenshaw, the sole remaining Democratic Commissioner left on the U.S.

Securities and Exchange Commission, the big regulator out there.

She's likely to be leaving at the end of this year and she is going out swinging.

She was at a conference earlier this week and she did not hold back.

She said the SEC is ignoring significant risks.

We are obviously seeing a bit of a free-for-all, particularly in crypto at the moment.

She said, and I quote, this is a dangerous game.

We are pulling apart our own regulatory foundation block by block, case by case and rule by rule.

It all feels too familiar to those of us who've lived through 2008.

Caroline Crenshaw, thank you for your service.

People, you have been warned.

Regulations are there for a reason.

Chaps, what do you have?

Aiden, do you want to go first?

Sure.

I am short DJs.

You're short DJs?

I think, you know, all well-intentioned, and there are some good DJs, but I was at an event this weekend that this DJ was playing songs from like middle school, like when I was in middle school, which was just such a bad read.

It was a college reunion.

It was such a bad read of the audience.

Like, they should have been playing songs from when we were in college.

Right.

And I just was like, how old do this person think we are?

Yes.

Do you know what I found the other day, slightly related?

Nick Luttnick's old SoundCloud account.

Ah, cool.

This is the son of

Frederick.

Yes.

Everyone should look this up.

Is it any good?

Don't sleep on this.

Is he a good musician?

I'll leave that to you to decide, dear listeners.

Let's return to this in a later podcast.

I like this list.

Yes, we should do a deep dive.

George, from Short DJs 2.

I'll go long flares.

Since I moved to New York, I've noticed that a lot of people here wear flares, and I've never had the kahonas to do it myself.

No, no,

not like rave flares, like the trousers, the flared trousers, the 70-star trousers.

I bought a pair the other day, and I'm really.

I'm just flat-out flares or kind of boot cut, like these are like beginner flares.

Not dance flares.

No, no, no, no.

Yeah, so yeah.

I'm going to say no more.

You're quite a tall person, so I would worry that maybe you might take off.

Just be careful about your aerodynamism.

we can get away with it in New York.

In London, I'd be booed, booed and hissed at.

Anything goes out there.

So listeners, you got your instructions, please check out Not Nick's SoundCloud between now and the next update from the Unhedged podcast, which will be on Thursday.

Unhedged is produced by Jake Harper and edited by Brian Urspat.

Our executive producer is Jacob Goldstein.

We had additional help from Topa 4heads.

Cheryl Brumley is the FT's global head of audio.

Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Seidler.

FT Premium subscribers can get the Unhedged newsletter for free.

A 30-day free trial is available to everyone else.

Just go to FT.com/slash unhedged offer.

I'm Katie Martin.

Thanks for listening.