This is an audio transcript of the Unhedged podcast episode: ‘The microcap explosion’
Katie Martin
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 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 gonna talk about — eenie weenie companies that are suddenly rushing on to 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.
George Steer
Hello, Katie. How are you?
Katie Martin
We used to work together in London. Do you miss me terribly?
George Steer
Every day. Every day.
Katie Martin
That’s the correct answer. And we also have, from New York City, Aiden Reiter from the Unhedged newsletter. Aiden, I gather you are a little hoarse, like a Shetland pony.
Aiden Reiter
(Laughter) 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?
Katie Martin
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?
George Steer
For the record, I do. I have written a few times about some big companies. (Laughter) 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 on to the US stock market, thanks to some interesting banks that we normally don’t cover. So yeah, the traditional large-cap IPO market has been quite quiet since I arrived because of tariff stuff, mostly. The small-cap IPO market, on the other hand, is booming.
Katie Martin
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 . . .
George Steer
You get to ring a bell.
Katie Martin
You get to ring a bell. What could be better?
George Steer
It’s really fun.
Katie Martin
But some of these companies are pretty teeny-weeny and they do quite weird things.
George Steer
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 $50mn in the process.
Katie Martin
Five-zero.
George Steer
Five-zero, 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 microcap IPO market.
Katie Martin
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 gonna be a runaway, super soaraway, great year for companies listing, because it was gonna 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, but . . . So why? Why do we have all of these tiddlers?
George Steer
A few reasons, I think. The first is that Nasdaq tightened its rules around which kinds of companies can list on its exchange. So the other day, they enacted a ruling that means that companies have to raise at least $15mn 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 $50mn have dried up, but there have been plenty of deals — I think at least 15 since mid-April — involving companies that have raised between $15mn and $50mn.
Aiden Reiter
So the rush wasn’t just companies that didn’t think they hit the threshold? It was just like everybody went for the door, just in case.
George Steer
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.
Katie Martin
The punters do love a bit of this. But also, it’s quite important to know 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?
George Steer
Indeed. But a lot of these companies are just small, selling noodles or clothes or . . . The range of companies is really, really broad.
Aiden Reiter
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?
George Steer
That’s exactly what I’m saying. (Aiden laughs) 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 microcap IPO market. They’re . . . Japan, South Korea, Singapore also account for a small chunk, but outside of the US it’s China and Hong Kong that provide the bulk of these listings.
Aiden Reiter
So these are like small manufacturing firms, noodle restaurant chains, little companies. And why are they going to US markets and not to Chinese or Japanese markets?
George Steer
I guess for 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 hotpot chain that might not have done so well had it listed in Beijing.
Katie Martin
How do they even get to hear about these tiny hotpot chains? I mean, you know, is there a whole scene of promoting these stocks to retail investors in the States?
George Steer
Well, a lot of these companies use the same kind of cluster of US 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 pretty impressive.
Katie Martin
They’re on the march.
George Steer
And Nasdaq is more than willing, more than happy to list these companies.
Aiden Reiter
I understand these companies mostly don’t perform very well on the market. What’s in it for these underwriters to go, you know, hustle into China and try to find that one noodle shop that they could take public?
George Steer
I guess in a word it’s fees. (Katie laughs) 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.
Katie Martin
And they’re not all disasters, right?
George Steer
No, some of them do incredibly well. Shares in this ESG data company, Digenix, are up more than 1,000 per cent since the company listed in January, and it got a little help along the way from a big $300mn investment from UAE, a minor UAE royal.
Aiden Reiter
I have to say that’s so interesting that an ESG company, which is, you know, definitely not in vogue right now, from Hong Kong would be doing gangbusters on the US 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.
George Steer
Yes, none of it makes much sense.
Katie Martin
Who knew that environmental-based investing was such big news for Middle East royals?
George Steer
Maybe he had an epiphany.
Katie Martin
Yeah. Maybe he’s diversifying.
George Steer
Exactly. Diversifying.
Katie Martin
It all just feels kind of strange, right? So US 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.
George Steer
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, Chinese, Hong Kong-based companies, even if they do end up trading in weird and wonderful ways.
Aiden Reiter
Can we go back to the moment when Katie called Americans prestigious bus drivers? (Laughter)
Katie Martin
The nice, the shiniest buses. Yes, exactly. (Aiden laughs) 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?
Aiden Reiter
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 have generally been very excited to invest in the US. And the Chinese government has held and invested a lot in the US, both, you know, private companies and holds a lot, a lot, a lot of US Treasuries. So, I mean, the financial systems aren’t 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 détente, right, between the US and China since Trump started ratcheting up trade tensions. So now, tariffs are around 30 per cent 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 rumours in Washington and elsewhere that there could be more steps taken especially to stop Chinese investment in the US.
Katie Martin
Interesting. Now, George, this isn’t the first time you’ve written about all this stuff, is it? 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.
George Steer
Yeah, well, I think US stock markets have had a problem with very volatile Chinese microcaps in particular for a very long time, going back to the mid-noughties. 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.
Katie Martin
That was a weird one, yeah.
George Steer
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 IPO-ing 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 on to the story about Chinese companies IPO-ing and their shares surging by stupid numbers on their market debut, some thousands of per cent, only to crash by 98 per cent, 99 per cent, 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 share price moves involving small Chinese stocks and recognised 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 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.
Aiden Reiter
Oh.
Katie Martin
That was gonna be my next question. There is of course a Trump angle here.
George Steer
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 Lianhe Sowell and that hotpot chain restaurant I referred to earlier called MasterBeef.
Katie Martin
MasterBeef?
George Steer
MasterBeef.
Katie Martin
Amazing. I love it.
George Steer
Sounds pretty good. Sounds pretty good. So RF 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 4 miles north in New York. So I thought that was sort of peculiar. Perhaps listeners will agree.
Aiden Reiter
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 organisation and these underwriters. It could just be the link is they are a renter, but there might be something more. Is that right?
George Steer
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. Perhaps it’s a wild conspiracy theory. (Laughter)
Katie Martin
But this whole thing with shares suddenly going gangbusters, you know, as you note in your piece, 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, 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, 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.
George Steer
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 emptor reigns particularly in this kind of murkier part of the market.
Katie Martin
So you pay, it’s your money, it takes your choice. You take a risk, it’s on you, yeah.
George Steer
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 gonna 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, 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-cap 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.
Aiden Reiter
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.
George Steer
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. (Aiden laughs)
Katie Martin
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 were 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, oh, 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. (Laughter)
George Steer
I mean, you could yet still be proved very, very correct.
Katie Martin
I could be, but it hasn’t worked so far. This is a whole other story.
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George, you are doing God’s work and keeping an eye on this while we all obsess over the really, really big stocks, so keep it going.
George Steer
I watch that stuff too, I swear.
Katie Martin
You do. You’re a busy person, but we’re gonna be back in a sec with Long/Short.
Okie 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 US 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 wanna go first?
Aiden Reiter
Sure. I am short DJs.
Katie Martin
You’re short DJs?
Aiden Reiter
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. And I just was like, how old does this person think we are?
George Steer
Do you know what I found the other day? Slightly related — Lutnick’s old SoundCloud account.
Katie Martin
Quality . . . (Laughter)
Aiden Reiter
Ah, is this the son of the secretary of commerce, Howard Lutnick?
George Steer
It’s incredible. Yes. Everyone should look this up. Don’t sleep on this.
Aiden Reiter
Is it any good? Is he a good musician?
George Steer
I’ll leave that to you to decide, dear listeners.
Katie Martin
(Laughter) Let’s return to this in a later podcast. I like this idea.
George Steer
Yes, we should do a deep dive.
Katie Martin
George, from short DJs to?
George Steer
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 cojones to do it myself.
Aiden Reiter
Like a road flare?
George Steer
No, not . . . more like rave flares. Like the trousers, the flared trousers, the ’70s-style trousers. I bought a pair the other day and I’m really enjoying them.
Katie Martin
Like flat-out flares or kind of bootcut-like?
George Steer
These are like beginner flares, but . . .
Aiden Reiter
Not dance flares.
George Steer
No, no, no. I’m just . . . Yeah, so, yeah. I’m gonna say no more.
Katie Martin
You’re quite a tall person, so I would worry that maybe you might take off. (Aiden laughs) Like, just be careful about your aerodynamism.
George Steer
You can get away with it in New York. In London I’d be booed . . . booed and hissed at.
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Katie Martin
Anything goes out there. So listeners, you’ve got your instructions: please check out Lutnick’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 Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
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/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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