MGD Private Pulse: Microcaps—Opportunity Earned Through Governance
For Wholesale Investors Only
Insights from MGD Private’s Investment Office
Watch Above
Inside Microcaps—Manager Insights & Approach (16 mins)
Learn what “microcap” means on the ASX, where ideas tend to cluster, and how disciplined portfolio design helps contain risk.
Read Below
MGD Private’s Approach to Microcaps
Read how MGD Private determines whether microcaps earn a place in your portfolio.
For UHNW individuals and family enterprises, microcaps represent one of the few genuinely under-researched corners of public markets.
However, their inclusion demands discipline: these companies are in formative stages where outcomes can shift quickly. While the upside potential is compelling, sustained success hinges on sizing allocations appropriately and accessing managers with the research depth, capacity discipline, and risk controls to navigate the segment.
At MGD Private, if we can’t own it with governance, we don’t own it. We view microcaps as a small, deliberate satellite allocation—separate from a client’s core portfolio—that earns its place through capacity discipline, liquidity budgeting, and downside protection, never through speculation.¹,²,³
Key Takeaways
Policy before position. Agree the role and rules before adding a satellite to the core portfolio.
Small by design. Microcaps, if used, sit in a segregated satellite, not the core portfolio.
Access through discipline. Entry and exit rules—position limits, liquidity budgets—come first.
Downside awareness. Capital preservation and patience matter for sustained success.
Microcaps: Alpha Potential, Earned Through Discipline
Microcaps have historically offered periods of differentiated return drivers and alpha potential relative to large-cap-dominated allocations.⁴,⁵ Yet their place in a portfolio must be anchored in disciplined governance, rigorous research, and specialist risk management.⁶
Because the microcap universe is broad and inefficient,⁴ identifying tomorrow’s leaders requires managers with proven expertise, strong research depth, and the discipline to separate durable businesses from fleeting opportunities.² Equally critical is robust risk management: containing exposures when outcomes don’t play out as expected—whether due to market shifts, operational challenges, or liquidity constraints—so that the gains of successful positions are preserved.⁶
Governance provides the essential guardrails—ensuring allocations are proportionate, monitored through full cycles, and consistently aligned with long-term objectives.⁶,⁵ In this way, microcaps can be positioned not as speculation, but as a disciplined contributor to multi-generational wealth stewardship.
What We Mean by “Microcap” and Why This Corner Behaves Differently
“Microcap” typically refers to the smallest listed companies—often the bottom one to two deciles of the market, and in the US below roughly US$250–300 million.⁴,⁷ In Australia, the S&P/ASX Emerging Companies Index (XEC) comprises ~200 names ranked 350–600 by market capitalisation, with liquidity tests to keep the benchmark investable.⁸
In practice, many Australian strategies cap entry at ~A$250m market capitalisation, reflecting a common sizing convention in this segment.⁹
Microcaps tend to be less researched, trade less frequently, and show wider variation in quality and outcomes.⁴,² These dynamics create higher volatility and dispersion. Their performance also moves in waves—sometimes leading in early recoveries, sometimes lagging later in the cycle—which is why we prioritise a governed, patient approach over prediction.⁵,¹⁰
Australia vs Global—What “Microcap” Means in Each
Australia: The S&P/ASX Emerging Companies Index (XEC) includes ~200 companies ranked ~350–600 by market cap, with semi-annual rebalances and liquidity screens to keep it investable.⁸
Global (U.S. example): The Russell Microcap Index targets the smallest ~1,000 U.S. companies, generally below US$300m, highlighting how different this universe is from large-cap exposure.⁴
Why this matters: The investable set and liquidity differ across markets, but the need for governance, research depth, and capacity discipline is universal.¹,⁴
Why Stewards (Not Stock-Pickers) Should Care
Microcaps share features with private equity, but with the benefit of liquidity.
Institutional research shows that active, capacity-disciplined microcap strategies share some features with lower-middle-market private equity: limited research coverage, wider valuation dispersion, and value often realised through corporate activity.¹,² The crucial difference is liquidity. Private equity is typically illiquid, with capital committed for years, while microcaps—though less liquid than large caps—still trade on public markets with daily pricing. For families accustomed to private markets, the comparison is familiar and helps frame the opportunity: microcaps can provide similar inefficiency-driven potential, but with the flexibility of liquidity. That benefit only holds, however, when exposures are governed carefully through disciplined position sizing, liquidity budgets, and execution oversight.
Differentiated drivers to large‑cap portfolios.
UHNW portfolios often allocate significantly to developed-market equities.⁵ Microcaps, by contrast, are earlier in their lifecycles and less widely covered—offering differentiated sources of return when held with discipline alongside a large-cap core portfolio.⁴,⁵
Harnessing Microcap Potential With Risk Under Control
Microcaps can add value over the long term, but they demand specialist handling. Thin liquidity and wide spreads make trading costs—the “invisible fee”—a real risk if not managed with execution discipline.³ Governance variability adds complexity, and the segment is more vulnerable to market manipulation, which requires filters and oversight.¹¹
These risks are not reasons to avoid microcaps; they are reasons to access them the right way to turn these challenges into opportunity. Best-in-class managers apply robust research to identify quality businesses early, strict liquidity and position-sizing to contain risk, explicit sell disciplines to prevent underperformers from diluting winners, and capacity limits to keep strategies nimble.¹,²
The MGD Private Way: Governance First, Then Access
Microcaps can add meaningful long‑term value, but only when governed deliberately and integrated into the overall wealth strategy. Our governance framework focuses on three key areas:
Position sizing at two levels
Portfolio: Determine the right proportion of total wealth for a microcap sleeve, sized to objectives, liquidity needs, and risk tolerance.⁶
Manager: We select managers who balance conviction with liquidity, ensuring no single position can compromise outcomes.²
Diversification and interaction
The sleeve should complement—not compete with—existing exposures.⁵ We assess how allocations interact with the broader portfolio to maintain diversification while keeping the sleeve meaningful.
Access through specialists
How microcaps are accessed matters as much as whether they are included at all. We prioritise managers who combine deep research capability (to identify quality early), liquidity and execution discipline (to contain trading costs), capacity management (to keep strategies nimble), and explicit risk controls (to prevent underperformers from eroding winners).²,³
What is MGD Private Pulse?
Our MGD Private Pulse series explores the issues that matter most to UHNW individuals and family enterprises. MGD Private is a specialist capability within MGD Wealth, delivering strategic advice and institutional-grade investment governance to Australia’s leading business families. As a multi-family office, MGD Private serves as your family office or advises your existing one—bringing disciplined governance, investment strategy, and clarity to the management of multi-generational wealth.
This article was prepared by the MGD Private Investment Office.
For any questions or to discuss your portfolio, reach out to your MGD Private or MGD Wealth adviser.
Important Note: The information in this article is current as of 9 September 2025. This article is intended solely for and this investment is only available to wholesale clients (as defined in section 761G of the Corporations Act 2001 (Cth)). Please note that past performance is not an indication of future performance. Any advice included in this article is general and has been prepared without taking into account your objectives, financial situation or needs. As such, you should consider its appropriateness having regard to these factors before acting on it. Before you make any decision about whether to acquire a certain financial product, you should obtain and read the relevant Fund Information Memorandum.
References
1. Acadian Asset Management. Active Micro-Cap Equities as a Substitute for Private Equity. Feb 2017.
2. Boston Partners. Micro-Cap Stocks: A Surrogate to Private Equity. Dec 2020.
3. AQR Capital Management (Frazzini, Israel, Moskowitz). Trading Costs (Working Paper; first draft 2012; revised 2015/2018).
4. Meketa Investment Group. Microcap Equities. May 2024.
5. UBS. Global Family Office Report 2025. 21 May 2025.
7. SEC Investor.gov. Microcap Stock (Glossary). Updated 2023.
8. S&P Dow Jones Indices / ASX. S&P/ASX Emerging Companies Index – Fact Sheet. 2025.
9. Pendal Group. Pendal MicroCap Opportunities Fund – Product Disclosure Statement. Issued 20 Feb 2025.
