With more than 7,000 listed companies, Europe offers an extensive investment spectrum. The majority of investors’ money is concentrated in large and mega caps, but if one looks at the pure number of companies and leaves market capitalisation out of the equation, the majority of companies come from the mid-, small- and micro-cap sectors (circa 95 per cent of all listed stocks), which are hardly noticed by many investors and analysts. 
This is partly due to lower trading volumes but mid and small-cap companies are also less present in the media. A megacorporation like GlaxoSmithKline receives more attention than small companies, which often offer only one product or service, simply because of its size and the large number of its divisions and products. Large corporations can also afford to spend more on marketing.
This is all reflected in the level of analyst research. A large corporation such as AstraZeneca is covered by 31 analysts, a small company such as the British flavour manufacturer Treatt has just two analysts. Volume of media and analyst coverage is not a good indicator of the best investment opportunities though. The best mid, small and micro-cap companies possess a number of advantages that stand them in good stead against the behemoths.
For a start, small businesses by nature tend to be more nimble than their larger counterparts, which can also give them the flexibility to more quickly respond to changing market conditions. This makes them much more independent of economic cycles. In addition, many small caps have built up positions as “hidden champions” becoming global market leaders in niche segments. Mid- and small-caps are often among the winners of long-term structural trends, such as digitisation, major changes in the healthcare sector and the growing demand for sustainable technologies. Current crises such as the Covid-19 pandemic further reinforce these trends.
Examples of European small-caps from the healthcare sector include Biotage from Sweden and Revenio from Finland. Biotage is a global leader in separation technologies for drug discovery and development, analytical testing and water/environmental analysis.
Finnish Revenio offers screening- technologies for the early detection of glaucoma, osteoporosis, skin cancer and asthma – diseases that will continue to plague an ageing population. Customers are doctors and clinics as well as patients.
The past decade has seen an increasing focus on ESG (environmental, social & governance). Mid- and small-caps have shown they can rise to the challenge and there are a number of European companies prospering from growing demand for sustainable technologies. The strong drive for innovation and the substantial growth opportunities that characterise many smaller companies are key drivers of their relative outperformance. They often invest a greater proportion of their budgets in research & development compared with their larger counterparts.
The Italian company Carel is a world leader in control solutions for air-conditioning, refrigeration and heating. Electricity consumption for cooling and air conditioning alone now accounts for 17 per cent of the world’s energy consumption. With intelligent control, up to one-third of this can be saved. To address this Carel’s products are designed to generate energy savings and reduce the environmental impact of machinery and systems; their solutions are used in commercial, industrial and residential applications.
Another major advantage possessed by some small and mid-caps is that they are usually owner-run. This gives the management boards a strong stake in their companies and reconciles their interests with those of the shareholders. This often also leads to these companies acting more sustainably than large corporations by putting long-term growth above short-term profit maximisation. As a result, they are often solidly financed and can use the dry spell to invest in growth.
Small and micro-caps are too frequently ignored but the aftermath of Covid-19 is a good time to take another look. Mid- and small-cap investing rewards the patient, analytical and rigorous investor who is prepared to search for hidden gems and the leaders of tomorrow in places most analysts do not have time to look.
Peter Kraus is head of small cap equities at Berenberg Wealth and Asset Management and portfolio manager of the Berenberg European Small Cap fund and Berenberg European Micro Cap fund. The views expressed above are his own and should not be taken as investment advice.