What’s Happening to the Small-Cap Universe?

In this IBKR Podcast episode, Nasdaq’s Michael Normyle joins Jeff Praissman to examine the dramatic decline in publicly listed small-cap companies and the factors driving it, including mergers, delistings, fewer IPOs and the growth of private capital.

Summary – IBKR Podcasts Ep. 391

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi, everyone. This is Jeff Praissman with Interactive Brokers. It’s my pleasure to welcome back to the Interactive Brokers Podcast Studio, Michael Normyle from Nasdaq. Hey, Michael, how are you? 

Michael Normyle

Hi, good. Glad to be here. Thanks 

Jeff Praissman

Love having you coming in for our monthly podcast. And today we’re gonna talk about a pretty interesting subject, the disappearance of or reduction of like kind of smaller companies on the exchanges And you know, kind of just to kick it off, Michael the number of publicly listed companies has nearly halved since 2000. Why has that decline been driven almost entirely by fewer smaller companies listing? 

Michael Normyle

Yeah. So the SEC put out a report recently, their staff, that showed since 2000 we’ve gone from 6,300 listed companies down to about 3,500. And while this has been a widely discussed phenomenon, it’s often been overlooked actually that the bulk of the decline is in small companies, like you’re saying. So the number of companies with a market cap under $250 million, that’s the threshold that they used, has declined from nearly 4,000 back in the year 2000 to about 1,200 now. And so just doing the math, the total listings are down about 2,800, but small listings are down about 2,800. So it’s pretty much entirely due to the reduction in small listings here. And there’s a few reasons for this. First, there were about 4,000 mergers between public companies from 1996 to 2020, and then of course smaller companies, they’re relatively easier to be acquired. And then second, there’s been delistings, and of course, that’s also tends to be more of a risk for companies when their market caps get too small, so smaller companies. And then lastly, there’s been, you know, a slowdown in IPOs that we’ve seen, and this is going back to the start of this century, a ctually 

Jeff Praissman

So Michael, small companies, went from making about 66% of the listings to closer to 34%. So what does that shift say about how markets have evolved? 

Michael Normyle

Yeah, I think maybe you could say markets have gone a little bit more top-heavy. In 2000, it was two out of every three listed companies that were small, like you were saying, 66%. So that was really the bulk of the market, and now it’s flipped. Now, of course, the market as a whole has grown a lot too. So in 2000, the market cap was about $15 trillion. 

In 2025, it was almost $70 trillion. So of course, there’s gonna be a lot more big companies when the market cap is up five times, you know? 

Jeff Praissman

One case you could make, is inflation, right? So like $250 million in 2000 isn’t the same as $250 million now, right?, So how does that play into this? 

Michael Normyle

Yeah, and I think that’s an important caveat to note. The original SEC report was maintaining a steady threshold of two hundred and fifty million dollars in nominal terms from two thousand to twenty twenty-five. And it’s not really a fair comparison given twenty-five years’ worth of inflation. So if you adjust for inflation, two hundred and fifty million dollars in two thousand, that’s equivalent to four hundred and seventy-five million in twenty twenty-five. 

And so when you make that adjustment, the share of small companies drops from sixty-six percent in two thousand to forty-three percent in twenty twenty-five. So not as big as that drop to thirty-four percent where you’re using that steady two hundred and fifty million threshold, but it’s still a twenty-three per-percentage point drop. 

So that suggests that there is some structural factors at play, and it’s not strictly due to inflation. And there are a few factors that Bloomberg Intelligence’s recent report on the future of IPA– IPOs called out. It was, you know, disclosure burdens, regulatory complexity, litigation risk, and of course, the growth of private capital. So a number of factors that were that were in play here in addition to the inflation piece as well. 

Jeff Praissman

Regardless of inflation adjusting for it or not it’s still a huge drop. What are the consequences for investors in the markets when the drop is so significant in these smaller companies? 

Michael Normyle

Yeah, I think it’s a big problem for retail investors and also the economy perhaps more so than markets even. So for retail investors, of course, means you have fewer chances to participate in early growth phase, the early growth phase of companies, and that’s also, you know, something that historically it’s been a huge source of household wealth creation in the US. Another issue that Bloomberg report highlighted is that this trend tends to drive wealth concentration because private markets are largely inaccessible to most investors. So if we’re seeing more companies stay private for longer, there’s a smaller pool of people that can really benefit from growing valuations when companies are private. 

For the economy, if you look at companies that IPO, they see about a twenty-three percent annual employment growth in their first three years, compared to seven percent for companies that filed to go public and then withdrew. And then public companies invest about fifty percent more in R&D than comparable private firms. So, you know, fewer public companies, that means less job creation, less innovation, and of course, a missed opportunity to support retirement for ordinary Americans that won’t have access to private markets. And of course, you know, there’s risks associated with private markets too, as we’ve seen lately with concerns about liquidity and lack of transparency too. 

Jeff Praissman: The SEC attributes the decline to, you know, you kind of hinted at it before, mergers, delistings, and fewer IPOs in general. So how are these all combining to kind of shrink that small cap universe? 

Michael Normyle

Yeah. I think I’m gonna try a visual metaphor here. So if you think about the listed companies like, like water in a bathtub, it’s that water, those companies, they drain out through three different pipes. So you have acquisitions, you have delistings or just plain going away. And then water only flows in through one pipe, which is new IPOs. 

And so we mentioned earlier, right, four thousand mergers between public firms from nineteen ninety-six to twenty twenty. IPOs have been running around a hundred and ten operating companies a year this century, compared to over three hundred in the eighties and nineties. And then you add, you know, a steady stream of delistings as well. 

So those three drains are outpacing what’s coming in through that other pipe, you know? 

Jeff Praissman

That was actually a great visual, Michael. That was, it’s a really good, nice way to explain it. I think our listeners from home will appreciate that. You know, there’s been around 4,000 mergers too over the past few decades, which is kind of a crazy number when you think about it. You always hear the big name ones, but, you know, people don’t realize that all these smaller mergers kinda, kinda fly maybe under a lot of people’s radars. But how much has that consolidation kind of reshaped opportunities available in the public markets? 

Michael Normyle

Yeah, I think really it’s the scale that makes it a big deal because when you have two companies merge, you’re gonna lose one distinct investable name. And you do that 4,000 times over 25 years, and that’s a lot of investment options. And, you know, also a lot of companies that otherwise may have still existed as small or even mid-cap companies for investors to own, they’re now a business unit within a bigger company, and of course you can’t buy just that division. You have to buy the whole parent company. And that’s not necessarily a bad thing, right? Obviously, these mergers provide synergies or growth that those bigger companies wouldn’t have had otherwise. But of course, it does reduce the number of options available to investors. 

Jeff Praissman

Kind of continuing with this drainpipe comparison here. Markets need, you know, roughly like 180, 190 IPOs per year just to kind of offset the delistings in M&A. So on the other end of this, like we know why they’re disappearing, we know what’s causing that, but why are there just fewer IPOs to begin with? 

Michael Normyle

Yeah. I mean, we have been able to surpass that 180 number a lot of times going back to 2014 at least, because that’s kind of like the breakeven that you need to build on, but not by a lot of the time. So that’s where you run into this issue where we’re not fully replacing every company that’s been lost here. But a big factor is companies are waiting much longer to IPO. So the median age at IPO in 2025 was 12 years for a company, and it used to be, you know, single digits back in the ’90s oftentimes. And then you have compliance and reporting costs have gone up a lot. So the median 10-K has more than doubled from 23,000 words in 1996 to 49,000 words by 2023, and of course likely increased from there. 

Then you have the private capital points that we discussed already. And then actually, as I mentioned earlier, one of the— that Bloomberg report had suggested that the top hurdle to going public is actually the threat of class-action lawsuits after IPO. And then following that, there’s the IPO process itself and regulatory burdens based on the survey that they did. 

So it’s not just one thing. There are multiple headwinds that make it challenging for some companies to IPO, and it makes some companies wait longer until they’re more mature. 

Jeff Praissman

There seems like there’s a lot of factors that are sort of potentially causing that delay. Maybe one for one firm, maybe another for another firm, maybe all of them for another firm and so forth. You mentioned compliance costs, and across public companies they’re billions annually. Does it fall disproportionately on smaller issuers? Like in other words, obviously a smaller issuer is not going to have the same compliance cost as a mega cap or a large cap. But as far as a percentage of their overall value, is it just heavier weight because there are some fixed items that you always have to do no matter what size you are? 

Michael Normyle

Yeah, exactly. So if you look at total compliance costs for all public companies, it’s around $9 billion a year based on our calculations. For a small company, it’s typically a little under $500,000 per year. For a large company, it’s $5 million or more, and the average is $2.3 million. 

So in absolute dollar terms, of course it’s bigger for larger companies. But like you’re saying, as a share of revenue or earnings, it’s going to be a much bigger share for smaller companies. And so that comes down to your quarterly 10-Q reporting, which is, you know, averaging over 50 pages. You do that three times a year. You add a 10-K on top of it, and then if you think about what’s happened in other countries—the UK, the EU, Australia—looking at semi-annual reporting, which is something the SEC has proposed in the U.S. to kind of lighten that compliance burden a little bit as well. 

Jeff Praissman

There’s also a perception, I think, that it’s just easier to stay private for some of these firms or for a lot of people. A lot of business owners might have that perception. But why does the data suggest that view misses some of the key benefits of going public? 

Michael Normyle

Yeah, I think this was one of the things that was highlighted in the SEC report really well, where when companies go public, their credit spreads fall by about 25%, their borrowing costs drop, and the pool of available lenders grows as well. So going up to four and a half banks on average post-IPO from three and a half pre-IPO. 

And then when you look four years after the IPO, companies that IPO’d have about 40% more CapEx and 50% larger assets than comparable private companies. So everything else is more or less the same between these two companies except one’s public, one’s private. And then in that same Bloomberg report, it showed that staying private isn’t actually as riskless as some people might make it out to be. There’s, of course, increasing illiquidity risk. 

And so overall, you might have being private is simpler on reporting, but you’re giving up cheaper capital, deeper lender base, and faster growth in investment in assets. And that’s a lot of benefits to going public that are maybe overlooked, and these are benefits for both companies and for the economy. 

Jeff Praissman

The lower borrowing costs and the ability to invest more in CapEx and assets, how critical are these advantages for, say, long-term growth? 

Michael Normyle

Yeah, I think this is big, and it’s especially the compounding nature of it that’s a big factor. So if you have a 25% cut in credit spreads, that means cheaper financing for your factories or your acquisitions as we talked about, plus getting through downturns. And then you combine that with 40% more CapEx, 50% larger assets compared to similar private peers. And that’s a big difference when you’re doing these things over multiple years and decades. And then, you know, as I mentioned earlier, from the long-term growth of the economy, companies that IPO see 23% annual employment growth in their first three years compared to 7% for those companies that withdrew their filing. Plus you have that 50% boost to R&D spending versus comparable private firms. And of course, R&D is one of those things that drives innovation, drives productivity, and drives the economy. And there’s also the fact that we have relatively high valuations in the U.S., and it’s often attributed to investor trust and governance standards and enforcement mechanisms. So transparency and accountability—those things that come with being public—are also why the U.S. public markets have a valuation premium, and that feeds back into a lower cost of capital. So it’s a virtuous cycle, really. 

Jeff Praissman

So we talked about a lot. We talked a lot about why the listings are—or have been—reduced, or the number of listed companies has been reduced. We talked about the causes, but given all these trends, I kind of want to talk about how important it is to rebuild the pipeline of these small companies, of IPOs, to kind of maintain a healthy and competitive public market for everyone. 

Michael Normyle

Yeah, I mean, of course, coming from Nasdaq, we think it’s important, right? That it’s important to public markets, but also to the broader economy, right? So public markets, they’ve been a core reason why the U.S. has been the most dynamic economy in the world for decades. They channel savings into productive investment. They fund innovation, they create jobs—all these things that we’ve already talked about. They build retirement wealth. And so I think the good news is we have certainly seen policymakers prioritizing changes that will make it easier for smaller public companies to consider going public. So there is a path that we’re seeing developing to rebuilding that small-cap pipeline, and that’s going to hopefully help make the U.S. economy stronger, help American households share in that growth, and really help ensure the retirements of millions of Americans. 

Jeff Praissman

Michael, this has been great as always. For more from Michael, you can go to nasdaq.com or go on our website ibkr.com, click on education. Lots of great podcasts, webinars, articles that Nasdaq contributes to us, and they have their own area as well called Insights that you can go onto and catch great articles from Michael and the rest of the economists over at Nasdaq. Until next time, Michael, thank you for stopping by. 

Michael Normyle

Yeah, thanks. Glad to be here.