Identifying Small Cap Opportunities Before the Mainstream

Early-Stage Growth Investing: A Research-Driven Approach‍

Identifying companies with long-term growth potential before they enter the mainstream requires deep primary research and a disciplined investment process. As an independent investment fund manager in Australia, we apply this method to every investment decision, allowing us to identify opportunities early.

In an interview with Livewire back in 2017, Emanuel Datt highlighted the importance of recognising structural trends at an early stage. This philosophy remains highly relevant today, as markets continue to reward investors who focus on businesses with durable long-term growth drivers.

Listen to full interview below.

Where Market Dislocation Creates Opportunity in Small Caps‍

Over the past 18 months, a material divergence has opened between the ASX 100 (XJO) and the ASX Small Ordinaries Index (XSO). Historically, such dislocations have occurred at market turning points, post-dotcom and post-GFC and were followed by periods of strong outperformance for small-cap strategies.

For long-term investors, this creates overlooked investment opportunities in Australian small companies. Many businesses that have been indiscriminately sold now offer both value and upside, particularly for active, research-driven managers.

Case Studies: Afterpay and Adriatic Metals‍

Our investment in Afterpay demonstrates how disciplined research and real-world observation can identify opportunities before they are widely recognised. In 2017, when the company traded at around $6, we saw early signs of rapid adoption that were not yet fully reflected in the market. Emanuel recalls:

“I walked through a shopping mall and noticed Afterpay signage everywhere. That real-world observation gave us conviction to dig deeper, and the fundamentals backed it up.”

Similar discipline was applied with Adriatic Metals, an investment made when its market cap was around $150 million. Despite concerns about its Bosnian operations, Datt Capital backed the team and the asset. Today, it trades at over $1 billion.

Note: Performance figures referenced are net of fees and based on time-weighted returns from actual portfolio data.

Our Framework for Spotting Emerging Leaders‍

At Datt, we identify durable, scalable businesses that meet three key criteria:

• Structural tailwinds: Is this sector growing due to long-term shifts in policy, technology, or demographics?
• Unit economics and scalability: Can the company grow efficiently and protect margins?
• Early adoption signals: Are we seeing proof of concept in the real world before it shows up in the numbers?

This framework helps us assess undervalued companies in Australia across technology, financial services, healthcare, and rare earths.

Why Small Caps in Australia Remain Undervalued‍

Small companies in Australia remain undervalued after several challenging years. Higher rates and limited liquidity have widened the gap between large and small-cap performance, creating opportunities for investors in small companies funds.

For wholesale investors, these conditions present overlooked opportunities that active, conviction-led fund managers in Australia are well positioned to capture.

Investing with Datt Capital’s Small Companies Fund‍

The Datt Small Companies Fund is designed for wholesale investors seeking exposure to these opportunities. Our disciplined, research-driven process identifies undervalued companies in Australia with durable long-term growth drivers. We invest alongside our clients, ensuring full alignment of interests.