Australia's AI infrastructure boom is creating small-cap opportunities

Australia’s largest listed companies command most investor attention. But Ellerston Capital argues the country’s most compelling future growth is playing out in ASX small caps, where artificial intelligence (AI) infrastructure, electrification and digital transformation are driving earnings the Australian Securities Exchange (ASX) 20 simply cannot offer.

The Ellerston Australian Micro Cap Fund delivered 27.8 per cent over the 12 months to 31 May 2026, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 16.6 per cent. Since inception in May 2017, the fund has returned 16.0 per cent per annum against its benchmark’s 7.2 per cent.

Portfolio Manager James Barker sees those returns as validation of a structural shift, not a short-term trade.

“The market is still underestimating the duration of this investment cycle.”

Project pipelines across the companies Ellerston backs now extend into 2028 and 2029, he says, giving these businesses far stronger revenue visibility than they had only a few years ago.

Where AI meets the real economy

Rather than chasing software developers riding the AI wave, Ellerston has focused on the physical infrastructure making it possible. Data centres require power. Power requires networks. Networks require engineers and electrical contractors.

“The businesses building the infrastructure behind AI are where we’re finding some of the most exciting opportunities locally,” Barker said. “Investors can gain very little exposure to these themes through the S&P/ASX 20. Many of the companies benefiting most from these structural shifts are operating in the micro and small-cap universe.”

Companies including SKS Technologies (ASX: SKS), Mayfield Group Holdings (ASX: MYG), Southern Cross Electrical Engineering (ASX: SXE) and GenusPlus Group (ASX: GNP) have all benefited from surging investment in hyperscale data centres, power infrastructure and electrical networks.

Order books across these businesses have expanded significantly, improving earnings visibility in a sector not historically known for it.

Australia’s ongoing electrification program, covering transmission upgrades, renewable energy projects and rising electricity demand from data centres, is expected to extend that tailwind for years.

Finding quality before the market does

Many ASX small caps receive little or no broker research coverage. Ellerston treats that as an advantage.

The firm employs a research-intensive, bottom-up approach, using frequent company meetings, deep industry analysis and fundamental research to identify quality businesses before they attract broader attention.

The team also runs a deliberately capacity-constrained strategy.

“We’ve deliberately built these funds around investment performance rather than gathering assets under management,” Barker said. “Being capacity constrained allows us to invest in businesses much earlier in their growth journey and build meaningful positions before they become too large for many institutional investors.”

SKS Technologies illustrates the approach. Ellerston first invested in July 2024 at around $1.30 per share. The company has since benefited from surging demand linked to AI infrastructure and hyperscale data centres, delivering significant earnings growth.

Discipline when conditions shift

FY26 demonstrated how quickly market leadership can rotate. Early in the financial year, falling interest rates and improving housing activity supported consumer-facing businesses including Autosports Group (ASX: ASG) and Cedar Woods Properties (ASX: CWP).

Three consecutive rate rises later in the year prompted the team to reduce exposure to more economically sensitive companies.

Portfolio Manager Jack Briggs says the process stays grounded in fundamentals rather than macro calls.

“Our investment process starts with identifying quality businesses. If the fundamentals change, we’ll adjust our portfolio accordingly.”

Other high-conviction holdings include Wagners Holding Company (ASX: WGN), a multi-year opportunity the team links to Queensland’s population growth and the Brisbane 2032 Olympic Games, and Shape Australia (ASX: SHA), a fit-out and refurbishment business the team identified as consistently misunderstood by a market categorising it alongside higher-risk construction peers.

The entry point may not last

After several years of underperforming large caps, ASX small caps are trading below their long-term relative valuation against the ASX 200.

Ellerston believes that gap, combined with strengthening structural growth themes, makes the current moment a rare entry point for long-term investors.

“Investors looking beyond the ASX 20 aren’t simply buying smaller companies,” Barker said. “They’re accessing businesses exposed to some of the fastest-growing parts of the Australian economy. For active investors prepared to do the research, that’s where we believe many of Australia’s future market leaders will be found.”