Lincoln International Releases Proprietary Q2 2021 Middle Market Index

Private Credit Market Experiences Continued Competition

In the second quarter of 2021, the Lincoln Middle Market Index (Lincoln MMI) grew by 5.6%, with the last two quarters representing the strongest six-month growth in the Lincoln MMI’s history. This compares to the historical quarterly average growth of the Lincoln MMI of 1.9%. Strong fundamental performance contributed to the large majority of this growth with EBITDA multiples remaining at record high levels of 10.9x, approximately 1.0x above the historical average, and relatively stable over the first quarter.

“Fundamentals have been strong for the Lincoln MMI,” noted Steve Kaplan, Neubauer Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, who assists and advises Lincoln on the Lincoln MMI. “LTM EBITDA growth has driven the Lincoln MMI to a record level.”

The robust performance of private companies expanded on the momentum experienced in Q1 with over half of companies tracked growing their year-to-date revenue and EBITDA relative to the prior year. Moreover, while 2021 company budgets were anticipating a 7.5% increase in EBITDA over 2020, actual performance for the first six months is ahead of these budgets by 4.0%. This outperformance was evident across all major industries covered by the Lincoln MMI, including the highly pandemic-impacted consumer and industrials industries.

“Private companies benefitted from booming demand one year after the economy largely shut down as a result of the pandemic,” stated Ron Kahn, Managing Director and Co-head of Lincoln International’s Valuations & Opinions Group. “And as we sit at the halfway point of the calendar year, portfolio companies have so far exceeded their forecasts set earlier in the year.”

The Private Credit Markets Remain Hot

Robust valuations, exceedingly strong fundamental performance and a potential for tax law changes have propelled mergers and acquisitions, refinancings and dividend recapitalization activity in 2021 to record levels.

With a watchful eye to invest in resilient businesses, stark competition remains strong among lenders with Lincoln observing leverage levels and spreads reverting back to, and in some instances, becoming more attractive than pre-COVID levels. Given these trends, lender hold sizes have proven to be a differentiator. Based on a subset of data collected from Lincoln’s proprietary database, Lincoln observed average lender hold sizes of new originations in Q2 2021 of $62.2 million, which compares favorably to the $39.5 million observed during the height of COVID in 2020. Notably, in the first half of 2021, Lincoln observed multiple unitranche deals over $1.0 billion, with at least one topping out at $2.5 billion.

As strength in portfolio company performance persisted, the Lincoln default rate, which measures the number of covenant breaches in a given quarter on a size-weighted basis, reached a three-year low of 3.1%. This compares to 9.4% at the height of the pandemic. Despite this and the competitive environment, lenders continued to demonstrate discipline with equity cushions remaining stable at approximately 40% and average leverage levels of 4.8x, aligning with the historical three-year average level of 5.0x.

“2021 has largely been a period of exceedingly positive private company performance and a competitive private lending market. Yet, a myriad of questions are mounting, including how and if inflationary pressures will impact gross profit margins and if supply chain shortages will have long-lasting effects on vendor selection,” added Kahn. “However, if we use the first half of the year as any indication, if companies continue to overcome these issues and the variant does not cause any unforeseen shutdowns, there is no end to the upward sloping Lincoln MMI in sight.”

For more information, visit An Overview of the Lincoln Middle Market Index.

About the Lincoln Middle Market Index

The Lincoln MMI is the only index that tracks changes in the enterprise value of U.S. privately held middle market companies—primarily those owned by private equity firms. With the Lincoln MMI, private equity firms and other investors can benchmark private companies’ performance against their peers and the public markets.

This index is differentiated from other indices as it (1) tracks enterprise values of private middle market companies over time; (2) is based on valuations rather than executive surveys; and (3) covers a wide sampling of companies across a range of private equity firms’ portfolios.

The Lincoln MMI seeks to measure the variation in middle market companies’ enterprise values by analyzing the aggregate change in company earnings as well as the prevailing market multiples for approximately 500 middle market companies each generating less than $100 million in annual earnings. The index is calculated using anonymized data on an aggregated basis by Lincoln’s Valuations & Opinions Group, which has distinctive insights into the financial performance of thousands of portfolio investments of financial sponsors, business development companies and private debt funds.

The methodology was determined by Lincoln in collaboration with Professors Steven Kaplan and Michael Minnis of the University of Chicago Booth School of Business. While other indices track changes to a company’s revenue or earnings, the Lincoln MMI is different in that it tracks the total value of these companies. Significantly, the large number of middle market companies used to create the Lincoln MMI helps ensure that the confidentiality of all company-specific information used in the Index is maintained.

Important Disclosure

The Lincoln Middle Market Index (“LMMI”) is an informational indicator only, and does not constitute investment advice or an offer to sell or a solicitation to buy any security. It is not possible to directly invest in the LMMI. Some of the statements above contain opinions based upon certain assumptions regarding the data used to create the LMMI, and these opinions and assumptions may prove incorrect. Actual results could vary materially from those implied or expressed in such statements for any reason. The LMMI has been created on the basis of information provided by third-party sources that are believed to be reliable, but Lincoln International has not conducted an independent verification of such information. Lincoln International makes no warranty or representation as to the accuracy or completeness of such third-party information.

The LMMI should not be construed as an offer to sell or buy, or a solicitation to sell or buy, any products linked to the performance of the LMMI.  The use of the LMMI in any manner, including for benchmarking purposes, is not endorsed or recommended by Lincoln International and Lincoln International is not responsible for any use made of the LMMI.  Lincoln International does not guarantee the accuracy and/or completeness of the LMMI and Lincoln International shall not have any liability for any errors or omissions therein.  None of Lincoln International, any of its affiliates or subsidiaries, nor any of its directors, officers, employees, representatives, delegates or agents shall have any responsibility to any person (whether as a result of negligence or otherwise) for any determination made or anything done (or omitted to be determined or done) in respect of the LMMI and any use to which any person may put the LMMI.  Lincoln International has no obligation to update the LMMI, and has no obligation to investors with respect to any product based on the performance of the LMMI.  Any investment in such a product will not acquire an interest in the LMMI.  Lincoln International is not an investment adviser and will not provide any financial advice relating to a product linked to the performance of the LMMI.  Investors should read any such product offering documentation and consult with their own legal, financial and tax advisors before investing in any such product.