Lincoln International launches Europe’s first private credit market quarterly benchmark

Private credit returns in Europe outperform broadly syndicated loan market over last five years

London, 10 April, 2024. Lincoln International has launched Europe’s first private credit market quarterly benchmark, the Lincoln European Senior Debt Index (Lincoln ESDI). The Lincoln ESDI provides a comprehensive and unique private credit market overview spanning five years and is constructed from hundreds of valuations across a wide cross section of private credit managers, in order to provide a direct comparison with European publicly traded debt indices.

Lincoln International already publishes a U.S. Senior Debt Index, which provides a 10-year view of the market. Lincoln’s indices are based on its proprietary data from valuing over 5,000 private companies quarterly, most of which are owned by private equity and levered via the private lending market. Lincoln’s indices are independently peer reviewed by the Faculty of Finance at the University of Chicago Booth School of Business.

The Lincoln ESDI shows that quarterly private credit returns have been attractive in Europe over the past five years compared to the broadly syndicated loan market, especially when considering the median returns of both indices (8.1% Lincoln ESDI versus 4.9% ELLI) compared to their respective return volatilities.

As of the end of the fourth quarter, average European five-year yields (9.2% Lincoln ESDI versus 5.9% ELLI) and fair values (97.5% Lincoln ESDI versus 95.3% ELLI) in private credit within the Lincoln ESDI Index have remained significantly higher and with a lower standard deviation of returns than equivalent public indices.

Richard Olson, Managing Director of Lincoln International’s European Valuations & Opinions Group, said: “Until now there has been no comprehensive quarterly measure of the European private credit industry. Lincoln International is pleased to fill that gap with our index, which provides far greater visibility and understanding of illiquid private credit markets and enables us to benchmark private credit performance.”

Ron Kahn, Chicago-based co-head of Lincoln International’s Global Valuations & Opinions Group, added: “Clients greatly value our U.S. Senior Debt Index and the reaction to our European index has already been very positive. With the demand for the performing European private credit continuing to grow strongly within a global market set to increase more than 60% to reach €2.1 trillion in five years, we are very pleased with the valuable contribution we can make to the market with our indices.”

Comparing Lincoln International’s European Senior Debt Index to Public Credit Markets

• Lincoln’s European Senior Debt Index (Lincoln ESDI) is 148.5 as of 31 December 2023, representing a compound annual growth rate of 8.1% since 2018, compared to 4.3% for the European Leveraged Loan Index (ELLI).
• Average annual Lincoln ESDI yields over the past five years exceeded the ELLI by 3.3%, and show an average excess fair value of 2.2% over the same period as of 31 December 2023.
• The Lincoln ESDI shows lower return volatility for private credit than broadly syndicated loans, particularly during the COVID lockdown period and the subsequent period of higher interest rates and inflation.
• The complete rebound in valuations during COVID took one quarter for the Lincoln ESDI versus one year for the ELLI.

Comparing Lincoln International’s European and U.S. Senior Debt Indices

• Private credit lending returns and yields in Lincoln’s Senior Debt Indices have been highly correlated between the U.S. and Europe for the past five years, based on valuations performed by Lincoln International’s Valuation & Opinions Group.
• European direct lending quarterly returns over the past five years on average have benefited from higher OIDs and spreads, but have seen lower base rates, leading to +12bps higher quarterly returns for Europe compared to the U.S. (OIDs being higher), but +35bps higher quarterly yields for the U.S. (base rates being higher).
• COVID lockdowns impacted the fair values of U.S. private credit securities to a greater extent than in Europe.
• European private credit borrowers have historically been smaller than the U.S. (€29 million LTM EBITDA in Europe compared to €46 million in the U.S. as of 31 December 2023).

About the Lincoln Private Market Index & Lincoln Senior Debt Index

The LPMI is the only index that tracks changes in the enterprise value of U.S. privately held companies—primarily those owned by PE firms. With the LPMI, private equity (PE) 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 companies over time, (2) is based on valuations rather than executive surveys and (3) covers a wide sampling of companies across a range of PE firms’ portfolios.

The LPMI seeks to measure the variation in private companies’ enterprise values by analyzing the aggregate change in company earnings as well as the prevailing market multiples for approximately 1,500 private companies of the more than 5,000 the firm values quarterly.  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 LPMI is different in that it tracks the total value of these companies. Significantly, the large number of private companies used to create the LPMI helps ensure that the confidentiality of all company-specific information used in the index is maintained.

Further, in 2020, Lincoln launched the LSDI which provides insight into the direct lending market as a fair value index tracking the total return, price, spread and yield to maturity of direct lending securities. The index is developed using much of the same data as the LPMI and the methodology was determined by Lincoln in collaboration with Professor Pietro Veronesi of the University of Chicago Booth School of Business.