Lincoln International Releases Proprietary Q1 2021 Middle Market Index

Private Company Enterprise Value Momentum Continues in Q1 2021 as the Lincoln MMI Climbs to Another Record High

In the first quarter of 2021, the Lincoln Middle Market Index (Lincoln MMI) increased 5.7%, which compared favorably to the S&P 500 which grew 4.2% over the same period. The continued enterprise value growth was driven by a snapback in company performance from COVID lows, which resulted from further vaccine rollouts, and additional government stimulus fueling consumer spending.

“As seen consistently in the Lincoln MMI, we expect fundamentals, rather than multiple expansion, to remain the long-term growth driver in the Middle Market,” 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. “Q1 2021 also represented yet another quarter where growth was not limited to specific industries, with each industry tracked in the Lincoln MMI growing quarter-over-quarter.”

Fundamentals Remain Backbone of Private Company Value

Despite being burdened by highly COVID-impacted months in the first half of 2020, over half of portfolio companies analyzed by Lincoln experienced revenue and EBITDA growth for the full year 2020 compared to 2019. The Q1 2021 enterprise value of private companies continued the market growth experienced in Q3 and Q4 of 2020. However, leverage multiples remained consistent with pre-COVID levels of roughly 5.0x, resulting in higher equity cushions.

Q1 2021 also marked the third consecutive quarter of decline in loan amendments executed since the height of the pandemic, with amendments being cut in half since Q2 2020. And not only did the number of amendments decrease but, the percentage of amendments relating to deferrals of principal and interest and liquidity cures also declined from their pandemic highs, indicating that the days of widespread liquidity shortfalls may be behind us.

Even more interesting than the strong 2020 performance, is the double-digit earnings growth companies are projecting for 2021. From 2020 to 2021, revenue and EBITDA are expected to grow 8.6% and 7.5%, respectively, based on Lincoln’s analysis of a subset of companies in its proprietary database; this is approximately 3x that of the EBITDA growth between 2018 and 2019 of 2.5%.

“The private markets have been resilient over the course of 2020,” noted Ron Kahn, Managing Director and Co-Head of Lincoln International’s Valuations & Opinions Group. “And looking ahead, the train is expected to keep on rolling with private companies projecting growth well above pre-pandemic levels.”

As Growth is Achieved, Multiples to Normalize

Average EBITDA multiples in Q1 equaled Q4’s record of 10.8x, with both quarters being the highest level since 2014 when these statistics were first maintained.  These all-time highs compare to a long-term historical average of 9.9x and were prevalent for every industry, showing the expansiveness of the recovery.

Looking ahead, as the robust projected earnings growth is realized, EBITDA multiples are expected to converge to pre-COVID levels. In fact, the average 2021 forward EBITDA multiple was estimated to be 9.9x, which aligns precisely with the long-term historical average. Unsurprisingly, this reversion is not unique to the private markets as companies in the S&P 500 demonstrate a similar trend. The 2021 forward EBITDA multiple of 14.1x for the S&P 500 compares to a long-term average EBITDA multiple of 14.0x.

It should be noted, however, that the sustainability of enterprise value levels is dependent upon the achievement of projected growth and should growth slow down from its current pace, enterprise values could decline. Conversely, should growth exceed current forecasted levels and multiples continue to revert towards historical norms, further enterprise value growth could be achieved.

“It remains to be seen if projected growth in 2021 will be realized and to what extent. With pent up demand and about one-third of the U.S. fully vaccinated, tailwinds are blowing in private business’ favor, which could result in another banner year for private company valuations” Kahn concluded.

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 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 Lincoln Middle Market Index. Some of the statements above contain opinions based upon certain assumptions regarding the data used to create the Lincoln Middle Market Index, 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 Lincoln Middle Market Index 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.