Lincoln International Releases Proprietary Q4 2020 Middle Market Index

Despite the challenges stemming from the pandemic, the concerted efforts of private equity funds, private debt lenders and their portfolio company management teams led to a substantial resiliency in private company earnings in 2020. These efforts, together with the expectation of a continuation of strong performance improvement, resulted in enterprise value multiples reaching record highs for the second quarter in a row averaging 10.7x for Q4—0.9x greater than the previous year and 1.7x higher than the historical average. This is according to analysis from Lincoln International based on its proprietary database of over 2,400 portfolio companies primarily owned by private equity firms with median EBITDA of approximately $30 million.

As further evidence of the effective changes management teams and sponsors undertook, despite the fact that revenue decreased 5% between 2019 and 2020, EBITDA grew approximately 6%.

“Looking back as we close the year, most could never have imagined the velocity of the recovery we have witnessed and it most certainly would not have occurred without sponsor and lender support,” noted Ron Kahn, Managing Director and Co-head of Lincoln International’s Valuations & Opinions Group. “Notably, although revenue declined, the increase in earnings resulted from sponsors’ and management teams’ efforts to manage costs amidst the height of the pandemic.”

Lincoln Middle Market Index Reaches All Time High

Results of the Lincoln Middle Market Index (Lincoln MMI) in Q4 2020 illustrated an unprecedented level of enterprise value appreciation, increasing 7.4% from Q3 2020, which was the highest quarter-over-quarter growth in the Lincoln MMI on record since its inception in 2014. This late in the game rally reversed losses experienced through the first nine months of 2020 with the index ultimately showing a 7.3% increase from 2019.

“With the distribution of COVID-19 vaccines, there is now a light at the end of the tunnel, and the private market enterprise valuations are reacting accordingly,” 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. “Interestingly, while most of the growth in the Lincoln MMI in the fourth quarter of 2020 was driven by multiple expansion, earnings growth was a positive contributor to the index for the first time since the onset of the pandemic.”

Enterprise value growth in Q4 2020 was largely industry agnostic with enterprise values in each of the industries tracked in the Lincoln MMI expanding in Q4 2020. Such growth erased losses suffered in 2020 by most businesses—excluding highly COVID-impacted energy companies and those reliant upon large indoor gatherings such as hotels, movie theaters and gyms.

Another measure of the strength of these companies is default rates. Lincoln recently completed an analysis, from a subset of companies in its proprietary database, of default rates, defined as any company not meeting its leverage covenant ratio in the quarter being measured. While default rates averaged approximately 6% in 2018 and 2019, as a result of the pandemic, the rate increased substantially to approximately 10% in Q2 and 9% in Q3 of 2020, respectively. However, again, the continued support by both sponsors and lenders resulted in the default rate falling to 6% in Q4 2020, a further indication of the resiliency of these companies.

Looking Ahead to 2021

On average, companies across all industries are anticipating performance in 2021 to surpass pre-COVID levels. Based on an analysis of approximately 400 portfolio companies’ forecasts, looking ahead to 2021 the average expected revenue and EBITDA growth from 2020 are 11% and 10%, respectively—demonstrating that management teams view the pandemic’s impact on company performance to be disruptive, not destructive.

“A wave of uncertainties, from the timing of a return to offices to the revival of live events, has not passed. Yet, it is evident through record enterprise value levels and projected financial performance that private companies may have endured the worst, and the best is yet to come,” 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 575 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.