Private Business Performance Raises Lincoln International Private Market Index to New Heights

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CHICAGO–(COMMERCIAL THREAD) – Growth in the value of private companies continued in the third quarter as the Lincoln Private Market Index (Lincoln PMI), formerly known as the Lincoln Middle Market Index, rose 6.4% in the last quarter. third quarter 2021, the second strongest quarter-over-quarter growth. since its inception seven years ago. This growth is mainly attributable to the strong fundamental performance of private companies, although US economic growth slowed in the third quarter.

In fact, private companies have seen 12-month EBITDA (LTM) grow an average of 4.5% quarter-over-quarter, while enterprise value multiples have only increased by 0.1x since the second quarter of 2021. Despite the moderate quarterly change in enterprise value as a multiple of EBITDA, these multiples reached a record high of 11.0 times EBITDA, exceeding by almost 1.0 times the historical 3-year average.

“The trends observed in the Lincoln PMI in the third quarter of 2021 demonstrate once again that fundamental performance is the long-term driver of growth in company value in private-equity-backed companies,” 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 PMI.

Growth of portfolio companies soars as private company performance accelerates with public company levels

Growth in the value of private market companies was even more robust than growth in the public market in the third quarter of 2021. The values ​​of S&P 500 companies remained stable in the third quarter of 2021; however, a decline in corporate values ​​of the S&P 500 would likely have occurred had it not been for strong operating performance from its components, similar to the trends seen in the Lincoln PMI. To this end, while the average enterprise value multiple of the S&P 500 declined 0.6 times in the third quarter of 2021, LTM EBITDA increased 9.2% during this period. Notably, during the month of October 2021, the values ​​of companies in the S&P 500 rose 5.9%, rebounding from the high volatility observed in the third quarter of 2021, especially in September.

According to an analysis of private companies in Lincoln’s proprietary database, between 2021 and 2020, private companies with EBITDA above $ 150 million outpaced the growth of small private companies during the same period. Since the start of the year, the average growth in revenues and EBITDA of private companies has been 13% and 7% respectively. In addition, these large private companies with EBITDA above $ 150 million grew at an even faster rate as the year cumulative growth on the basis of revenue and EBITDA reached 15% and 13%, respectively. . The growth observed is almost double the levels observed between a strong increase between 2018 and 2019 where revenue and EBITDA only increased by 7% and 3%, respectively, across the entire population of portfolio companies.

“Growing private companies are changing at a breakneck pace,” noted Ron Kahn, managing director and co-head of the Lincoln Reviews and Opinions group. “The growth of private businesses today has almost doubled from the rate of growth before COVID-19. As we wind down 2021, the challenge these companies face is to ensure that supply chain disruptions and barriers to hiring don’t become the limiting factors that slow their progress. ”

Robust private credit market prepares for LIBOR transition

The proliferation of covenant-lite loans, which Lincoln defines as those without financial sustaining covenants (excluding spring loaded covenants), is resurfacing in credit markets as lenders seek to stay competitive. This trend first started in the largely syndicated loan market, but in recent months has spread to the private credit market.

Based on an analysis of private credit loans issued in the third quarter of 2021, Lincoln noted that about 20% of loans had a covenant, and about 50% of additional loans included only one only clause, mainly a leverage clause. In comparison, just half of the loans issued during the pandemic had a restrictive covenant, while a similar percentage had only one restrictive covenant. Despite this easing of covenants, the average leverage multiple was 5.0 times EBITDA, which is in line with the historical average; Similarly, the average equity cushion was 55%, which is above historical average levels due to record company valuations. This is consistent with the results of the Lincoln Senior Debt Index, which was introduced a year ago, as the median loan-to-value ratio was at its lowest level since its inception in 2014.

Additionally, lenders are preparing for the transition of the London Interbank Offered Rate (LIBOR) as the benchmark rate for new issues after December 31, 2021, as US regulators cite any transaction issued after that date as a “security risk.” and solidity ”. Lincoln continues to see a rush to use LIBOR as the base rate on new issues. Based on Lincoln’s analysis of recent transactions in the private credit market, while some larger direct lending agreements are priced based on the Guaranteed Overnight Funding Rate (SOFR), agreement prices based on alternative rates in the private credit market are the exception, not the reign.

Almost all of the loans issued in Q3 2021 analyzed by Lincoln include fallback provisions to deal with the move to an alternative benchmark rate once LIBOR is no longer published in June 2023. Of these new issues, about two-thirds agreements have defined a specific reference rate which is to be used or defined a reference rate which is likely to be used (subject to a choice by the lender). In each case, the SOFR is the benchmark rate defined as the replacement rate or the benchmark rate set if the borrower chooses not to use another acceptable benchmark rate.

“The lack of private market activity related to benchmark rates other than LIBOR is notable at this stage of the transition, especially given the apparent market enthusiasm around SOFR as the preferred replacement rate,” said added Ron Kahn. “As the year draws to a close, it will be interesting to see how lenders account for the difference between LIBOR and SOFR in new arrangements, either through changes in contractual spread requirements or through a spread adjustment. ”

About the Lincoln Private Market Index

The Lincoln PMI, formerly known as the Lincoln Middle Market Index (LMMI), is the only index that tracks the evolution of the enterprise value of US private companies, primarily those held by private equity firms. With the Lincoln PMI, private equity firms and other investors can benchmark the performance of private companies against their peers and the public markets.

This index differs from other indices because (1) it tracks the corporate values ​​of private companies over time; (2) is based on evaluations rather than surveys of executives; and (3) covers a broad sample of companies across a range of private equity firm portfolios.

The Lincoln PMI seeks to measure the change in the values ​​of private companies by analyzing the overall change in corporate profits as well as prevailing market multiples for approximately 700 private companies each generating less than $ 100 million in annual profits. The index is calculated using anonymized data on an aggregated basis by Lincoln’s Valuations & Opinions Group, which has distinctive insight into the financial performance of thousands of portfolio investments from financial sponsors, development companies commercial and private debt funds.

The methodology was determined by Lincoln in collaboration with Professors Steven Kaplan and Michael Minnis of the Booth School of Business at the University of Chicago. While other indexes track changes in a company’s income or profit, the Lincoln PMI is different in that it tracks the total value of those companies. Significantly, the large number of private companies used to create the Lincoln PMI helps ensure that the confidentiality of all company-specific information used in the index is maintained.

Important disclosure

The Lincoln Private Market Index is for informational purposes only and does not constitute investment advice, an offer to sell or a solicitation to buy any securities. It is not possible to invest directly in the Lincoln Private Market Index. Some of the above statements contain opinions based on certain assumptions about the data used to create the Lincoln Private Market Index, and those opinions and assumptions may prove to be incorrect. Actual results could differ materially from those implied or expressed in these statements for any reason. The Lincoln Private Market Index was created based on information provided by third party sources believed to be reliable, but Lincoln International has not independently verified this information. Lincoln International makes no warranties or representations as to the accuracy or completeness of this third party information.

About Lincoln International

We are trusted investment banking advisers to business owners and senior executives of leading private equity firms and public and private companies around the world. Our advisory services include mergers and acquisitions and capital market advice for the mid-market. We also provide fairness assessments and opinions and joint venture advisory services. As a tightly integrated team of more than 700 professionals in 16 countries, we offer a clear perspective, supported by superb execution and a deep commitment to the success of our clients. With deep industry knowledge and relationships, timely market intelligence, and strategic insight, we forge deep and productive customer relationships that last for decades. Connect with us to find out more at www.lincolninternational.com.


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