European Lincoln PMI declines in Q1 but outperforms public markets amid the software-driven sell-off

European Lincoln PMI declines in Q1 but outperforms public markets amid the software-driven sell-off

Lincoln International, a global investment banking advisory firm, announced today that the European Lincoln Private Market Index (PMI), the only index that tracks enterprise values (EV) of Europe’s privately held companies, declined 1.3% in Q1 2026. This marked the first quarterly decline since inception, as multiple contraction more than offset earnings growth. The contraction in Q1 was primarily driven by decreases in the EVs of technology companies following the accelerated pace of AI development and recent public market software sell-off. Technology companies constituted 15% of the European Lincoln PMI but contributed to over 50% of the overall decline this quarter.

Despite the Lincoln PMI’s decrease, private markets continued to demonstrate relative resilience in comparison to the public markets. The FTSE 250 and STOXX 600 EVs declined 5.0% and 2.9%, respectively. As with previous quarters, the return was almost entirely attributed to the impact of changes in EV multiples, which more than offset the positive underlying fundamental performance. Over the last twelve months, the Lincoln PMI’s return of 3.1% beat that of the FTSE 250’s of 2.4%, but it trailed the STOXX 600’s return of 6.1%.

“While private company enterprise values have historically been driven by fundamental performance and near-term expectations of growth, Q1 marked a deviation from that trend for software 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 PMI. “Within the European Lincoln PMI, European software company operating performance, in fact, was positive in Q1. The decline in software valuations was entirely due to lower multiples for such businesses, reflecting market participants’ views of longer-term expectations around AI driven disruption.”

Quarter Highlights:

• This quarter: Multiples had a negative impact, with the median EV multiple for the constituents of the PMI declining from 11.7x in Q4 to 11.5x in Q1. Notably, for technology companies, the median EV multiple declined approximately 1.0x in Q1.
• Earnings: Whilst earnings growth has underpinned the index’s increase since inception, it was not enough to offset the extent of multiple contraction in Q1. However, earnings continue to grow at a steady rate. Across all industries, the percentage of companies reporting year-over-year (YoY) LTM revenue growth declined from 76.4% to 71.1%, and the percentage of companies reporting YoY LTM EBITDA growth declined from 67.4% to 62.8%. Furthermore, the rate of revenue growth was flat at 7.5%, while the rate of average EBITDA growth slowed from 7.1% to 5.8%.
• UK vs. Eurozone: UK company EVs increased 0.7%, outperforming the 1.6% decline in Eurozone company EVs. The Eurozone had greater exposure to declining sectors, such as technology and industrials, and hence was more impacted by multiple compression.
• Sector Highlights:
  • Technology: Technology EVs, which represented 15% of the European Lincoln PMI, declined 6.4% for the quarter, driven by the global software sell-off. Software EVs, specifically, declined 8.3% within the PMI, driven entirely by multiple contraction. There were also declines in the digital media subsector. On the credit side, across European software loans valued by Lincoln in Q1 2026, the average fair value declined by 1.0% of par. There was a clear link between higher LTV deals and a more material trade off in loan prices, with the spread of software loans with an LTV above 45% increasing by 0.49% on average.
  • Consumer: Consumer was the only sector to grow in Q1, increasing +3.3%, rebounding from the decline in Q4. The sector saw strong average earnings growth across all subsectors, but most notably in lifestyle and leisure.
  • Industrials: Industrial EVs declined by 1.8% in Q1, reflecting concerns around the Iran conflict’s impact on energy costs and supply chains. While underlying performance remained resilient, any sustained disruption could translate into more pronounced operational pressures and weaker earnings in coming quarters.
  • Business Services: Business services declined by 1.3%, marking its first decline since early 2023, as AI-related disruption spread into subsectors such as insurance, which is particularly exposed to AI-related risks. Other subsectors experiencing average earnings decline were marketing and information services, while the majority of subsectors experienced average multiple decline.
• Small and Large Businesses: In Q1, small companies (i.e. EBITDA < €30 million) outperformed large companies as stronger earnings growth offset multiple contraction. The impact of multiple contraction was elevated in large companies given the largest constituents of the PMI were particularly concentrated amongst software companies with AI-related risks. The three largest companies within the PMI were software companies and had an average multiple decline of 8.6%.

Deep Dive into Software

Consistent with all the public headlines, the decline in EVs this quarter was primarily driven by weakness in the technology sector, particularly software companies. The results should come as no surprise given the recent global sell-off of public software equities and credits, and fears of AI-disruption to software and Software as a Service (SaaS) companies. AI’s capabilities, investment and adoption have grown significantly and far more quickly than many market participants expected. However, the decline in the software subsector was specifically driven by the impact of multiple contraction rather than earnings, which was positive within the European Lincoln PMI in Q1. While macroeconomic factors such as AI disruption may take time to be reflected in financial results, private companies’ earnings growth overall remained positive in Q1, albeit the rate of growth continued to slow slightly.

Credit Check

Whilst headline metrics appeared positive, some signs of weakness remain. Covenant default rates declined from 1.8% to 1.5%, but this was influenced by the amending or restructuring of several breaches in the prior quarter rather than a fundamental improvement in borrower health, and there were nine new companies that breached covenants in the quarter. The overall proportion of companies utilizing PIK interest declined from 17.1% to 16.2%. However, the percentage of companies that paid cash interest at close before implementing PIK interest (i.e., bad PIK) increased from 7.3% to 7.8%, indicating rising stress among more challenged private companies. For those companies with “bad PIK,” LTV increased 28.5% since transaction close.

Financing Conditions

European private credit markets remain active, with deal flow continuing despite ongoing uncertainty on AI disruption, economic policy shifts and geopolitical uncertainty. Competitive dynamics are still supporting borrower-friendly terms, although lenders are becoming more selective, particularly in software, where underwriting standards have tightened. While spreads remain stable, leverage levels have edged lower as lenders apply greater scrutiny and higher base rates constrain debt capacity. Reflecting this, Lincoln has maintained its spread guidance from March 2026 but reduced the high end of its leverage guidance by 0.25x across unitranche, second lien and subordinated debt structures for all size categories.

The Bottom Line

While private markets have remained resilient, Q1 reflected a shift toward multiple-driven valuation declines offsetting earnings growth, albeit slowing growth, in addition to some persistent credit stress. Together, these trends point to a more cautious market backdrop.
Nick Baldwin, Managing Director in Lincoln International’s European Valuations & Opinions Group, commented, “Q1 marked a notable shift, with the decline in the European Lincoln PMI largely driven by the software-led sell-off and changing market expectations around AI. That said, underlying fundamentals remain robust, with the European Lincoln PMI still supported by positive earnings growth. What we are seeing is a growing divergence, where strong businesses continue to perform, but valuations are adjusting to reflect longer-term uncertainty. As a result, investors are becoming more selective, particularly in sectors most exposed to disruption.”