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Total interest income for private credit firms has steadily included a greater share of payment in kind (PIK) since 2021, reaching 11% of outstanding private credit loans in Q2 2026. However, lending standards have tightened in 2026, and private credit lenders are experiencing increased negotiating power when negotiating deals. As a result, many private credit lenders are responding to fears of a rising shadow default rate by clamping down on PIK options and other loan sweeteners.

Brian Garfield, Lincoln International Managing Director & Global Head of Portfolio Valuations, shared his insights with the Wall Street Journal.

“This is an evolution we are seeing unfolding now,” said Brian. “The pendulum is shifting.”

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The aerospace and defense sector has seen increased interest from private equity in recent years, and Navy-focused targets have seen the sharpest uptick in 2026. Five key trends are drawing private equity interest, including a historic rebuilding of the domestic Naval industrial base, a fragmented supplier base, a large Naval budget, high barrier to entry and the opportunity to modernize the fleet through AI and technology solutions.

Ryan O’Toole and Eric Cartier, Managing Directors and co-heads of aerospace and defense, shared their insights with PE Hub.

“Within the Navy procurement offices, price is not the primary decision driver,” said Ryan. “This affords acquirers the comfort of knowing that a business will typically not find themselves in a situation of having their work be ‘bid down’ during their ownership. This ‘stickiness’ is a sought-after attribute and driver of M&A value.”

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Lincoln International, a global investment banking advisory firm, announced today that the Lincoln Private Market Index (LPMI), an index that tracks changes in the enterprise value of U.S. privately held companies, increased by 1.9% in Q2 2026, recovering most of its 2.2% decline in Q1. The increase was driven by EBITDA growth, which more than offset modest enterprise value multiple contraction. By comparison, S&P 500 enterprise values increased by 14.8% during the quarter, while S&P 500 enterprise values excluding the Magnificent 7 increased by 15.4%.

The scale of the public-market rebound was driven primarily by faster-than-expected AI adoption and deployment, alongside broader optimism around the technology. While the rally extended beyond the “Magnificent Seven” for the first time in some time, many of the strongest-performing sectors (including semiconductors, power and cooling infrastructure and industrial companies tied to data-center investment) benefited directly or indirectly from AI spending, which contributed to a rapid expansion in public market valuations as investors priced in stronger future growth.

Conversely, the LPMI’s growth was primarily driven by current operating performance, as the LPMI is not subject to the same volatility as the public market repricings as seen in Q1 and Q2 and therefore rebounded to a smaller magnitude compared to the S&P 500 enterprise values after the Q1 drawdown. Finance and technology companies led the way with year-over-year EBITDA growth of 8.5% and 6.5%, respectively, and although industrial companies displayed the lowest year-over-year EBITDA growth, the impact to deal activity may be limited as industrial companies exhibited the least exposure to AI and technology-driven disruption.

“Q2 marked a return to the LPMI’s long-term pattern: private company enterprise value growth was driven by operating performance, not multiple expansion,” 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 LPMI. “The public market’s much larger gain likely reflected a rapid repricing of future growth expectations across AI infrastructure and adjacent sectors. Private markets did not participate to the same extent, but they also did not experience the same degree of volatility.”

Private Company Fundamentals Strengthened as Multiples Remained Disciplined

Private company performance strengthened in Q2. The percentage of companies reporting year-over-year revenue growth increased to 70.7% from 69.6% in Q1, while the percentage reporting EBITDA growth rose to 64.0% from 62.4%. The magnitude of growth also accelerated, with year-over-year revenue growth increasing to 6.9% in Q2 from 6.5% in Q1, and EBITDA growth increasing to 5.6% from 4.7%. For context, the 6.9% revenue growth rate was well above the 3.5% year-over-year increase in the Consumer Price Index (CPI), suggesting that aggregate top-line growth was not solely attributable to price inflation. Furthermore, EBITDA adjustments declined to 23.2% of adjusted EBITDA from 24.3% in Q1, indicating an improvement in the quality of reported earnings.

However, stronger performance did not translate into more aggressive valuations for new deals. The average enterprise value multiple for new buyouts was 12.0x EBITDA for the first half of 2026, below the 12.8x average enterprise value multiple for new buyouts for the first half of 2025 but still above the long-term average of 11.5x. This decline in entry multiples also reflects a shift in deal mix, as investors have increasingly pursued lower-multiple sectors such as industrials over higher-multiple sectors such as software.

Software Fundamentals Held Steady, but Leverage Drove Valuation Dispersion

Software fundamentals held steady following Q1’s enterprise value multiple-driven valuation reset. Year-over-year revenue growth edged up to 6.8% in Q2 from 6.6% in Q1, while EBITDA growth moderated slightly to 6.5% from 6.6%, indicating that software kept pace with broader private company performance. As expected, the Q1 repricing reflected anticipatory longer-term disruption risk more than a change in near-term results and outlook.

Loan valuations further showed that the market is differentiating among software credits rather than applying one sector-wide conclusion. Average fair values were 99.0% of par for software loans with LTVs below 35.0% and 97.8% for loans with LTVs between 35.0% and 50.0%, both relatively stable from Q1. By contrast, the average fair value of software loans with LTVs above 50.0% declined by 1.6% to 87.1% of par. The most important dividing lines are therefore business quality and capital structure: the durability of the product’s value proposition, recurring customer demand, retention and pricing power; the extent to which AI enhances or substitutes for the offering; and the amount of equity cushion available to absorb volatility.

“Q2 reinforces that adjustments to software valuations are not one size fits all,” noted Ron Kahn, Managing Director and Co-Head of Lincoln International’s Valuations & Opinions Group. “The relevant distinction is not simply vertical versus horizontal. It is whether a company has a durable value proposition, recurring customer demand and a capital structure that can absorb volatility. Lower-LTV software credits remained well protected, while weaker and more highly levered businesses continued to be marked more selectively.”

Credit Metrics Remained Stable as Lenders Work Through Legacy Stress

At the portfolio level, private credit conditions remained broadly healthy. The size-weighted covenant default rate declined to 2.7% in Q2 from 3.1% in Q1, well below the 3.9% six-year average, primarily driven by improved private company performance and more active portfolio management among direct lenders. That said, Lincoln also evaluated PIK usage to assess credit health, which remained largely steady: PIK interest was present in 11.1% of loans and represented 11.3% of total interest income when considering second-lien and junior debt, compared with 10.8% and 11.9%, respectively, in Q1. Bad PIK (defined as investments with no PIK interest at close but with PIK interest today) was present in 55.4% of loans with PIK in Q2 compared to 55.7% in Q1, or 6.2% of all loans, which may also be viewed as shadow default rate, compared to 5.9% in Q1.

Collectively, the data suggest stable credit performance rather than either a broad improvement or deterioration, though pockets of stress remain. Lincoln observed additional lender-control activity during Q2, with lenders foreclosing on $22.3 billion of pre-takeover principal in the first half of 2026, nearly matching the $24.2 billion recorded for all of 2025. The activity remains concentrated in older credits: 70.0% of pre-takeover principal involved 2021 and 2022 vintage buyouts, many underwritten at higher entry multiples and leverage levels. The quantum of debt being taken over by lenders is materially outpacing not just 2025 but all of recent memory, reflecting a paradigm shift in the relationship between sponsors and lenders as these foreclosures were nearly nonexistent all but a few years ago.

Amid the potential stress, along with taking over companies, lenders are looking to generate liquidity in other ways, like turning to the secondary market. Following Q1 pressure on BDCs and other liquidity-sensitive direct lenders, Lincoln observed a meaningful increase in private loans being traded before maturity. As discussed in Lincoln’s July 2026 article, “Direct Lending’s New Price Discovery: What Rising Secondary Trading Activity Means for Valuations, Liquidity and Market Transparency,” investor liquidity demands, among other factors, are creating a broader set of observable transaction data via secondary market trades. Importantly, most trades observed by Lincoln to date have involved instruments valued above 95% of par, often close to par, suggesting that the increase in trading reflects liquidity and portfolio management needs rather than credit concerns.

“Most borrowers continue to service their debt and broad stress metrics remain contained, while a discrete group of older or more levered credits is moving toward lender takeover or sale,” noted Kahn. “The increase in secondary trading is making that differentiation more observable. It is creating liquidity and price discovery, but market participants still need to understand the context behind each trade before treating it as definitive evidence of fair value.”

The Income Cushion Remains Substantial

While the analyses in the prior section illustrate potential signs of stress and the search for liquidity, they do not necessarily describe systemic risk or the overall health of private credit markets. More specifically, private credit does not require perfect credit performance to generate a positive return, as losses are inevitable. To illustrate this, Lincoln performed a levered return analysis, which analyzes what combination of recovery and default rates achieve a zero IRR (i.e., investors recoup their principal but do not get any return).

Under the market-based assumptions reflected in Lincoln’s levered return analysis, which are a 5-year loan with a 1.50% original issue discount (OID), S+5.00% pricing and S+2.00% cost of debt to the fund with 50% leverage, a portfolio would need to experience 9% of cumulative principal loss before its IRR fell to zero. As an example, and as pictured below, that loss level could result from a 12% cumulative default rate at a 25% recovery rate. For the avoidance of doubt, these scenarios are not forecasts; rather, they illustrate the severity of defaults and losses required to fully offset the contractual income generated by a private credit portfolio, assuming no meaningful contribution from equity co-investments.

“Private credit is not immune to losses, and the increase in takeovers should not be dismissed,” noted Kahn. “But the asset class can absorb meaningful defaults and losses, to the point where recoveries are more important than defaults because often times, recoveries can offset defaults. Although current observations suggest the market is far off from the illustrated scenarios in the levered return analysis, if it ever were to come up, the key questions would be where the stress is concentrated and how actively lenders manage it.”

About the Lincoln Private Market Index

The LPMI tracks changes in the enterprise value of U.S. privately held companies — primarily those owned by private equity (PE) firms. With the LPMI, PE firms and other investors can benchmark private companies’ performance against their peers and the public markets.

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 1,800 private companies, each generating less than $250 million in annual earnings. The index is calculated using anonymized data on an aggregated basis by Lincoln’s Valuations & Opinions Group.

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 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.

About Lincoln International

We are trusted investment banking advisors to business owners and senior executives of leading private equity firms and their portfolio companies and to public and privately held companies around the world. Our services include mergers and acquisitions advisory, private funds and capital markets advisory, and valuations and fairness opinions. As one tightly integrated team of more than 1,400 professionals in more than 30 offices in more than 14 countries, we offer an unobstructed perspective on the global private capital markets, backed by superb execution and a deep commitment to client success. With extensive industry knowledge and relationships, timely market intelligence and strategic insights, we forge deep, productive client relationships that endure for decades. Connect with us to learn more at www.lincolninternational.com.

Important Disclosure

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

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The S&P Lincoln Senior Debt Indices combine Lincoln’s proprietary valuation data with one of the industry’s largest private credit datasets, supported by S&P DJI’s expertise in index design, administration and governance. The enhanced series enables investors to analyze performance across more granular market categories, including industry sectors such as industrials, technology and healthcare, as well as categories based on loan size and company earnings, while maintaining the independent, rules-based methodology of the flagship indices. S&P DJI is the sole publisher, calculator, administrator, and licensor of the index family.

“In private credit, better visibility is a strategic advantage,” said Cameron Drinkwater, Chief Product & Operations Officer at S&P Dow Jones Indices. “Moving the S&P Lincoln Senior Debt Index Series to monthly reporting gives market participants more timely insight into a fast-growing market that has historically lacked frequent, independent benchmarks.”

“Investor expectations for transparency within private markets are at an all-time high,” added Ron Kahn, Managing Director and Co-Head of Lincoln International’s Valuation and Opinions Group. “By moving to monthly reporting and expanding S&P Lincoln Senior Debt Index Series with sub-indices covering key industry sectors and different borrower size categories, we’re providing subscribers with more frequent, independent benchmarks that better reflect performance within the direct lending market throughout the year.”

S&P DJI and Lincoln International expect to continue expanding the breadth of the index family and developing additional tools that bring greater transparency and benchmarking capabilities to the evolving private markets ecosystem. To learn more about this index, please click here.

For more information about S&P Dow Jones Indices private markets solutions, please visit spglobal.com/spdji/en/landing/investment-themes/private-markets.

S&P Global remains focused on delivering comprehensive solutions for investors navigating private markets, through trusted private markets data, analytics, and insights. To learn more, please click here.

The expanded index series builds on Lincoln International’s longstanding leadership in private market valuations and proprietary market data. Drawing on one of the industry’s largest private credit datasets, Lincoln provides independent market insights that help investors benchmark performance, assess risk and better understand evolving private credit markets. For more information about Lincoln International, please visit lincolninternational.com.

About S&P Dow Jones Indices

S&P Dow Jones Indices is the largest global resource for essential index-based concepts, data and research, and home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. More assets are invested in products based on our indices than products based on indices from any other provider in the world. Since Charles Dow invented the first index in 1884, S&P DJI has been innovating and developing indices across the spectrum of asset classes helping to define the way investors measure and trade the markets. S&P Dow Jones Indices is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies, and governments to make decisions with confidence. For more information, visit: www.spglobal.com/spdji.

The U.S. S&P Lincoln Senior Debt Index and the Europe S&P Lincoln Senior Debt Index are products of S&P Dow Jones Indices LLC or its affiliates (“S&P DJI”) and Lincoln Partners Advisors LLC and its affiliates. S&P®, S&P 500®, SPX®, SPY®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Lincoln International and the Lincoln Senior Debt Index are service marks owned by Lincoln International, LP and its affiliated entities. Investment products based on S&P DJI’s indices are not sponsored or sold by S&P DJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the indices.

This press release contains forward-looking statements, including statements regarding the parties’ expectation to continue expanding the index family and to develop additional tools intended to bring greater transparency and benchmarking capabilities to the private markets ecosystem. These statements reflect the parties’ current expectations and are subject to risks and uncertainties—including the ability to develop and launch new products, market acceptance, competition, data availability, regulatory developments, and general market conditions—that could cause actual results to differ materially. Forward-looking statements speak only as of the date of this release, and the parties undertake no obligation to update them except as required by law.

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“Lincoln’s strategic insight, deep understanding of BRUSH’s products and markets, truly unmatched relationships with buyers in the space and unwavering focus on the process execution were instrumental in achieving an outstanding outcome,” said One Equity Partners.

The award recognizes the highest level of performance and standards of excellence within mergers and acquisitions, honoring transactions driven by innovation, strategic execution and leadership. BRUSH attracted substantial interest from both strategic and sponsor buyers, but translating that interest into a premium, executable outcome required a tightly managed process and sustaining competitive tension by leveraging a strong cross-border execution capability.

“It was a privilege to partner with OEP and the BRUSH management team on this transaction,” said Matthew Buck and Andrew Moen, Lincoln International Managing Directors who led the transaction. “We look forward to following BRUSH’s continued growth in what is a pivotal moment for the business and the market.”

One Equity Partners and BRUSH selected Lincoln based on its experience across the energy, power and infrastructure market, global buyer relationships and cross-border execution track record. Lincoln’s tightly managed approach helped maintain business momentum by enabling management to remain focused on operations while engaging only a limited number of high-quality parties, culminating in a decisive and competitive closing process.

The transaction represents a successful realization for One Equity Partners following a multi-year value creation plan and transitions BRUSH to an owner focused on continued investment in the business. The process also delivered meaningful benefits to BRUSH’s stakeholders.

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The commercial legal sector is increasingly welcoming private equity investment as a strategy to address the challenges and opportunities created by AI. Although investing directly into a law firm requires creative transaction structuring, exposure to the legal sector is a growing sponsor priority as AI disruption continues.

“It’s got to the point where it’s tipping over the edge, and people are thinking: ‘We have no choice but to do this,’” said Lewis.

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