Lincoln International Releases Proprietary Q2 2020 Middle Market Index

Sponsors and lenders remain supportive of their portfolio companies as the impacts of COVID-19 persist

Liquidity becomes focal point as portfolio companies feel the effects of the pandemic while middle market valuations recover a portion of their pandemic losses

As the initial shockwaves of the global pandemic subside, middle market sponsors and lenders have proven supportive of their portfolio companies as the financial challenges caused as a result of stay-at-home orders began to crystalize, according to analysis from Lincoln International, a leading global investment banking advisory firm, based on its proprietary database of over 2,100 portfolio companies primarily owned by private equity firms with median EBITDA of approximately $30 million.

This is evidenced across a subset of approximately 450 portfolio companies wherein 67 breached their leverage covenant, a 50% increase relative to 2019 levels. In addition, only one was taken over by its lenders. Flexibility among lenders was attributed, in part, to portfolio companies prioritizing debt service and sponsors remaining supportive. Moreover, of this population of portfolio companies, over 120 received capital infusions from sponsors, demonstrating a continued desire to help these companies bridge through a challenging period.

“The fact that you can  count on one hand the number of companies that have been taken over by lenders during this time shows that alternative investors have proven themselves benevolent players which genuinely believe in the long-term value and potential of their portfolio companies,” explained Ron Kahn, Managing Director and Co-Head of Lincoln International’s Valuations & Opinions Group. “When push came to shove, alternative investors stood behind their businesses, helping these companies achieve their strategic goals and contribute to the economy.”

Measuring Portfolio Company Liquidity Needs Proves to be a Top Priority

The pandemic is having a material effect on company operations with over half experiencing declines in revenue for Q2 2020 compared to Q2 2019. As a result of these headwinds, year-to-date earnings are being negatively impacted and, for the time being, investors have pivoted to tracking liquidity, as opposed to estimating add-backs to EBITDA for perceived one-time hits to earnings. In this climate, where there is little consensus on how to accurately pinpoint earnings, investors have changed their barometer for evaluating companies. To this notion, liquidity covenants—which were virtually unheard of before March—are becoming more prevalent in loan agreements today. Moreover, of the total of new deals and amendments to credit agreements observed by Lincoln, approximately one-third had a liquidity covenant, whereas only 5 percent added an explicit COVID-based adjustment to EBITDA.

“Given the times we are in, investors are evaluating the best way to measure portfolio company performance and, while earnings play a role, it’s better to evaluate short-term company health based on liquidity to ensure they have enough cash to bridge through this period without defaulting on their obligations” added Kahn.

Middle Market Rebounds but Remains Below Pre-COVID Levels

Despite evolving market conditions and a degree of uncertainty, middle market company enterprise values rose 3.5 percent in the second quarter, bringing valuations near to levels at the close of 2019. This is according to the Lincoln Middle Market Index (Lincoln MMI), which measures changes in the enterprise values of private middle market companies over time based on a subset of Lincoln’s proprietary database, primarily owned by private equity firms.

Recovery in Q2 has not been as pronounced as the banner quarter seen in the S&P 500, however overall Middle Market performance did not decline as much as the S&P 500 in Q1.  For the first six months of 2020, the Lincoln MMI decreased 4.3 percent compared to the S&P decline of 0.1 percent. However, the S&P 500 rally in Q2 was largely driven by the five largest constituents: Apple, Microsoft, Amazon, Google, and Facebook which comprise more than 22 percent of the S&P 500. Excluding these five, which are generally not comparable to middle market businesses, the year-to-date S&P decline would have been 5.6 percent, which is greater than the Lincoln MMI year-to-date decline of 4.3 percent.

When digging into the results, the disparity in performance between industry becomes evident. Although Consumer companies rebounded 3.2 percent after declining 8.9 percent in Q1, there was a significant split between those with an online or ecommerce focus as compared to traditional restaurant and retail which continue to face headwinds. Similarly, the healthcare and technology segments recovered almost all of their declines from Q1. “Private equity investors likely had not previously considered pandemic resiliency as a key underwriting consideration. Now it’s become very important and low-COVID impact segments like ecommerce, healthcare, and technology saw valuations rebound more quickly.” added Professor 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.

As private markets recover, and amendments and capital infusions percolate, sponsors and lenders anticipate recovery as early as the end of 2020 in some segments of the market, with the recovery expected to take longer for heavily impacted businesses. “As new coronavirus case levels rise across the country on the heels of states’ reopening, the outlook of private company earnings recovery remains cloudy. What continues to be evident however, is that sponsors and lenders have supported their companies through the pandemic thus far, however their continued support is uncertain.” 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 over 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.


  • As the initial shockwaves of the global pandemic subside, middle market sponsors and lenders have proven supportive of their portfolio companies as the financial challenges caused as a result of stay-at-home orders began to crystalize, according to analysis from Lincoln International, based on its proprietary database of over 2,100 portfolio companies primarily owned by private equity firms with median EBITDA of approximately $30 million.

  • Click here to download the full LMMI report.


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