Lincoln International Releases Proprietary Q4 2019 Middle Market Index

Lincoln International reports steady middle market growth

Even as the enterprise value performance across the middle market reached all-time highs during the fourth quarter, Lincoln International (Lincoln), a leading global investment banking advisory firm, finds that the magnitude of growth has remained relatively stagnant, although a focus on fundamentals and industry selection continues to increase. This is according to the Lincoln Middle Market Index (Lincoln MMI), released today, which measures changes in the enterprise values of private middle market companies over time.

For the fourth quarter, the Lincoln MMI grew by 1.7%, the fourth consecutive quarter where gains were observed. Consistent with last quarter, despite the positive momentum overall, the magnitude in growth remained at relatively low levels. Ron Kahn, Co-Head of Lincoln’s Valuations and Opinions practice explained, “While the Lincoln MMI grew in aggregate during 2019, the disparity in growth between cyclical and non-cyclical industries became increasingly apparent. With the Lincoln MMI reaching record levels in aggregate, the modest yet steady increase in earnings has led to cautious optimism among investors and lenders.”

An analysis of fundamental performance illustrates that even while more than half of portfolio companies are growing revenue and EBITDA across Lincoln’s proprietary database of over 1,800 portfolio companies, the magnitude of earnings growth, has slowed in four of the last six quarters. Moreover, positive growth trends can be isolated to higher cash flowing industries such as Technology, Healthcare and Business Services, whereas a lower or even negative growth can be observed in cyclical industries such as Industrial and Energy.

“Consistent with our prior observations, the public markets was predominantly driven by higher valuation multiples whereas the middle market’s performance continues to be largely driven by earnings growth.” 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.

And while the index reaches all-time highs, the earnings utilized to determine enterprise value include adjustments to EBITDA. We have observed that measures to control for how much of adjusted earnings should be accepted has evolved. Approximately half of credit agreements observed by Lincoln in 2019 have instituted caps on add-backs; this compares to 2017 when only a third of credit agreements instituted a cap. This is a sign of precautionary measures taken by lenders to protect against an eventual correction.

“As we close the books on 2019, with consistent performance in the Lincoln MMI and record level of dry powder in the marketplace, private equity firms and lenders alike are deploying capital judiciously. And as the public markets react to the impact of the Coronavirus, companies throughout the globe are scrambling. As this story unfolds, one begins to question its impact on the private markets and whether the Lincoln MMI will continue its upward sloping trend.” Ron Kahn added.


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 475 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.


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