Results

European Lincoln PMI Decreased for the First Time since Inception, Declining -1.3% Despite Continued Positive Earnings Growth

(NOTE:The Lincoln PMI, STOXX 600 and FTSE 250 EV returns above reflect enterprise values)
(Index EVs exclude financial institutions and real estate for which enterprise value is generally not meaningful; however, including such companies produces similar results)

Consistent with public market headlines, the decline in EVs this quarter was primarily driven by weakness in the technology sector, which represented 15% of the European Lincoln PMI and contributed to over 50% of the overall decline. The pressure in the sector was driven by software companies, reflecting the recent global sell-off of public software equities and credits and concerns around AI disruption to software and Software as a Service (SaaS) businesses. 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 driven by multiple contraction rather than earnings, which remained 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 with the rate of growth continuing to slow slightly.

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, whilst the majority of subsectors experienced average multiple decline.

Industrial EVs declined 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 pressure in coming quarters.

Meanwhile, consumer was the only sector to grow in Q1, rebounding from the decline in Q4. The sector saw strong average earnings growth across all subsectors but most notably in lifestyle and leisure.

Credit Conditions: Some Signs of Weakness Remain

* Q4 ‘25 (Pro Forma) excludes borrowers that were classified as Fail/Holiday in Q4 ‘25 but whose status was subsequently remediated through covenant
amendments or restructured in Q1 ‘26.

** As per the prior quarter, 1 large issuer made up a significant portion of defaults between Q1 ‘25 and Q3 ‘25.

While headline metrics appeared positive, some signs of weakness remain. Covenant default rates declined from 1.8% to 1.5%; however, this was influenced by the amending or restructuring of several breaches in the prior quarter rather than a fundamental improvement in borrower health, with 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.

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.”

Methodology

The Index is calculated using anonymized data on an aggregated basis by Lincoln’s Valuations & Opinions Group, which has unique insights into the financial performance of thousands of portfolio investments across a variety of investment vehicles, including private equity and private debt funds. All figures are quoted in and based on calculations in local currencies, however Lincoln also prepares the index on a single-currency basis to account for FX impacts. Lincoln applied the same methodology to public indices to allow a like-for-like enterprise value comparison between the Index, the FTSE 250 and the STOXX 600.

Academic Advisors

Professor Steven Kaplan

Professor Steven Kaplan is a Senior Advisor to Lincoln’s Valuations & Opinions Group. He is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance and Kessenich E.P. Faculty Director at the Polsky Center for Entrepreneurship and Innovation at the University of Chicago Booth School of Business. Among other courses, Professor Kaplan teaches advanced Master of Business Administration and executive courses in entrepreneurial finance and private equity, corporate finance, corporate governance and wealth management. Professor Kaplan conducts research on a wide array of issues in private equity, venture capital, corporate governance, boards of directors, mergers and acquisitions and corporate finance. He has been a member of the Chicago Booth faculty since 1988.

Professor Kaplan serves on the board of Morningstar and several fund and company advisory boards. He is also a Research Associate at the National Bureau of Economic Research.

Professor Kaplan received a Bachelor of Arts, summa cum laude, in applied mathematics and economics from Harvard College and earned a Doctor of Philosophy in business economics from Harvard University.

Professor Michael Minnis

Professor Michael Minnis is a Senior Advisor to Lincoln’s Valuations and Opinions Group. He is the Deputy Dean for Faculty and Fuji Bank and Heller Professor of Accounting at the University of Chicago Booth School of Business, where he researches the role of accounting information in allocating investment efficiently by both managers and capital providers. His recent research focuses on understanding the role of privately held companies in the U.S. economy and how these firms use financial reporting to access, deploy and manage capital. He particularly enjoys identifying unique data and methods to empirically examine issues in a novel way.

In January 2018, Professor Minnis became a member of the Private Company Council, the primary advisory council to the Financial Accounting Standards Board (FASB) on private company issues. Professor Minnis received his Ph.D. from the University of Michigan and his B.S. from the University of Illinois, where he graduated with Highest Honors.

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