CHICAGO–(BUSINESS WIRE)–In the first quarter of 2021, the Lincoln Middle Market Index (Lincoln MMI) rose 5.7%, which compares favorably to the S&P 500 which rose 4.2% over the same period. Continued growth in business value was driven by a setback in business performance from COVID lows, which resulted from new vaccine rollouts, and additional government stimulus fueling consumer spending.
“As seen regularly in the Lincoln MMI, we expect fundamentals, rather than multiple expansion, to remain the driver of long-term growth in the middle market,” said Steve Kaplan, Neubauer Emeritus Professor of Entrepreneurship and Finance. at the University of Chicago Booth School. of Business, which assists and advises Lincoln on the Lincoln MMI. “The first quarter of 2021 also marked another quarter where growth was not limited to specific sectors, with each sector tracked in the Lincoln MMI increasing quarter over quarter.
Fundamentals remain the backbone of private enterprise value
Despite being weighed down by heavily impacted months by COVID in the first half of 2020, more than half of portfolio companies analyzed by Lincoln reported full-year revenue and EBITDA growth 2020 vs. 2019. Private company enterprise value in the first quarter of 2021 continued market growth. in the third and fourth quarters of 2020. However, leverage multiples remained consistent with pre-COVID levels of around 5.0x, resulting in higher capital buffers.
The first quarter of 2021 also marked the third consecutive quarter of decline in loan modifications executed since the height of the pandemic, with modifications having been cut in half since the second quarter of 2020. And not only have the number of modifications decreased, but the percentage changes relating to deferrals of principal, interest and liquidity remedies have also declined from their pandemic highs, indicating that the days of widespread liquidity shortages may be behind us.
Even more interesting than the strong performance in 2020 is the double-digit earnings growth the companies expect for 2021. From 2020 to 2021, revenue and EBITDA are expected to grow 8.6% and 7.5%, respectively based on Lincoln’s analysis of a subset of companies in its proprietary database; this is around 3x that of EBITDA growth between 2018 and 2019 of 2.5%.
“Private markets have held up well through 2020,” noted Ron Kahn, Managing Director and Co-Head of the Valuations & Opinions Group, Lincoln International. “And going forward, the train is set to keep rolling, with private companies predicting growth well above pre-pandemic levels.
As growth is achieved, the multiples to normalize
Average Q1 EBITDA multiples matched the Q4 record of 10.8x, with both quarters the highest level since 2014, when those stats were first held. These all-time highs compare to a long-term historical average of 9.9x and were widespread across industries, showing the magnitude of the recovery.
Going forward, as the expected robust earnings growth materializes, EBITDA multiples should converge to pre-COVID-19 levels. In fact, the average forward EBITDA multiple for 2021 has been estimated at 9.9x, which is precisely the long-term historical average. Unsurprisingly, this reversion is not unique to private markets, as S&P 500 companies are showing a similar trend. The 2021 forward EBITDA multiple of 14.1x for the S&P 500 compares to a long-term average EBITDA multiple of 14.0x.
It should be noted, however, that the sustainability of company value levels depends on the achievement of projected growth and if growth were to slow from its current rate, company values could fall. Conversely, if growth were to exceed current expected levels and multiples continued to return towards historical norms, further growth in the value of the business could be realized.
“Whether and to what extent the projected growth in 2021 will materialize remains to be seen. With pent-up demand and about a third of the United States fully vaccinated, tailwinds are blowing in favor of private companies, which could lead to another banner year for private company valuations,” Kahn concluded.
For more information, see 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 middle-market US private companies, primarily those held by private equity firms. With the Lincoln MMI, private equity firms and other investors can benchmark the performance of private companies against their peers and the public markets.
This index differs from other indices because it (1) tracks the enterprise values of private mid-market companies over time; (2) is based on assessments rather than executive surveys; and (3) covers a broad sample of companies across a range of private equity firm portfolios.
The Lincoln MMI seeks to measure the change in enterprise values of mid-market companies by analyzing the overall change in company earnings as well as prevailing market multiples for approximately 500 mid-market companies each generating less than $100 million. annual profits. The index is calculated using anonymised data on an aggregated basis by Lincoln’s Valuations & Opinions Group, which has distinctive insight into the financial performance of thousands of portfolio investments from financial sponsors, development companies commercial and private debt funds.
The methodology was determined by Lincoln in conjunction with Professors Steven Kaplan and Michael Minnis of the University of Chicago Booth School of Business. While other indexes track a company’s revenue or profit, the Lincoln MMI is different in that it tracks the total value of those companies. Significantly, the large number of mid-market companies used to create the Lincoln MMI helps ensure that the confidentiality of all company-specific information used in the index is maintained.
The Lincoln Middle Market Index is an informational indicator only and does not constitute investment advice or an offer to sell or solicitation to buy any securities. It is not possible to invest directly in the Lincoln Middle Market Index. Some of the above statements contain opinions based on certain assumptions regarding the data used to create the Lincoln Middle Market Index, and such opinions and assumptions may prove to be incorrect. Actual results could differ materially from those implied or expressed in these statements for any reason. The Lincoln Middle Market Index was created based on information provided by third party sources believed to be reliable, but Lincoln International has not independently verified this information. Lincoln International makes no warranties or representations as to the accuracy or completeness of such third-party information.