#United States #Chicago #credit risks #Lincoln International #Private Market Index

Lincoln Private Market Index Update

In the third quarter of 2026, the Lincoln Private Market Index (LPMI) recorded an increase of 2.8%, reflecting sustained earnings growth within private companies. This performance, although commendable, is shadowed by rising credit risks in private markets. The index, maintained by Lincoln International, evaluates the enterprise value changes of U.S.-based privately held companies, primarily those owned by private equity firms.

Performance Overview

During Q3 2026, the earnings growth of private entities played a pivotal role in driving the LPMI. Notably, while the S&P 500 saw a 3.8% increase in enterprise values, excluding performance from the top seven firms—often referred to as the Magnificent 7—showed a decline of 2.8%. Steve Kaplan, a finance professor at the University of Chicago Booth School of Business, commented that this pattern reinforces the trend of enterprise value growth being fundamentally linked to company performance rather than fluctuating market multiples.

Healthy Earnings Amid Tightening Conditions

Data indicates that 72% of analyzed companies reported revenue growth year-over-year, with an average increase of 7%. Similarly, 64% reported EBITDA growth averaging 5%. This growth trajectory suggests resilience, especially in sectors like software, which maintained similar performance metrics from the previous quarter. However, uneven exposure to transformative technologies like AI and varying operational resilience mean not all software firms are faring alike.

Interestingly, new buyout valuations remained stable, with the average enterprise value multiple for buyouts recorded at 12.1 times EBITDA. This figure aligns closely with previous periods while exceeding the long-term average of 11.5. Such consistent valuations amidst varying economic conditions could signal promising opportunities for investors.

Credit Metrics and Risks

While private credit performance is generally stable, signs of stress are visible. The size-weighted covenant default rate decreased from 2.7% to 2.5%, well below the six-year average. However, caveats remain regarding the potential impacts on cash flows and refinancing opportunities for borrowers. One troubling indicator is the use of Payment-in-Kind (PIK) loans, which envelop financial stress; in Q3, 10% of loans involved PIK, echoing underlying vulnerabilities in certain sectors.

The analysis suggests that credit risk may be exacerbated by the increasing loan-to-value ratios, raising concerns about potential defaults, especially as some companies may struggle to comply with traditional payment structures. Although the default rate seems promising, indicators such as 'Bad PIK' suggest a lurking financial strain that could manifest as broader liquidity issues.

The Shadow of Rising Interest Rates

The recent surge in interest rates, including a 25 basis point increase by the Federal Reserve in September, complicates the funding landscape. Higher borrowing costs risk diminishing cash flow for many firms, resulting in a tighter operational environment.

Although these rates bolster lenders' returns by increasing interest income, they simultaneously elevate the debt service burden on borrowers. This dual pressure necessitates that private equity firms maintain a fine line between leveraging advantageous financing conditions while safeguarding against potential economic headwinds.

Conclusion: Navigating Future Challenges

Overall, despite promising earnings growth among private companies, the intricate balance of rising interest rates, credit risks, and varying sector vulnerabilities will require astute navigation by both investors and borrowers. The shifting dynamics in private markets underscore the need for ongoing assessment and adaptive strategies to thrive within an evolving economic framework. The LPMI remains a critical tool for benchmarks and future projections, highlighting its essential role among private equity investors aiming for sustainable growth.

About Lincoln International

Lincoln International is a renowned investment banking advisory firm, focused on serving business owners, private equity firms, and organizations globally. With over 1,400 professionals across 30 offices, Lincoln offers expertise in mergers, acquisitions, valuations, and overall advisory services, affirming its commitment to facilitating enduring client relationships and success.