While the full extent of tariffs and broader macroeconomic uncertainty may not yet be felt, private companies exhibited solid earnings growth once again in Q2

Lincoln International, a global investment banking advisory firm, announced today that the Lincoln Private Market Index (LPMI), the only index that tracks changes in the enterprise value of U.S. privately held companies, increased by 2.5% during the second quarter of 2025, driven by steady growth in EBITDA as enterprise value multiples remained approximately steady since Q1. When comparing the LPMI to the public markets, the LPMI underperformed the S&P 500 in Q2. The S&P 500 increased 10.6%, though the S&P 500 excluding the “Magnificent Seven” was more muted, increasing only 6.2%. Both increases were driven primarily by multiple expansion, likely due to investor optimism due to a deferral of the tariffs announced on “Liberation Day.”

However, while the increase in the LPMI was modest compared to the increase in public markets in Q2, the LPMI did not experience the same losses that public markets did in Q1, underscoring the private markets’ stability compared to the public markets. As a result, for the first six months of 2025, the LPMI increased 4.8%, whereas the S&P 500 increased 4.4%, and the S&P 500 excluding the “Magnificent Seven” increased 5.8%, with the LPMI’s growth being primarily driven by earnings growth.

“Despite the public markets generating a higher increase than private markets in Q2, the private markets have continued to increase, driven by steady earnings growth in the first half of 2025,” said 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 LPMI. “As we have seen since the LPMI’s inception, fundamental performance remains the key driver of value in the private markets, rather than short-term valuation multiple volatility.”

Revenue and EBITDA Continue to Grow, but Equity Value Creation Remains a Question

Consistent with the first quarter of 2025, roughly two-thirds of private companies tracked by Lincoln grew revenue and EBITDA. Most notably, the share of companies growing EBITDA continued to expand well above the historical average, demonstrating the resilience of the private markets amid macro uncertainty. Additionally, adjusted EBITDA increased 6.3% during the last 12 months and continued to be primarily driven by the technology and business services industries, which respectively saw 9.2% and 7.0% increases in adjusted EBITDA since Q2 2024. However, when evaluating the quality of earnings growth, it is important to recognize that the vast majority of companies report adjustments to their earnings and that these adjustments to EBITDA constitute approximately 24% of earnings.

Primarily, because of the high degree of adjustments coupled with higher base rates, EBITDA has not translated into free cash flow which is available to repay outstanding borrowings. For every vintage year since 2019, Lincoln observed an increase in leverage from the inception of a deal to Q2 of approximately 0.5x, the exact opposite of expectations for sponsor-led buyouts. This increase in leverage makes it more challenging for a sponsor to exit an investment at an attractive IRR or, for that matter, to refinance a capital structure at this higher level.

While Valuation Multiples Remain Below Record 2021 Levels in Aggregate, Higher-Quality Deals Are Fetching a Premium

Enterprise valuation multiples for new buyouts have decreased from peak levels in 2021 of 12.6x EBITDA to 11.9x based on a rolling 18-month basis. This is despite recent deals for the highest quality assets closing at premium multiples. These premium transaction multiples were recorded as high as nearly 25.0x, indicating that the deals getting done are generally for the best companies and industries and are not representative of the entire private market, as evidenced by the rolling 18-month enterprise valuation multiple decrease from peak levels.

Notably, they were not bifurcated by size of the company but rather industry, and most of the premium transaction multiples were observed within business services and technology. The elevated valuations for high-quality companies have been fueled by sponsors’ ample availability of capital amid pressure to deploy capital. In addition, debt financing remains robust as direct lenders are sitting on high amounts of dry powder and are hungry for high quality buyout opportunities to deploy into.

“Private markets are evolving in interesting ways—EBITDA continues to grow, driven by the hottest sectors, but whether these companies are creating equity value for investors remains the big question,” noted Ron Kahn, Managing Director and Co-Head of Lincoln’s Valuations and Opinions Group. “Sponsors have a significant appetite not only to exit existing holdings and return capital to investors but also deploy capital, which is driving the highest-quality deals garnering such high transaction multiples. The catalysts that will bring broader mergers and acquisitions back, whether they be more favorable interest rates, increased comfort surrounding current macroeconomic uncertainty, tariff confirmation or anything else, have not perpetuated in the market quite yet.”

Credit Markets Remain Competitive: Will the Dam Break?

Despite a short pause in early April immediately following “Liberation Day,” the direct lending market remained competitive in Q2. Lincoln observed spreads for the highest-quality deals fall in line with, or in some cases even tighter than, those seen pre-Liberation Day, with spreads averaging S+4.50% - S+5.50%. Additionally, original issue discounts (OIDs) have continued to remain historically tight, averaging just 1.00% - 1.50%, and with some deals lacking OID entirely as lenders compete on terms to get deals across the finish line.

Competition was perhaps most prevalent at the higher end of the market for companies with enterprise values of $1 billion or higher, where competition with the Broadly Syndicated Loan (BSL) market is highest. For this cohort of companies, Lincoln observed approximately 38% of new buyouts being done in the direct lending market thus far in 2025, compared to just 14% of deals in 2018. All the while, there have been numerous recent headlines of large direct lending deals that have been or are expected to be refinanced by a BSL facility.

Because of this competition coupled with improved operating performance, the average fair value of loans in the Lincoln Senior Debt Index (LSDI) increased to 98.9%, up 0.2% since Q1 and above the historical average of 97.8%. However, the LSDI registered a quarterly return of 2.3%, an increase of just 0.1% since Q1 2025, and continued to approximate the lowest return since Q4 2022. Furthermore, the index’s yield continued to decrease from 10.5% in Q1 2025 to 10.1% in Q2 2025, driven by competitive pressures on spreads for the highest quality deals and increased competition with the BSL market.

Despite the competition to deploy capital, lenders are wrestling with weaker borrowers lingering on their books, particularly those with deals done during 2021 and 2022 which represent over 50% all the companies Lincoln values. Lincoln has continued to observe higher covenant defaults, elevated use of PIK interest and lenders taking over businesses from sponsors. More specifically, size-weighted covenant defaults increased from 2.9% in Q1 2025 to 3.4% in Q2 2025, though a higher default rate may be disguised by significant amendment activity to avoid potential defaults.

As a result, the use of PIK interest may be a better indicator of stress. Lincoln saw that PIK interest is present in 11% of all deals it values, and, of those deals, 53% had bad PIK (i.e., PIK was not elected or available at close but is now being utilized). This translates to a “shadow default rate” of 6%, which may be more indicative of the health of private credit. This rate is further corroborated by the fact that the average loan-to-value (LTV) for companies with bad PIK was 45% at inception, compared to an average 83% today, a clear sign of stress. This current “shadow default rate” of 6% compares to 2% back in 2021.

Furthermore, in the last six months, Lincoln has seen more sponsors become unwilling to support their portfolio companies, a clear delineation from prior years. Whether it is due to sponsors’ fatigue over supporting these companies for the last four years, concern about investing good money after bad when there is no longer equity value or the unavailability of capital due to the fund’s life cycle, there have been some cracks starting to form in the relationships between private sponsors and direct lenders. Lincoln has observed lenders with $21 billion of pre-takeover principal gaining control of businesses thus far in 2025, which is more than the amount of pre-takeover principal for such transactions from 2019 through 2024 combined.

Lastly, if hold periods have increased, and most borrowers have seen an increase in leverage across the aforementioned vintages, one might ask if there is an upcoming maturity wall for direct lending. The short answer is likely no. Most loans in Lincoln’s proprietary database do not mature until 2028 or later, as a number of loans from the earlier vintages noted above have already been extended either via a refinancing or an amend and extend from the existing lenders. These refinancing and amend and extend transactions will likely continue so long as fixed charge remains adequate, as lenders value their relationships with sponsors and will likely allow them additional time to exit so long as they continue to receive their contractual coupons and have a blueprint to an exit down the road.

“Despite these pockets of stress, in large part, borrowers continue to perform well and have consistently been able to cover their fixed charges,” noted Kahn. “With the ample capital available in private markets and lenders’ need to deploy capital, I would be surprised if the increased competition to win mandates does not continue in the near future.”

About the Lincoln Private Market Index & Lincoln Senior Debt Index

The LPMI is the only index that tracks changes in the enterprise value of U.S. privately held companies—primarily those owned by private equity (PE) firms. With the LPMI, PE 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 companies over time, 2) is based on valuations rather than executive surveys and 3) covers a wide sampling of companies across a range of PE firms’ portfolios.

The LPMI seeks to measure the variation in private companies’ enterprise values by analyzing the aggregate change in company earnings as well as the prevailing market multiples for approximately 1,500 private companies, each generating less than $250 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 LPMI is different in that it tracks the total value of these companies. Significantly, the large number of private companies used to create the LPMI helps ensure that the confidentiality of all company-specific information used in the index is maintained.

Further, in 2020, Lincoln launched the LSDI, which provides insight into the private credit market as a fair value index tracking the total return, price, spread and yield to maturity of private credit securities. The index is developed using much of the same data as the LPMI, and the methodology was determined by Lincoln in collaboration with Professor Pietro Veronesi of the University of Chicago Booth School of Business.

Important Disclosure

The Lincoln Private 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 Private Market Index. Some of the statements above contain opinions based upon certain assumptions regarding the data used to create the Lincoln Private 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 Private 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.

About Lincoln International

We are trusted investment banking advisors to business owners and senior executives of leading private equity firms and their portfolio companies and to public and privately held companies around the world. Our services include mergers and acquisitions advisory, private funds and capital markets advisory, and valuations and fairness opinions. As one tightly integrated team of more than 1,000 professionals in more than 25 offices in more than 15 countries, we offer an unobstructed perspective on the global private capital markets, backed by superb execution and a deep commitment to client success. With extensive industry knowledge and relationships, timely market intelligence and strategic insights, we forge deep, productive client relationships that endure for decades. Connect with us to learn more at www.lincolninternational.com.

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