Valuations of private middle-market companies rose significantly in the second quarter, contributing to record growth for the first half of the year, according to the Lincoln Middle Market Index.
The Lincoln MMI grew 5.6% in the second quarter, after increasing 5.7% in the first quarter. This compares to a historical quarterly average growth of 1.9%.
The previous two quarters represent the strongest six-month growth in the Lincoln MMI's history. Lincoln International LLC's index tracks the enterprise values of more than 1,800 privately owned middle-market companies for roughly 100 private equity sponsors and lenders.
EBITDA multiples have retained record levels in the meantime, and companies are tracking ahead of budgets, Lincoln noted.
"The robust performance of private companies expanded on the momentum experienced in Q1 with over half of companies tracked growing their year-to-date revenue and EBITDA relative to the prior year," the Lincoln MMI said.
"Strong fundamental performance contributed to the large majority of this growth with EBITDA multiples remaining at record high levels of 10.9x, approximately 1.0x above the historical average, and relatively stable over the first quarter," Lincoln said.
According to the Lincoln MMI, company budgets in 2021 were anticipating a 7.5% increase in EBITDA over 2020, but actual performance for the first six months exceeded these budgets by 4.0%.
"This outperformance was evident across all major industries covered by the Lincoln MMI, including the highly pandemic-impacted Consumer and Industrials sectors," Lincoln said.
"Private companies benefitted from booming demand one year after the economy largely shut down as a result of the pandemic," stated Ron Kahn, co-head of Lincoln International's Valuations & Opinions Group.
"And as we sit at the halfway point of the calendar year, portfolio companies have so far exceeded their forecasts set earlier in the year."
In another measure of the health of these companies, defaults have reached a three-year low of 3.1%. This compares to 9.4% at the height of the pandemic. The Lincoln MMI default rate measures covenant breaches in a quarter on a size-weighted basis.
"Despite this, and the competitive environment, lenders continued to demonstrate discipline with equity cushions remaining stable at approximately 40% and average leverage levels of 4.8x, aligning with the historical 3-year average level of 5.0x," Lincoln noted.