Lincoln Middle Market Index exhibits strong rebound in Q1 2019 with persistent earnings growth

CHICAGO, May 28, 2019 /PRNewswire/ -- Lincoln International ("Lincoln"), a leading global investment banking advisory firm, today released the Q1 2019 issue of its proprietary Lincoln Middle Market Index ("Lincoln MMI").

The Lincoln MMI is a first-of-its-kind index measuring changes in the enterprise values of private middle market companies over time—a barometer for the performance of private middle market companies generally. The Lincoln MMI enables private equity firms and other investors to benchmark how private company investments are performing against peers, and how this performance correlates to the public markets (i.e., S&P 500).

Highlights:

• On an enterprise value basis, the Lincoln MMI is up 5.6% year-over-year; S&P 500 is up 7.8%
• Private company values continue to show less volatility than public companies
• All industry sectors increased in Q1 2019; energy industry experiences first quarter of growth since Q1 2018, while healthcare shows the largest increase in value at 6.8% over Q4

In Q1 2019, both the Lincoln MMI and S&P 500 erased their Q4 2018 losses; however, the Lincoln MMI did so through persistent earnings increases, while S&P gains stemmed primarily from increasing valuation multiples. 

Interestingly, while both indexes since inception show comparable growth in enterprise values, private equity owned companies traditionally have more leverage than public companies and, therefore, generate relatively greater equity gains.  The Lincoln MMI also showed that while private company values are correlated to the public markets, private company values exhibit much less volatility in valuations than public companies. 

Professor 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 Lincoln MMI stated, "Both the middle market and public markets recovered nearly all of the value lost as a result of market decline during Q4 2018. However, whereas the recovery in the public markets was predominantly driven by higher valuation multiples, the middle market's recovery was largely driven by earnings growth."

Positive Trends Across Sectors
Notably, every industry tracked by the Lincoln MMI showed increases in enterprise value over Q1, something that has occurred only four times since the inception of the Index. Coincidently, each prior instance of this increase in value across all industries also took place in the first quarter, indicating a trend of strong performance in the beginning of each year. 

Healthcare gains of 6.8% over the prior quarter were the most significant, as the sector continues its general immunity from market disruption and economic cyclicality. Companies in the sector performed well against a backdrop of regulatory change and increasing focus on quality, outcomes based care.

For the first time in a year, the energy sector experienced its first, albeit nominal, quarterly increase in enterprise value of 0.6%. Investor confidence has been bolstered by stable, consistent growth in oil prices over the past two years as well as by the country's continued focus on energy independence and continuous technology and innovation around exploration and production efficiencies.

Economic Cycle Impacting Growth
The data forming the Lincoln MMI comes from a data base of approximately 1,100 to 1,500 private equity backed companies valued by Lincoln every quarter. Lincoln computes the Lincoln MMI on a dollar weighted basis. However, an analysis of all companies on an equally weighted basis shows a different story. The actual number of companies experiencing quarter-over-quarter increases in revenues was 62%, compared to just 48% of companies experiencing quarter-over-quarter increases in earnings. This phenomenon has been consistent for the last several years and demonstrates that while the overall portfolio of private equity companies continues to show growth, the majority of private companies continue to struggle in this economic cycle. 

Ron Kahn, Managing Director and head of Lincoln's Valuations & Opinions Group, stated, "Given the considerable impact of the middle market on the American economy, it is both incredibly important and a key positive indicator that the middle market rebounded so quickly. That every industry grew, and that growth was fueled by positive earnings trends, is a strong sign for the economy. However, the fact that this growth is coming from only half of the companies in Lincoln's database also shows that many middle market companies continue to wrestle with trying to achieve growth in a relatively low growth environment."

Graph 1: Lincoln MMI vs. S&P 500 (Enterprise Value)
Starting with a value of 10,000 as of March 31, 2014, the Lincoln MMI stands at 13,544 (as of March 31, 2019), reflecting a compound annual growth rate of 6.3%—versus 14,400 for the S&P 500, or a gain of 7.6%. 

For more information, visit
www.lincolninternational.com/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 U.S. privately held middle market companies—primarily those owned by private equity firms. With the Lincoln MMI, private equity 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 middle market companies over time; (2) is based on valuations rather than executive surveys; and (3) covers a wide sampling of companies across a range of private equity firms' portfolios.

The Lincoln MMI seeks to measure the variation in middle market companies' enterprise values by analyzing the aggregate change in company earnings as well as the prevailing market multiples for approximately 450 middle market companies each generating less than $100 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 Lincoln MMI is different in that it tracks the total value of these companies. Significantly, the large number of middle market companies used to create the Lincoln MMI helps ensure that the confidentiality of all company-specific information used in the Index is maintained.

About Lincoln International
We are trusted investment banking advisors to business owners and senior executives of leading private equity firms and public and privately held companies around the world. Our advisory services include mergers and acquisitions and capital markets advisory for the mid-market. We also provide valuations and fairness opinions and joint ventures advisory services. As one tightly integrated team of more than 500 professionals across 15 countries, we offer an unobstructed perspective, 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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Important Disclosure
The Lincoln Middle 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 Middle Market Index. Some of the statements above contain opinions based upon certain assumptions regarding the data used to create the Lincoln Middle 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 Middle 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.

SOURCE Lincoln International LLC

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