Lincoln International, a global investment banking advisory firm, announced 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 2.3% during the first quarter of 2025, driven by steady growth in EBITDA as enterprise value multiples decreased approximately 0.1x since Q4 2024. When comparing the LPMI to the public markets, the LPMI outperformed the S&P 500 in Q1 2025 as the S&P 500 decreased 5.6%, though the S&P 500 excluding the “Magnificent Seven” was more muted, declining only 0.4%. Both decreases were driven primarily by multiple contraction, likely due to investor apprehension and uncertainty surrounding recessionary fears.
Revenue & EBITDA Performance Sheds Positive Light in Q1 2025, but is Equity Value Appreciating?
In Q1 2025, 68% and 62% of private companies tracked by Lincoln demonstrated revenue and EBITDA growth, respectively, which increased from 67% and 58%, respectively, in Q4 2024. Additionally, the percentage of those companies that demonstrated EBITDA growth in Q1 2025 is the highest percentage of companies that demonstrated EBITDA growth since Q2 2022.
While the majority of companies grew, growth was relatively flat for companies with EBITDA greater than $50 million and increased from -0.1% to 2.8% for smaller companies. Furthermore, EBITDA growth was concentrated to a few specific industries, namely technology, businesses services and consumer; more specifically within consumer, residential services, restaurants and fitness clubs.
“Private markets have proved to be resilient over time,” 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. “However, slowing growth coupled with potential tariff or broader recessionary impacts could lead to a drag on valuations.”
Despite the increase in earnings, private companies are still not generating enough cash flow to pay down debt. Lincoln observed an increase in leverage from the inception of the deal to Q1 2025 of approximately 0.5x across every deal vintage dating from 2019 to 2023. This increase in leverage could be driven by several factors, including lower-than-expected synergy realization from add-on activity and lower fixed charge coverage as a result of continued elevated base rates, among others. Should tariffs be fully implemented and affect company earnings, these leverage trends could worsen, further impacting private company valuations and sponsor hold periods.
Atop of this, enterprise valuation multiples for new buyouts, based on a rolling 15-month basis have declined from peak levels in 2021 of 12.6x to 11.7x. And despite recent deals closing at higher multiples, the deals capable of closing are for a finite pool of the highest-quality companies and not representative of the entire private market.
“The private market story unfolding afront of us is fascinating—positive EBITDA growth continues but just is not great enough to de-lever portfolio companies,” noted Ron Kahn, Managing Director and co-head of Lincoln’s Valuations and Opinions Group. “To think that total equity value is not appreciating puts a fine point on why the private market M&A stalemate continues. And now, we are layering in additional uncertainty given tariffs. No one in the private markets likes uncertainty, and it isn’t an ingredient to aid in the return of robust deal activity.”
Lincoln Senior Debt Index Declines as Covenant Defaults and PIK Usage Increase
With portfolio companies’ fundamental performance holding up, the average fair value of loans in the Lincoln Senior Debt Index (LSDI) as of Q1 2025 approximated the historical average at 98.7%, down 0.1% since Q4 2024. While debt valuations remained healthy, the LSDI registered a quarterly return of just 2.2%, the lowest return since Q4 2022, in line with a decrease in the index’s yield from 10.7% in Q4 2024 to 10.5% in Q1 2025. This decrease was driven both by competitive pressures on spreads as well as a slight decline in SOFR.
Furthermore, the size-weighted covenant default rate of direct lending deals increased from 2.4% to 2.9% in Q1 2025, although it remained below the historical four-year average of 3.2%. This lower-than-expected default rate was likely due to two primary factors: the prevalence of amendments preempting or waiving defaults and elevated paid-in-kind (PIK) interest.
As it pertains to PIK interest, the percentage of debt investments tracked by Lincoln that had some element of PIK interest increased to 11% compared to just 7% in Q4 2021. While PIK interest remained a competitive lever to pull in certain situations, the prevalence of so-called “bad PIK” (i.e., PIK interest added to loans that did not get done originally with PIK interest) increased over that same timeframe with 6% of deals having “bad PIK” in Q1 2025, an increase from just 2% in Q4 2021. This percentage of borrowers with “bad PIK” may also be viewed as a “shadow default rate” and may be a better measure of troubled loans. While not all “bad PIK” borrowers are distressed, as a sign of the poor performance of these borrowers, LTV for these deals increased from 49% at close of the investment to 86% in Q1.
In the most extreme examples of stress wherein sponsors have already gone back to the table with numerous amendments, equity injections and PIK elections, fatigue has elevated to a pace where sponsors are handing over the keys to lenders. More specifically, in the last six months, Lincoln observed transactions wherein companies had approximately $17 billion of aggregate debt outstanding prior to being taken over by the lenders. In about half of those situations, the companies had sponsor infusions as recently as 2024. Furthermore, of the $17 billion of debt, approximately $14 billion was related to companies in the 2021 or 2022 vintages, which made up around 70% of these transactions.
Liberation Day’s Impact on the Private Markets
On April 2, 2025, dubbed “Liberation Day” by President Trump’s administration, the U.S. imposed new universal tariffs of 10% on all imports, with additional country-specific tariffs impacting over 100 countries and the most significant tariffs imposed on China, Vietnam and India, among others. The tariffs intensified global trade tensions and sparked debate over the long-term impact on inflation, supply chains and international relations. Since that time, the uncertainty surrounding the macroeconomic environment and growing recessionary fears, private market mergers and acquisitions activity grinded to a halt. In short, portfolio companies are being forced to constantly reevaluate their business plan as the extent of tariffs changes. For deals that were agreed to prior to Liberation Day, in almost all instances, terms were unchanged as lenders value the relationships they have with sponsors too much to nickel and dime on terms. However, for any deals being negotiated post-Liberation Day, lenders are requiring an incremental 0 to 50 basis points of spread to account for the heightened uncertainty and thus higher risk across the private markets, leading to unitranche financings being completed at spreads of S+4.75% to S+5.75% for borrowers with $40 million to $100 million of EBITDA.
Digging deeper, the widening is not uniform across all companies. For those with no impact or low impacts from tariffs, spread widening ranged from zero basis points to 15 basis points. For those companies with medium to high impacts, spread widening was 25 basis points or more. Larger companies generally fared better with widening of zero basis points to 25 basis points, with smaller companies seeing widening closer to 25 to 50 basis points. This bifurcation due to size is a result of market participants indicating that this is where the highest quality and most competitive deals remain. All of this being said, while tariff exposure may be limited in certain instances, recessionary pressures would likely be more far-reaching and ultimately impact the fundamental performance of all companies, not just those with greater tariff exposure, and would trickle down to pricing on loans.
However, because of the ample availability of capital in the direct lending market along with sponsors’ pressure to both deploy capital and exit existing investments, there is a subset of companies that are seeing heightened demand in light of the broader market slowdown. For A++ companies in lower tariff-impacted industries such as technology-enabled services and business-to-business services, interest from potential buyers is high, and lenders are competing to win the mandate with spreads at or even potentially below pre-Liberation Day levels.
“The private capital markets are proving to be a tale of two cities,” noted Kahn. “For A++ companies, the population of which continues to shrink, competition could not be higher as both sponsors and lenders are hungry for attractive opportunities. Outside of those companies, however, the picture is bleaker as M&A processes for B and C companies are on hold and sponsors and lenders are focused on portfolio management to weather the macroeconomic storm. Therefore, while some deals are getting done at very tight spreads, this pool is limited, and the average deal is likely seeing some widening.”
Looking Ahead
To get a glimpse of the impacts of Liberation Day on the private markets, during the month of April 2025, enterprise values of a cohort of companies that Lincoln International values on a daily, weekly or monthly basis decreased ~1.1%, while the average fair values of loans declined around 0.6%. Despite these declines, the direction of enterprise values and debt values for the remainder of 2025 will be primarily driven by the extent of tariffs that do stick, whether a recession is avoided and whether growth persists and exceeds levels observed in Q1.