Lincoln International has reported that the Lincoln Private Market Index (LPMI), which tracks the enterprise value of U.S. privately held companies, increased by 2.3% in the fourth quarter of 2024.
The index’s growth was primarily driven by steady EBITDA expansion, as valuation multiples remained stable. This outpaced the S&P 500, which grew 1.8% during the same period, and significantly outperformed the S&P 500 excluding the “Magnificent Seven,” which saw a 2.3% contraction in enterprise value due to investor uncertainty surrounding interest rates and potential tariffs. However, despite its stronger Q4 performance, the LPMI’s overall growth in 2024 (8.0%) lagged behind the S&P 500 (21.3%) and the S&P 500 excluding the “Magnificent Seven” (10.7%). The “Magnificent Seven” refers to a group of seven high-performing and influential technology companies in the U.S. stock market, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
Private companies continued to face challenges throughout 2024. The percentage of companies demonstrating EBITDA growth fell to 58%, the lowest since Q3 2022. EBITDA growth for the year was 3%, down from 4% in 2023, marking the slowest expansion since 2020. Revenue growth of 6% also lagged behind the 8% recorded in 2023. On average, companies missed their revenue and EBITDA targets for 2024 by 3% and 5%, respectively, as ambitious internal forecasts had projected 10% revenue growth and 12% EBITDA growth.
“While EBITDA growth persisted in the fourth quarter, that is only one side of the story,” said Steve Kaplan, a professor of entrepreneurship and finance at the University of Chicago, who advises Lincoln on the LPMI. “Rising debt levels and lower buyout multiples may impact private equity returns.”
Meanwhile, heightened competition in the direct lending market has driven significant shifts in financing dynamics.
Higher leverage is also posing a challenge for companies approaching the sale process in 2025. Portfolio companies acquired in 2021 and 2022 that remain unsold have seen EBITDA compound annual growth rates of 10.9% and 8.0%, respectively. However, those from 2021 saw leverage increase by 0.3x, while 2022 deals experienced a 0.6x increase. This rising debt burden could stem from unrealized pro forma EBITDA adjustments or higher borrowing costs. Fixed charge coverage ratios (FCCR), which were expected to improve to 1.3x by the end of 2025 due to anticipated rate cuts, are now projected to reach just 1.2x, reflecting shifts in the Federal Reserve’s policy outlook.
The impact of these factors is being felt in private equity dealmaking. Average buyout multiples declined from 12.7x in 2021 to 11.4x in 2024. As a result, many sponsors may choose to hold assets longer rather than sell at lower valuations, in an effort to drive greater equity returns.
Meanwhile, heightened competition in the direct lending market has driven significant shifts in financing dynamics. Large lenders, pressured by competition from the broadly syndicated market, have turned their attention to mid-sized borrowers. Spreads for borrowers with under $100 million of EBITDA tightened by 25 basis points in response to this increased competition. For unitranche loans to borrowers with EBITDA between $40 million and $100 million, spreads now range from S+4.75% to S+5.50%. These conditions have led to more borrower-friendly covenants and increased leverage.
Private equity sponsors entered 2025 with optimism that dealmaking would accelerate, but the anticipated rebound remains uncertain.
Despite these competitive dynamics, signs of financial stress are emerging. The Lincoln Senior Debt Index (LSDI) reported an increase in the fair value of loans from 98.6% to 98.8%, yet covenant defaults ticked up from 2.2% in Q3 to 2.4% in Q4. While still below the historical average of 3.4%, smaller borrowers faced higher default rates than their larger counterparts, reflecting tighter covenant headroom.
According to Lincoln International, one evolving area of concern is the prevalence of paid-in-kind (PIK) interest, which allows companies to defer interest payments by rolling them into the loan balance. While some high-quality borrowers use PIK interest to reinvest in growth, its increased usage can signal financial distress. Lincoln’s analysis showed that 11% of debt investments in its database included some element of PIK interest. For companies that added PIK post-close rather than having it structured in at the outset, leverage ratios increased from 45.4% to 83.9% on average, with EBITDA declining by 20.5% annually.
“Throughout 2024 we have observed lenders affording sponsors and portfolio companies flexibility in the form of PIK interest, covenant waivers, maturity extensions, and other borrower-favorable amendments,” said Ron Kahn, a managing director and co-head of Lincoln’s Valuations & Opinions Group. “However, private companies can only kick the can down the road for so long. The slowing growth trends we have observed, coupled with the continued use of PIK in distressed situations, could spell trouble for some private companies.”
M&A Activity in 2025: Delayed Recovery?
Private equity sponsors entered 2025 with optimism that dealmaking would accelerate, but the anticipated rebound remains uncertain. In a Lincoln International survey conducted in Q4 2024, more than half of private equity sponsors expected to bring at least one portfolio company to market in Q1 2025. However, since then, persistent valuation gaps, shifting interest rate expectations, and policy concerns—including the potential impact of new tariffs—have dampened momentum.
“While 2025 was initially shaping up to be a banner year for buyout activity, recent data suggests that perhaps the significant pop in activity many were expecting may be delayed,” added Ron Kahn. “With continued pressure on cash flows due to elevated leverage, an inability to realize synergies, and slowing portfolio company growth, we may see an uptick in restructurings and, at a minimum, an extension of hold periods for private companies.”
Lincoln International provides mergers and acquisitions advisory, private funds and capital markets advisory, and valuations and fairness opinions. The firm is headquartered in Chicago and has over 20 offices in 15 countries.
Follow this LINK for the full Q2 2024 Lincoln Private Market Index report.
© 2025 Private Equity Professional | February 14, 2025
