The Lincoln Private Market Index: Broader Private Market Trends Were Stable Despite Software-Driven Decline

Accelerated pace of AI developments led to a bifurcated Q1 with software and highly AI impacted companies’ enterprise values and loans seeing meaningful decreases in values, while non-software companies and loans less impacted by AI demonstrated stability

CHICAGO--(BUSINESS WIRE)--Lincoln International, a global investment banking advisory firm, announced today that the Lincoln Private Market Index (LPMI), an index that tracks changes in the enterprise value of U.S. privately held companies, decreased by 2.2% in Q1, driven primarily by a 7.8% decrease for technology companies (driven by an 8.8% decrease for software companies) and a 1.5% decrease for business services companies while all other industries remained flat or modestly up quarter-over-quarter. The S&P 500 exhibited similar trends, with enterprise values decreasing 3.5% since Q4, primarily due to a pullback in public software valuations. Notably, however, excluding the Magnificent 7, S&P 500 enterprise values grew by 0.7%, highlighting the resilience of less AI-impacted companies given the significant AI exposure of the Magnificent 7.

“While private company enterprise values have historically been driven by fundamental performance and near-term expectations of growth, Q1 marked a deviation from that trend for software companies,” noted 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. “Software company operating performance, in fact, remained positive on average in Q1. The decline in software valuations was entirely due to lower multiples for such businesses, reflecting market participants’ views of longer-term expectations around AI driven disruption.”

Despite a Flurry of Headwinds, Private Company Performance was Robust

The majority of private companies performed well in Q1. Lincoln observed an increase in the number of companies growing both revenue (69.8% vs. 68.6% in Q4) and EBITDA (62.6% vs. 61.7% in Q4) while also observing an increase in the magnitude of year-over-year growth in revenue (6.6% vs. 5.9% in Q4) and EBITDA (4.6% vs. 4.4 % in Q4) in Q1. Looking at software companies’ performance specifically, trends were also positive as 74.9% of software companies grew revenue and 67.0% grew EBITDA, while the magnitude of year-over-year growth was 6.6% for both revenue and EBITDA.

AI’s Impact on Software Valuations

It comes as no surprise that loan valuations for software and other highly AI-impacted businesses decreased meaningfully in Q1 despite the aforementioned resilience in performance to date. AI disruption risk is not necessarily a near-term headwind but rather a medium-to-longer term dynamic which nearly every company, not just software businesses, will need to grapple with. For software companies specifically, according to Lincoln Lens - Private Market Intelligence which captures the portfolio company valuations performed by Lincoln quarterly, there were a number of key determinants in the magnitude of fair value declines in software-based loans in Q1.

To set the stage, 20% of the outstanding principal of loans in Lincoln Lens – Private Market Intelligence in Q1 was to software companies, and the loan-to-value of these loans at the time of underwriting was on average 32%. Even after accounting for the decline in enterprise values observed in Q1, these loans, on average, have lower loan-to-value (LTV) than loans to borrowers in other industries. Specifically, as of today, the average LTV of software loans in Lincoln Lens is 42.2%, and the LTV of all other loans is 47.4%. However, not all software loans can be treated equally, and Lincoln views it as critical to dig a level deeper to understand the relative risk to any given software-based loan.

First and foremost, software companies can broadly be defined as either horizontally or vertically integrated, meaning that a business can either serve many industries with a general-purpose product (horizontal integration) or focus deeply on one industry or workflow (vertical integration). Historically, vertically integrated software businesses have been acquired at a premium relative to horizontally integrated software businesses. In Q1, the gap in enterprise values between the two widened to nearly 2.0x EBITDA. Putting a finer point on it, overall software valuation multiples declined to 14.3x EBITDA in Q1 (vs. an average of 15.2x since Q1 2024), whereas vertically integrated multiples declined to 15.0x (15.5x) and horizontally integrated multiples declined to 13.4x (14.7x). Therefore, there was meaningfully higher degradation of enterprise value and thus equity cushion (and conversely, an increase in LTV) for horizontally integrated software businesses given these are viewed as being more vulnerable to replacement by general purpose AI solutions.

Next, capital structures vary greatly among software borrowers. While more conservatively capitalized software businesses (i.e. lower LTV and / or lower EBITDA-based leverage) are not going to be immune to the potential for disruption from AI, they have a meaningfully higher cushion for their lenders as compared to a higher-leverage or higher-LTV borrower. Said differently, if cash flow becomes strained, or if equity value deteriorates, more conservatively capitalized businesses will still be able to service debt payments and, in the event of a business having to be sold at a discount relative to its original purchase multiple, the likelihood of the loan remaining covered by enterprise value is much higher than a loan to in a highly levered business.

Putting this all together, when looking at software loan valuations in Q1, the average fair value of loans to software business valued by Lincoln declined by 1.9% of par. Notably, however, this varies greatly depending on the loan’s LTV; the median decrease for loans by LTV was as follows: <35%: 0.8%, 35%-50%: 1.3% and >50%: 2.3%. Only time will tell which companies end up being winners or losers due to the rapid pace of AI adoption; however, it is clear, in today’s market, having a vertically integrated business with a more conservative capital structure provides a higher level of cushion and insulation from AI-based risk.

“The impact of AI will be far-reaching and touch nearly every business, not just software companies,” noted Ron Kahn, Managing Director and Co-Head of Lincoln International’s Valuations & Opinions Group. “The challenge for market participants is how to price that risk in today given both recent results and short-term expectations of performance are favorable. Each company needs to be evaluated for its relative risk of disruption, the sustainability of its business model and its capital structure leading into this transformative time.”

Outside of Software, Direct Lending Terms are Evolving

While cracks started to form for certain borrowers in 2025, those cracks generally not only didn’t widen in Q1 but actually started to stabilize. Covenant defaults remained steady at 3.1%, which was in line with the historical average dating back to 2020. PIK interest was present on 10.6% of all loans and represented 8.9% of total interest income, both of which remained relatively in line with what was observed throughout 2025. Similarly, bad PIK (i.e., investments with no PIK interest at close but with PIK interest today) was 55.7% of loans with PIK, or 5.9% of all loans, which may also be viewed as shadow default rate and was similarly in line with observations throughout 2025.

Lastly, while lender foreclosures continue to occur with $24.2 billion of principal foreclosed in 2025 and another $15.2 billion year-to-date in 2026. These foreclosures still remain concentrated in 2021 and 2022 vintage buyouts and still represent a small amount of total direct lending principal outstanding.

While these negative performance indicators are not worsening, because of concerns about software and redemptions in retail-focused funds, Lincoln has observed late in Q1 and early in Q2 that spreads were beginning to widen, and other lending terms were pivoting back to favor the lenders.

Is There a Direct Lending Problem?

Recent headlines raised questions about whether direct lending is approaching a deeper reckoning. At the borrower level, Lincoln Lens – Private Market Intelligence data suggests the answer is no. One reason that there may be a perceived problem is that income returns (i.e., the yield of underlying loans) have come down meaningfully in the past two years; however, yields are in line with the historical levels for the asset class, and some may be taking a very short-term view of asset-level returns. Putting a finer point on it, in Q1 2024, average unitranche spreads were S+5.50% to S+6.25% with spot SOFR sitting at 5.3% implying an all-in yield around 11.8% when also considering the impact of OID. Zooming forward to today, average unitranche spreads sit at S+4.75% to S+5.50%, with spot SOFR at 3.70% and smaller closing fees, implying a yield of 8.9%. That roughly 3% decline in yield seems steep at its face, but the 11.8% was simply not sustainable in the context of what historically has been a high single-digit yield for the asset class.

There is also fear from some that defaults may rise and lead to significant losses for private credit managers, their lenders and ultimately investors. While not every fund is created equal, Lincoln performed an analysis to assess what a spike in defaults may do to fund level returns. Assuming a 5-year fund life with an average unitranche spread of 5.0% over SOFR, unlevered returns would measure at roughly 9.0%. If the portfolio were to be stressed with a 10% cumulative default rate with the first default beginning in year 2 and an assumed recovery rate of 65%, unlevered returns would decrease to around 8.3%, implying a 0.7% decrease in unlevered returns. While this is certainly impactful, it does not suggest widespread erosion of returns for the asset class.

“Direct lending is at a defining point in its lifecycle,” noted Kahn. “Some view the current market backdrop as one of the first true tests of the asset class, but Lincoln Lens – Private Market Intelligence data shows that direct lending is well-positioned to weather even an unprecedented and unlikely level of defaults, and there is a case to be made that spreads for direct lending loans may start to widen further increasing returns for lenders.”

About the Lincoln Private Market Index

The LPMI 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.

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 1,800 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.

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 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.

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

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