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Lincoln International Presents its Comprehensive Middle Market Index

By Lincoln International

Lincoln International (“Lincoln”), the leading global, middle market investment bank, today announced the launch of the Lincoln Middle Market Index (“Lincoln MMI” or “Index”). The Lincoln MMI is the only index that tracks changes in the enterprise value of U.S. privately held middle market companies and is formulated to increase the transparency in closely-held companies largely owned by private equity firms. Lincoln will be updating the Index each quarter.

The Lincoln MMI seeks to measure the variation in middle market companies’ enterprise values by analyzing the aggregate change in both company earnings as well as the prevailing market multiples of approximately 350 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 what we feel are unique 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.

Starting with a benchmark value of 10,000 as of March 31, 2014, the Lincoln MMI has increased to 12,268 as of September 30, 2017, resulting in an annual compounded growth rate of 6.0 percent per year since inception. The Lincoln MMI has grown 3.9 percent over the last year and 1.0 percent over the last quarter. This compares to increases in the S&P 500 and Russell 2000 indices of:

  • 16.2 percent and 19.1 percent, respectively, for the period September 30, 2016 to September 30, 2017.
  • 4.0 percent and 5.3 percent, respectively, for the period June 30, 2017 to September 30, 2017.

Other key observations include:

  • While the S&P 500 and Russell 2000 appear to illustrate higher returns, a subtle but significant difference between the Lincoln MMI and public stock market indices is that the Lincoln MMI is constructed from changes in enterprise values versus equity values (like the S&P 500 or Russell 2000). In all likelihood, equity returns associated with middle market companies would have been substantially higher due to the impact of leverage of companies within the Lincoln MMI.
  • The Lincoln MMI has been highly correlated to public U.S. stock markets but less volatile.
  • The companies in the Lincoln MMI generated a similar return but with less risk than the S&P 500 and Russell 2000.
  • The industry segmentation of companies included in the Index is similar to that of the S&P 500 and Russell 2000.

“The Index’s findings have shown that privately-held middle market companies create shareholder value primarily by increasing earnings rather than capitalizing on changes in market multiples.” said Ron Kahn, Managing Director and co-head of Valuations & Opinions Group.

“The U.S. middle market is a significant component of U.S. economic performance and employment. I believe the Lincoln MMI offers a more comprehensive, more detailed and more useful measurement of private middle-market company performance and values than any other index,” said Professor Steve Kaplan, Neubauer Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.

“We believe the Lincoln MMI is a substantial step forward compared to other published indices and offers visibility that investors never had,” said Jim Lawson, Chairman of Lincoln International. “Lincoln has consistently strived to provide our clients with unparalleled advice, and the Lincoln MMI is another example of our ability to offer keen insights and differentiated perspectives on the middle market.”

Relationship of the Lincoln MMI to the S&P 500 and Russell 2000

(Note: Lincoln MMI tracks enterprise value whereas S&P 500 and Russell 2000 track market capitalization)

Click here to download the full report

Compliments of Lincoln International, a member of the EACCNY