Proprietary

MIDDLE MARKET

Database

Q4 2019

Valuations & Opinions Group

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Inside this Issue

Private equity backed portfolio company performance remains robust as market participants remain cautiously optimistic.

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  • Key Takeaways
  • Overview of Q4 2019 Database
  • Lincoln Middle Market Index
  • Middle Market Portfolio Company Performance
  • Enterprise Value and Leverage Multiples
  • Impact of EBITDA Adjustments
  • Quarterly New Issuances and M&A Transactions
  • Credit Market Environment
  • Distressed Assets
  • Valuations & Opinions Group Key Contacts

Quarterly YoY Performance - Percentage of Companies

In Q4 2019, 61% of portfolio companies grew revenue. Above historical average growth in revenue drove a record level of portfolio companies growing EBITDA (55%)

Quarterly YoY Revenue Growth — % of Companies

Quarterly YoY EBITDA Growth —% of Companies

…and Business Services, Healthcare, and Technology industries continued to drive the multiple expansion.

All size categories continued to experience positive YoY revenue and EBITDA growth during the quarter; on average, companies >$50 million of EBITDA have outpaced other size categories in terms of revenue and EBITDA growth

Quarterly YoY Revenue Growth

  • Companies across all EBITDA size categories experienced positive quarterly year-over-year revenue growth in Q4 2019; companies with >$30 million of EBITDA reported revenue growth above 6.5%, continuing the theme of larger companies achieving revenue increases of a greater magnitude compared to smaller companies
  • Companies with greater than $30 million of EBITDA exhibited their 25th consecutive quarter of revenue growth

Quarterly YoY EBITDA Growth

  • Consistent with Q3 2019, all size categories reported positive EBITDA results in Q4 2019 with total average growth more than double the longterm historical average
  • Companies with greater than $50 million of EBITDA led the total growth expansion across all portfolio companies, while EBITDA growth in the $30-$50 million size category reverted to historical average levels

Note: Dataset classified into various size categories based on LTM EBITDA as of the Q4 2019 valuation period; Average reflects average of quarterly periods for periods displayed

(1) Q4 2013 reflects $10 million to $50 million of EBITDA companies

Historical Quarterly YoY Performance by Industry

The trend of strong revenue and EBITDA growth in Business Services, Healthcare, and Technology persisted through the end of 2019 as all three industries continued to outperform historical average revenue and growth rates

Middle Market Quarterly YoY Revenue Growth

  • Consistent with the prior two quarters, all industries except for Energy exhibited positive revenue growth; Healthcare revenue growth elevated to historic highs in Q4 2019 while Technology experienced its tenth consecutive quarter of revenue growth
  • Business Services, Healthcare, and Technology were the strongest performers with revenue growth exceeding their long-term averages

Middle Market Quarterly YoY EBITDA Growth

  • In Q4 2019, all industries reported positive quarterly year-over-year EBITDA growth above their respective long-term average growth rates
  • EBITDA growth in Business Services, Healthcare, and Technology averaged 4.4%, 3.9%, and 3.9%, respectively, during CY 2019 and held above the historical average growth rate in Q4 2019; in relation to its long-term average Industrials experienced improved profitability with an average EBITDA growth rate of 2.1% in CY 2019

Note: Dataset classified into various size categories based on LTM EBITDA as of the Q4 2019 valuation period; Average reflects average of quarterly periods for periods displayed

LTM EBITDA Margin Trends

Consistent with historically observed trends, larger companies tend to generate higher EBITDA margins; the average LTM EBITDA margin for Q4 2019 was at an all-time high despite companies with $0-$10 million of EBITDA reporting below the long-term historical average

LTM EBITDA Margin —Size (1)

LTM EBITDA Margin – Industry

Note: Data based on LTM EBITDA margin as of the Q4 2019 valuation period; size dataset classified into size categories based on LTM EBITDA as of the Q4 2019 valuation period; LTM EBITDA represents earnings before interest, taxes, depreciation, and amortization, inclusive of all allowed addbacks as may be defined by lenders in the compliance certificate; Average reflects average of Q4 periods for years displayed and all quarters of FY 2019

(1) For the period Q4 2013 to Q4 2019; (2) Q4 2013 reflects companies with $10 million to $50 million of EBITDA