Private Markets Anchor on Earnings as AI-Fueled Rally Rocks Public Equities

CHICAGO, IL – August 13, 2026 – The second quarter of 2026 painted a picture of two distinct market narratives. While public equity markets, fueled by an AI-driven frenzy, shot upward with speculative fervor, private markets charted a more deliberate course, anchoring their value in tangible operating performance. New data from Lincoln International’s Private Market Index (LPMI) reveals this growing divergence, highlighting a private market landscape defined by fundamental strength, but also by increasing selectivity and pockets of stress that demand closer inspection.

Lincoln, a global investment banking advisory firm which recently went public in May, reported that its index of U.S. privately held companies grew by a modest 1.9% in Q2. This gain, which recovered most of a 2.2% first-quarter dip, was driven almost entirely by solid EBITDA growth. This stands in stark contrast to the S&P 500, which surged an eye-watering 14.8% during the same period, propelled by what the report calls “faster-than-expected AI adoption” and a rapid expansion in valuations as investors priced in future growth.

“Q2 marked a return to the LPMI's long-term pattern: private company enterprise value growth was driven by operating performance, not multiple expansion,” commented Steve Kaplan, a professor at the University of Chicago Booth School of Business who advises on the index. “The public market's much larger gain likely reflected a rapid repricing of future growth expectations across AI infrastructure and adjacent sectors. Private markets did not participate to the same extent, but they also did not experience the same degree of volatility.”

A Tale of Two Recoveries

The data underscores a fundamental difference in valuation drivers. The public market rally, while extending beyond the “Magnificent Seven,” was heavily concentrated in sectors benefiting from AI investment. The SOX Semiconductor Index, for instance, soared an incredible 88% in the second quarter. This optimism is built on future promise. In contrast, the LPMI’s growth is rooted in current reality. Over 70% of private companies in the index reported year-over-year revenue growth, and 64% saw EBITDA growth, with the average top-line increase of 6.9% comfortably outpacing inflation.

However, this operational health in existing portfolio companies belies a more cautious environment for new transactions. While the LPMI reflects the value of companies already held, other industry reports from firms like PitchBook and KPMG show that new private equity deal value declined significantly in the quarter. Investors are demonstrating a clear “flight to quality,” with new buyout multiples for the first half of 2026 declining to 12.0x EBITDA from 12.8x a year prior. This reflects not just caution, but also a mix-shift away from high-multiple software deals toward sectors like industrials.

Beneath the Surface: Stress and Selectivity in Private Credit

While private company performance appears robust, the private credit markets that finance them are revealing a more complex story. On the surface, credit conditions look healthy, with the size-weighted covenant default rate declining to 2.7% in Q2, well below the six-year average. Yet, beneath this calm surface, significant currents are moving.

Lender-control activity has surged, with lenders foreclosing on $22.3 billion of principal in the first half of 2026 alone—nearly matching the $24.2 billion for all of 2025. This trend represents what Lincoln’s report calls a “paradigm shift in the relationship between sponsors and lenders.” The activity is highly concentrated in deals from the 2021 and 2022 vintages, which were underwritten at peak valuations with higher leverage and are now struggling in a higher-rate environment.

Further signs of stress are visible in more subtle metrics. The use of “bad PIK”—where loans that were not supposed to have payment-in-kind interest now do—crept up to 6.2% of all loans from 5.9% in Q1. This metric is viewed by many as a “shadow default rate,” indicating borrowers who cannot service their cash interest payments.

Simultaneously, a new mechanism for price discovery is emerging. Secondary trading of private loans has increased meaningfully, driven by liquidity needs and active portfolio management. “The increase in secondary trading is making that differentiation more observable. It is creating liquidity and price discovery,” said Ron Kahn, Co-Head of Lincoln International's Valuations & Opinions Group. He cautions, however, that “market participants still need to understand the context behind each trade before treating it as definitive evidence of fair value,” noting most observed trades have been near par, suggesting portfolio rebalancing rather than credit-driven distress.

Software's Great Divide

Nowhere is this new era of selectivity more apparent than in the software sector. After a valuation reset in the first quarter, software fundamentals held steady, with revenue and EBITDA growth keeping pace with the broader private market. However, the market is no longer treating all software companies equally. According to PitchBook, new deal value in software plummeted 65.7% year-over-year as investors grapple with the disruptive potential of AI on legacy business models.

Loan valuations tell a similar story of differentiation. For software companies with strong balance sheets and low loan-to-value (LTV) ratios, loan fair values remained stable at or near par. But for companies with LTVs above 50%, the average fair value dropped 1.6% to just 87.1% of par.

“Q2 reinforces that adjustments to software valuations are not one size fits all,” Kahn noted. “The relevant distinction is not simply vertical versus horizontal. It is whether a company has a durable value proposition, recurring customer demand and a capital structure that can absorb volatility.”

The Income Cushion

Despite these emerging stresses, the data does not suggest systemic risk. The private credit asset class was built with inherent defenses. Lincoln’s analysis highlights a substantial “income cushion” that allows portfolios to absorb significant losses before investor returns are wiped out. Their modeling shows a typical levered fund would need to experience a cumulative principal loss of 9%—for example, a 12% default rate with only 25% recovery on those defaults—before its IRR fell to zero.

“Private credit is not immune to losses, and the increase in takeovers should not be dismissed,” Kahn concluded. “But the asset class can absorb meaningful defaults and losses... Although current observations suggest the market is far off from the illustrated scenarios in the levered return analysis, if it ever were to come up, the key questions would be where the stress is concentrated and how actively lenders manage it.”