Private Markets Show Stress Cracks Despite Record Deal Valuations

CHICAGO, IL – February 11, 2026 – The U.S. private market ended 2025 on a contradictory note, with enterprise values posting their slowest quarterly growth of the year even as competition for top-tier companies drove acquisition multiples to record highs. A new report from Lincoln International highlights a growing divergence between the sky-high valuations commanded by premium assets and the underlying financial health of the broader private sector, where signs of stress are becoming increasingly apparent.

According to the Lincoln Private Market Index (LPMI), which tracks the enterprise value of U.S. privately held companies, values increased by just 1.9% in the fourth quarter of 2025. While positive, this growth lagged the S&P 500's 2.3% gain over the same period and marked a slowdown for private firms. For the full year, the LPMI’s 9.9% growth trailed both the S&P 500's 15.6% and the 11.9% gain of the public index when excluding the dominant 'Magnificent 7' tech stocks.

Beneath these headline numbers lies a critical distinction: while public market gains were heavily influenced by multiple expansion and the performance of a few tech giants, private market growth was almost entirely dependent on earnings—a foundation that appears to be weakening.

A Tale of Two Markets

The performance gap between public and private markets in 2025 was largely a story of the 'Magnificent 7'—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. These seven companies, representing over a third of the S&P 500's market capitalization, were responsible for the lion's share of its gains, fueled by investor enthusiasm for AI and cloud computing. Excluding them, the S&P 500's growth was a more modest 1.4% in Q4, closer to the private market's performance.

“Private company enterprise value growth in Q4 was consistent with the rest of 2025 in that the growth was driven by an increase in earnings,” noted Steve Kaplan, a professor at the University of Chicago Booth School of Business who advises Lincoln on the LPMI. “The LPMI’s growth was almost entirely on the back of earnings growth whereas as the S&P 500 had a larger degree of multiple volatility driving its performance.”

This reliance on fundamental earnings makes the private market a purer barometer of broad corporate health. However, that barometer is now signaling caution. After peaking at 6.5% in the second quarter of 2025, year-over-year EBITDA growth for private companies steadily decelerated, falling to 5.2% in Q3 and ending the year at 4.7% in Q4. This slowdown, coupled with the lingering effects of tariffs now appearing in financial results, is forcing many companies to issue more conservative budgets for 2026.

The High Price of Quality

Paradoxically, the M&A market for the most attractive private companies has never been hotter. Fierce competition among private equity sponsors and lenders to deploy vast sums of capital drove buyout valuations for 'A-tier' companies back to, and in some cases beyond, the peak levels of 2021. The average buyout multiple climbed to a record 13.1x EBITDA in 2025.

This trend was exemplified by deals like Parker-Hannifin’s $9.25 billion acquisition of Filtration Group, which commanded a multiple of 19.6x EBITDA—a significant premium highlighting the market's willingness to pay up for perceived quality and predictable cash flows. To win these deals, sponsors wrote larger equity checks, and lenders stretched on terms, pushing average leverage up to 5.2x, a level not seen since the low-interest-rate environment of 2021-2022.

This intense focus on the top end of the market has concentrated activity, with billion-dollar deals comprising roughly one-third of all acquisitions in 2025, up from 25% in prior years. Yet, this top-line strength masks growing fragility elsewhere.

Cracks Appear in the Foundation

While lenders compete aggressively for new deals with historically tight spreads, signs of distress are multiplying within existing loan portfolios. Lincoln International’s data reveals a troubling increase in risk indicators, suggesting that years of high interest rates and slowing growth are taking their toll.

One of the most telling metrics is the rise of “bad PIK” interest—instances where companies that initially paid cash interest now must defer payments by adding them to the loan principal. This figure, considered a “shadow default rate,” has surged to 6.4% of all loans in Lincoln's database, a dramatic increase from just 2.5% in Q4 2021. These are often situations where a default may have occurred if not for the lender's willingness to accept non-cash interest.

Further evidence of stress includes a 13% quarter-over-quarter increase in loan amendment activity, with sponsor equity infusions to support struggling portfolio companies jumping 31%. More dramatically, lenders are taking control of businesses at an unprecedented rate. In 2025 alone, lenders foreclosed on $24.1 billion of debt to take ownership of companies—more than the $13.6 billion recorded in the preceding three years combined. Nearly 75% of these takeovers involved deals from the 2021 and 2022 vintages, which were often underwritten with high leverage and aggressive growth assumptions.

“We have seen a steady slowing of EBITDA growth during 2025 and companies not being able to organically deleverage,” said Ron Kahn, Managing Director and Global Co-Head of Lincoln’s Valuations and Opinions Group. He noted that for loans from 2019 and 2020 vintages, leverage has actually increased by about 1.0x since inception, the opposite of what is expected. With many of these loans facing maturity in the next two years after already receiving extensions, the pressure is mounting.

Navigating 2026 Headwinds

The outlook for 2026 is a complex tapestry of conflicting forces. Expected interest rate cuts from the U.S. Federal Reserve should provide some relief, allowing healthier companies to refinance debt at more favorable terms. However, for direct lenders, these cuts will also compress the yields on their floating-rate loan portfolios, which have already fallen from a peak of 11.8% in 2023 to 9.5%.

This puts lenders in a precarious position: returns are shrinking just as underlying portfolio risk appears to be rising. The combination of tighter spreads on new deals and growing stress in older ones creates a challenging environment where mistakes can be costly.

“Amidst this period of rising stress and compressing spreads, so far, direct lending has broadly proven an ability to weather these compounding headwinds,” Kahn observed. “While returns continue to remain attractive, particularly for portfolios locked in with more favorable spreads from earlier vintage years, asset selection and active portfolio management will be critical for successful funds with a larger proportion of recent vintages that were underwritten to tighter spreads and higher leverage levels, as defaults on these deals will be more impactful given the lower level of interest income being generated.”