Middle-market companies with up to $750 million in revenue have seen their cash conversion cycles stretch by roughly 30 days over the past few years, according to James Gellert, CEO of RapidRatings, a financial analytics firm that rates public and private companies across 27 industries in approximately 170 countries.

The widening gap reflects a one-sided dynamic: larger buyers are slowing payments to preserve their own cash, while smaller suppliers remain obligated to pay their own vendors on accelerated timelines.

"Those middle-market companies have had cash conversion cycles, depending on the industry, gap out over the last few years almost a month," Gellert said, noting that the dynamic reflects larger customers who have "basically been able to extend payments, generally speaking, because they're stronger."

"So many companies have had to be the shock absorbers in the market … having the erosion in their operating margins," he added.

The squeeze matters acutely for carriers, brokers, and shippers because private companies make up approximately 75% of most large companies' supply chains, Gellert said. When mid-tier suppliers face cash shortfalls, the consequences extend beyond balance sheets — production slowdowns, missed delivery windows, and in severe cases sudden supplier failures can force logistics networks into emergency rerouting and costly last-minute sourcing. As working-capital pressure mounts on those private firms, the resilience of the broader supply chain ecosystem deteriorates with it.

RapidRatings' Algorithmic Approach

RapidRatings specializes in providing financial health ratings of public and private companies through an algorithmic modeling system designed to assess financial health, default risk, credit risk, and future financial performance. The system evaluates companies on a comparable basis regardless of size, industry, public or private status, or global domicile. There is no minimum revenue cutoff.

Gellert described the analytics as "probably the most sophisticated commercially available modeling system" for understanding financial strength. A key differentiator is the firm's ability to obtain private company financials directly — a capability that addresses a critical blind spot for many organizations evaluating their counterparties, particularly suppliers and other third parties. That blind spot has grown more consequential as supply chain disruptions since 2020 have pushed large enterprises to scrutinize deeper tiers of their supplier networks, where private mid-sized firms predominate.

RapidRatings reaches out to private companies on behalf of clients to obtain financials, and Gellert said the firm has become a trusted intermediary in this space, with many private companies now proactively seeking inclusion in the network. The firm holds considerable data in concentrated industries such as automotive, spanning multiple sub-industries within the auto supply chain.

Post-2022 Macroeconomic Pressures

The deterioration in middle-market financial health has been compounded by a post-2022 macro environment marked by persistent inflation, elevated interest rates, higher labor costs, and tariff volatility.

During the COVID period and its immediate aftermath, many companies experienced relative stability, aided by low borrowing costs and subdued inflation. The post-2022 landscape shifted dramatically. Most private companies borrow at floating rates rather than issuing long-dated bonds, leaving them directly exposed to rate moves that public peers can partially hedge.

"They aren't necessarily able to charge more or pass those costs through," Gellert said. The result has been rising leverage, shrinking interest coverage ratios, and erosion in both operating and net margins across the middle market.

Gellert noted that when tariffs are layered on top of inflation and higher rates, companies face not only higher costs for goods and services but also the volatility and uncertainty that complicate planning and operations.

Private Equity Hold Periods Lengthen

Private equity exit timelines have extended under these pressures. Gellert said average hold periods, historically around 4.5 years over the past decade, have stretched to six or seven years depending on the sector.

Multiple compression has been a significant factor. Valuation multiples on revenue, EBITDA, and other measures have contracted over the past few years. For SaaS companies in particular, the advent of artificial intelligence has driven further multiple erosion, Gellert said.

The combination of tighter multiples and operational struggles means that private equity firms that acquired companies in 2021 and 2022 at higher valuations now face a less attractive exit environment. That elongated hold period is pushing more PE-owned companies toward M&A, restructurings, creditor negotiations for extensions or waivers, and in some cases bankruptcy.

"We're likely to see more M&A," Gellert said, describing the current period as an opportunity for strategic investors to acquire middle-market companies that may be late in their private equity hold cycle but not yet operationally mature enough to be flipped to another PE firm or moved into a continuation fund.

For indebted companies with weaker profiles, refinancing remains difficult. Many are negotiating with creditors for extensions or waivers. Gellert said the market should expect more bankruptcies and restructurings — though restructurings, he noted, often happen outside public view.

SaaS Valuations and AI Disruption

Addressing concerns about a "SaaS apocalypse," Gellert struck a measured tone. "AI is neither categorically wonderful or categorically bad," he said. "It is about how it's applied, where it's applied, and the efficiencies that can be brought to running a business because of that AI."

He compared the current AI transformation to prior technological revolutions such as the internet, arguing that businesses will adapt and some will change fundamentally. However, the core objective of generating profitability and returns for shareholders remains unchanged.

For venture-backed companies that raised at elevated multiples during the 2021 peak, the environment poses distinct challenges. The window for selling to institutional investors at inflated valuations has largely closed. Gellert said these companies will need to evolve — potentially becoming smaller, more efficient, and more focused, with expansion plans pared back.

He cited Bending Spoons, a Milan-based technology company known for acquiring established consumer software brands, as an example of a firm acquiring subscription-based technology businesses that may have peaked and are in decline, suggesting that such strategic acquisitions represent one path for companies that cannot independently sustain their earlier trajectories.

Advice for Founders and Supply Chain Managers

Gellert's advice to founders who raised at high multiples is to focus on clearly defining their value proposition and objectives, then pursuing them through measurable milestones rather than open-ended ambition.

"There's more scrutiny on these businesses," he said. The current environment, he argued, creates a genuine opportunity for communication and transparency. Many of these companies sell to or seek to sell to larger enterprises that are already conducting supplier risk management programs.

"The stronger private companies are the ones who are going to capitalize on that the best," Gellert said, arguing that proactive financial disclosure by suppliers creates tangible commercial value with large buyers. The strongest customers, he added, will require such transparency and appreciate it when delivered proactively.

For supply chain managers, the firm's guidance is to intensify financial health monitoring of private suppliers and treat transparency as a commercial lever. Gellert emphasized that the market is entering an extended period in which strong, mature risk management of supply chains will be essential for understanding risks to one's own business.

Key Findings

Middle-market supplier cash conversion cycles have stretched nearly 30 days over the past few years as larger buyers slow payments while smaller vendors continue paying upstream suppliers quickly. Private companies represent about 75% of most large companies' supply chains, making their financial deterioration — rising leverage, margin erosion, and floating-rate debt exposure — a systemic supply chain risk. Private equity hold periods have expanded from a historical average of 4.5 years to roughly 6–7 years due to multiple compression and operational pressures, increasing the likelihood of restructurings and bankruptcies among PE-backed suppliers.

Source: FreightWaves