This article was originally published in Mergers & Acquisitions by Jamie Kimon.
December 16, 2025 | LINK
The Middle Market’s Hidden Debt Crisis
RapidRatings executive chair James Gellert says pressure on top-line growth and increased labor, goods and capital costs is causing rising concerns for many PE-backed middle market companies.
New York-based RapidRatings is a provider of global financial health analytics for organizations looking for insights into their business partners’ financial stability. RapidRatings often evaluates private companies for which the market doesn’t have visibility.
“On an operating profit basis, middle market private companies deteriorated 23 percent, whereas their larger public peers improved by over 16 percent, between 2020 and 2025.” Gellert says, adding that “on a net-profit after-tax basis, which captures the interest expense from debt, we have seen middle market private companies deteriorate by 227 percent, compared to their larger public peers improving by 24 percent, between 2020 and 2025.”
Gellert says this is largely due to the floating rate debt that these companies have used. As interest rates increased, these companies have been paying significantly more in interest expense over the years. “In many cases, this is wiping out operating profits because it’s taking up all of their excess cash,” he says.
Gellert says middle-market private companies have increased their leverage by 126 percent since 2020, compared to the public market, which is seven percent less leveraged. Meanwhile, interest coverage is down 68 percent for private middle-market companies versus about six percent for the public companies since 2020.
“Private middle-market companies’ ability to cover their interest expense is dropping,” Gellert says. Tariffs have only further increased costs and uncertainty for these companies, he says, leaving many companies challenged around strategic planning and expansion.
Gellert has seen a deterioration in these companies over the past five years, but from 2020 to 2023, “companies had access to capital and liquidity that allowed them to continue from an operational perspective, even as operations were deteriorating, so the fuse life was extended for many of these companies.”
However, now “their liquidity is beginning to run out and capital costs more to obtain, so we are starting to see real cracks,” he says.
Gellert says 45 companies have been taken over by their lenders in the first nine months of the year, and he expects to see a continuation of this trend, mostly within private credit lenders. But this is a last resort as lenders don’t want to own businesses.
James Gellert “With the PE-owned firms, we’ll see a higher increase of restructurings and forced M&A than Chapter 11 and 7 bankruptcies compared to the broader universe of companies,” he says of 2026. “The economy will need to radically improve, and the tariff-driven trade wars would need to be resolved immediately for a calm 2026. Neither is going to happen.”
________________________________________
James Gellert recently spoke with Mergers & Acquisitions about the state of the middle market in 2025 and what would need to change to drive improvement.
In his analysis, James referenced data from RapidRatings and Marblegate Asset Management’s whitepaper, The Hollowing Out of the Middle Market: A Working Capital Crisis Unfolds.
The white paper reveals that middle market companies are under significantly greater strain than their larger, publicly traded peers. Much of the data focuses on suppliers that are often private, underfunded, and more vulnerable to financial stress.
With middle market distress expected to persist into 2026, it is critical for companies to actively monitor the financial health of their supply chains and vendor ecosystems. Reputations, operations, and profitability are all at stake.
