Private Equity Working Capital Optimization

The global private equity market has expanded significantly over the past decade, supported by favourable credit markets, low interest rates, and elongated economic cycles across major regions. The industry has matured, but it now faces new challenges: debt has become more expensive, buyout costs continue to rise, and firms are struggling to keep loan-to-value ratios under control. Portfolio companies need new levers to deliver returns.

Private equity typically applies a transformative, value-added, and active investment approach. Value is created through three broad channels: operational improvements, multiple arbitrage, and leverage. Within operational improvements, working capital is often the neglected lever. The department that manages working capital and cash flow, mainly treasury, tends to sit one stage removed from operational decisions, and there is limited visibility or incentive among operational teams to make working capital a priority.

That is where the opportunity is.

The Case for Working Capital as a Return Driver

The more cash a portfolio company can release, the less capital needs to be deployed to deliver the return, and the higher the Return on Invested Capital created by the deal. Market research suggests that companies can reduce the cash needed to run the business by as much as 20%, lifting overall ROIC by up to 30 basis points across industries. With acquisition prices high and target returns increasingly difficult to realize, this represents a significant, largely untapped, value lever.

The pattern is now widely recognized across the industry. Unlocking working capital and generating cash flow has moved to the second most important value creation strategy after operational cost savings and profitability. In the first 100 days post close, revenue and cost typically get prioritized. Working capital improvement is targeted between days 100 and 365. Requirements and capabilities for cash and working capital management have increased at private equity firms at the same level as pricing and profitability analysis.

Where the Working Capital Is Trapped

A high-level comparative analysis of the leading 1,500 US-based and European companies, many backed by private equity, indicates over $2.5 trillion in excess working capital above the level required to operate their business models efficiently. That figure is equivalent to nearly 10% of combined sales. In other words, for every $1 billion in sales, the average opportunity for working capital improvement is approximately $100 million.

The three primary levers are accounts receivable, inventory, and accounts payable. Accounts payable, in particular, represents the most significant source of short-term self-funding for portfolio companies. Matching payment terms and Days Payables Outstanding to industry-acceptable vendor terms is paramount. Financing solutions such as Supply Chain Finance can be added to allow suppliers to be paid earlier while extending payment terms for the buying organization.

Why the Opportunity Persists

The reason most portfolio companies have not captured this working capital is not the size of the opportunity. It is the visibility. Organizations do not know how they perform in comparison to peers and competitors by industry, commodity, or country. Without external benchmarks, working capital opportunities remain invisible.

Companies also need to challenge prevailing assumptions. It is often incorrectly believed that working capital improvements come at the cost of EBITDA. In reality, this is not the case. Management often frames working capital as a financial issue, when it is actually an operational issue driven by multiple interconnected processes across treasury, procurement, and operations.

For portfolio companies focused on improving accounts payable and optimizing supplier terms, top management, treasury, and procurement must collaborate and have access to the same data. Procurement teams need visibility into supplier financial strength, leverage, materiality, DSO of suppliers, and average payment terms within supplier peer groups. That data is the foundation of every credible negotiation.

The ESG Layer

ESG and sustainability considerations are increasingly central to how private equity firms manage portfolio value. Customers, suppliers, investors, and consumers are demanding more sustainable and socially conscious corporate behavior. A recent S&P Global Market Intelligence survey found that 40% of private equity firms plan to work on improving ESG standards within their current portfolio companies. Payment term optimization, when done with Supply Chain Finance backing, can support ESG objectives by improving supplier financial resilience while delivering working capital gains to the buying company.

What the Full Report Covers

The full report covers the private equity value creation framework and where working capital sits within it, the requirements for finance teams under PE ownership, the specific levers to optimize working capital (accounts receivable, inventory, accounts payable), the common barriers to capturing the opportunity, and the ESG and sustainability dimensions of payment terms optimization.

For private equity partners, portfolio company CFOs, and treasury teams operating in a higher cost of capital environment, working capital is no longer a back-office metric. It is a direct lever on fund returns.