Working capital as a value-creation lever across a portfolio

Cash has always been king, but in the private equity space it now matters more than ever. With exits slowing down and debt getting more expensive, cash generated inside the portfolio is the most reliable source of liquidity a sponsor has. Bain's 2026 Global Private Equity Report found that funds returned only about 14% of net asset value to their investors in 2025, it is the fourth year running that is has been below 15%, and that around 32,000 companies are still waiting to be sold. Borrowing offers little relief: the Bank of England held Bank Rate at 3.75% in September 2026, with three of its nine policymakers voting for a rise.

Most firms treat working capital company by company. A new acquisition gets an inventory review in its first year, a receivables tidy-up before refinancing, perhaps a payables push before exit. What we argue is that working capital is better managed as a portfolio discipline, with common measures, common playbooks and a small central capability that moves between companies.

The size of the prize

PwC's Working Capital Study 24/25 estimated €1.56 trillion of excess working capital across more than 19,000 listed companies. Days sales outstanding had risen 6.6% over five years, and inventory days had deteriorated in six of eight cash-intensive sectors since 2019. Those are listed companies with treasury teams. Mid-market portfolio companies, with thinner finance functions and older systems, are rarely ahead of them.

An illustrative portfolio shows how this adds up. These numbers are illustrative and developed for this example, not drawn from any real fund.

Cash released is revenue divided by 365, multiplied by the reduction in days. None of the targets is heroic. Together they come to more than £9m of one-off cash across four companies, plus a lower ongoing financing cost. For a fund trying to show distributions, that is a number worth an operating partner's time.

Inventory is where most of it sits

Receivables and payables get attention because finance teams own them. Inventory is harder because it belongs to operations, purchasing and sales at the same time, and nobody owns the whole of it.

It is also where the last few years have left the most excess. McKinsey's supply chain risk survey published in December 2025 found that 45% of companies facing tariff impacts were responding by increasing inventory. That was often the right call at the time. The problem is that buffer stock built for a shock tends to stay on the balance sheet long after the shock has passed, because reorder parameters are rarely reset.

The work is unglamorous. We need to segment stock by velocity and value, reset safety stock on the lines that matter, clear the slow and obsolete through a recovery channel rather than a skip, and then put a monthly S&OP process in place so the stock doesn't creep back. Done properly, it releases cash without hurting service levels, which is the test every operating partner should insist on.

In one inventory release, about a third of the cash came from clearing slow-moving and obsolete stock, which took six months of selling, reworking and returning. The other two thirds came from resetting safety stock on active lines, which was done in eight weeks and simply stopped the business buying more than it needed.

Be careful with payables

Stretching suppliers is the oldest trick in the book, and its days are numbered in the UK. In March 2026 the government confirmed plans for a 60-day cap on payment terms between businesses, applying no earlier than 2027, alongside new powers for the Small Business Commissioner to investigate and fine persistent late payers. There are exemptions, including where both parties are large, but a portfolio company buying from small suppliers should assume that terms beyond 60 days are on borrowed time.

A better payables strategy is consistency: pay on the agreed date, every time, and use that reliability to negotiate price or service. Supply chain finance has its place, but it is a financing decision and should be disclosed and understood as one.

Why a portfolio approach works better

Four reasons. First, common definitions: if every company calculates inventory days differently, the board cannot compare them and cannot set credible targets. Second: the playbook is largely the same across sectors; the first company teaches the second. Third: a central team avoids each management team having to build expertise it will use once. Fourth: it changes the conversation at exit. A buyer's diligence team will test whether working capital improvements are structural. A business with a functioning S&OP process and three years of stable inventory days makes that case far more convincingly than one that ran a clean-up in the last quarter before sale.

The trade-off here though, is control. Portfolio CEOs rightly resist central teams telling them how to run their business. The answer is to make the central role a service with a clear commercial model, and to let each company own its targets.

BankStreet Partners runs inventory release and working capital programmes paid from the cash they free, which makes it a practical fit for portfolio-wide work.