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Working capital in the transaction lifecycle
While days 100-365 post-close are the typical period for executing working capital improvement initiatives, the cash flow transformations are beginning to be incorporated throughout the entire transaction lifecycle for private equity groups (PEGs) that have an operational focus.
During diligence, the market has matured beyond traditional working capital PEG analysis to incorporate diligence in cash flow risk and upside. From the buy-side, we’ve seen working capital become a more strategic item in due diligence and after pre-close, into day one planning. While lever execution may not occur until day 100+, an advanced planning process lays the groundwork by functional area and establishes the benefit realization timeline.
From the sell-side, we’ve seen an increased focus on working capital when determining the investment exit, which allows PE to extract cash while also optimizing operational performance. Implementation typically begins 12-18 months prior to investment exit, with a focus on Account Receivables (AR) and Account Payables (AP), and includes advanced strategies that go beyond typical terms negotiations for customers or suppliers. This allows ample runway to recognize improvement and ensures working capital levels are sustained six months prior to the pre-close process.
As we continue to monitor trends in how PE’s prioritize value creation, we will continue to see working capital improvement be a prioritized strategy across portfolios in each stage of the transaction lifecycle.