Although private equity companies would protest that their profits are far from underserved, the very nature of their operations depends on making optimum use of all available information. As a result, the logic follows that the most informed companies are those that possess not necessarily the most information on target acquisitions, but the most relevant.

However, anyone who has knowledge of market theory will also be aware that as more companies look to join the party, prices inevitably rise as a result of increased demand. With potential profit margins being limited due to the sheer number of active players in the sector, the boom time experienced in private equity throughout 2005 is logically expected to be followed by a sharp downturn in 2006 as private equity companies shy away from paying over-inflated prices that do not justify the return on risk. Too many private equity companies are now seemingly possessing similar knowledge leading to no competitive advantage. Deals of the magnitude of SunGard, Hertz, Cadbury Schweppes and Wind, supposedly picked up because of the value that lies behind them, could well become relics of a nostalgic golden age. 2006 may be a more conservative year with fewer bargains to be had.

Yet to write 2006 off already may be slightly myopic. There still remains an opportunity for private equity firms when looking at targets and running existing portfolios to optimise or approach the common knowledge they have at their disposal in a different way.

As with the opaque nature of the private equity world, the potential for profit and acquisition optimism could depend upon the equally (yet perhaps unfairly) enigmatic world of working capital. Identifying the working capital strategies and processes in place at certain target companies and comparing these to what are conceivably ‘best practice’ in the field can prove to be revealing and financially rewarding. With the boom time expected to sharply fade away, private equity groups should quite rightly make their portfolio companies work for every penny to ensure value is delivered. This should be underpinned by a sound knowledge of and in-depth attention to their current working capital strategies and those being used by sector competitors.

A recent evaluation of the top 1000 companies in Europe points to the fact that over 20% of the working capital scope (defined as the sum of receivables, inventories and payables) is surplus to requirements; effectively, 20% of additional value is to be found amongst European companies alone and therefore ‘undeserved profits’ are still out there to be harvested.

Despite this seeming allure of ‘20% extra free’, working capital remains regularly overlooked primarily and perhaps ironically because its impact percolates into multiple strands of a business. Far from being compartmental and easy to approach, the nature of working capital management is frequently polluted by a managerial mindset of being ‘somebody else’s responsibility’- often a symptom of the inefficient incumbent management and a source of prospect for private equity firms. The extent, to which working capital management is disjointed, for the private equity firm, should be seen as the extent for significant improvement that can be teased out of the business. Sector leading firms are regularly those that have optimum working capital through taking a holistic rather than siloed attitude. For them, they appreciate that aspects such as inventory management, sales forecasting and supplier dealings are not stand-alone areas. Rather, they are interdependent with factors including current system functionality, corporate sales forecasting and even areas such as what processes are in place to deal with customer disputes.

Of course the leading companies in each sector are very rarely under threat from private equity firms primarily because they can’t be bought ‘on the cheap’, yet what they should be looked upon in relation to working capital are the best practice benchmarks that can be achieved within specific industries; a reference frame that the private equity world would be advised to adopt as the competition increases, prices become inflated and targets become more scarce.

Put into practice, an approach that appreciates the value of working capital