Sign inWhat is dry powder in private equity?
Dry powder is committed capital a fund has raised but not yet invested. High industry dry powder tends to push entry valuations up.
How practitioners use it
Dry powder matters because committed capital has a clock on it. Investment periods expire, and unspent commitments eventually have to be returned or deployed, which changes bidding behaviour.
When aggregate dry powder is high relative to deal supply, competition for quality assets raises entry multiples, which in turn makes operational value creation more important to the return.
For a candidate, dry powder is the cleanest way to explain why disciplined pricing is a differentiator in a crowded market.
Worked example with round numbers
01
A fund closes at 1,000 of commitments and has deployed 600.
02
Dry powder is 400, less any reserves held for follow-on investment.
03
With two years left in the investment period, deployment pressure rises.
Where people get it wrong
- Confusing dry powder with cash on hand. It is uncalled commitments.
- Ignoring reserves earmarked for existing portfolio companies.
- Assuming high dry powder means easy financing conditions.
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