Dry powder
Committed capital that has not yet been invested.
It shows how much a fund, or a whole industry, still has available to deploy. Large pools of dry powder mean competition for deals, and slow deployment can mean a fund is struggling to find them.
Industry-wide dry powder in private equity has been measured in the trillions of dollars in recent years. High levels can push up deal prices as funds compete, while also showing that LPs have already committed money that managers must still deploy.
At the level of a single fund, LPs compare deployment against the plan in the LPA and the pitch. Deploying too slowly raises questions about deal flow, while deploying too quickly can concentrate risk in one market period and bring the next raise forward before results are visible.
Worked example
A $100M fund in year three has called $55M, mostly for investments, and has about $45M of dry powder. With a planned 30 investments and 18 made so far, the GP tells LPs it is on pace and expects to raise Fund II in about 18 months.
Common questions about dry powder
Is a lot of dry powder good or bad?
Neither on its own. For a single fund it should match the plan. Across the industry, high dry powder can mean strong competition for deals and higher prices, which can weigh on future returns.
How is dry powder calculated?
Committed capital minus capital already called for investments and fees. Some measures subtract reserves for follow-on investments and expected fees to show what is truly available for new deals.