What is dry powder?
March 2, 2020
What started as slang has grown to be pervasive across the financial industry.
In the private markets, dry powder refers to the amount of committed, but unallocated capital a firm has on hand. In other words, it’s unspent cash that is waiting to be invested.
A venture capital firm, for instance, could use some of its dry powder to invest in a promising healthtech startup. A private equity firm could use its dry powder stockpile to buyout a distressed company. Even a corporation can reserve its dry powder in preparation for an add-on acquisition.
Historically, the term “dry powder” dates to the 1600s when warring armies used gunpowder to fire guns and cannons. Not only did the soldiers have to store stashes of the powder at any given time, but they had to keep it dry in order for it be effective in combat. This idea of a reserve that can be dipped into if needed has transcended time in various ways, including dry powder.
It can also be thought of as a safety net in case of an economic downturn. In the world of alternative assets (where volatility and risk are a given) it can be extremely beneficial to have cash on hand. Firms or businesses with more dry powder are better positioned compared to their competitors, especially when the market becomes turbulent. At the same time, however, maintaining too high a level of dry powder could stifle growth or limit the value of investments.
In 2017, total dry powder levels in VC and PE hit unprecedented sums with more than $1.1 trillion available to fund managers worldwide. Today, that total has grown even larger. With more cash on hand than ever, firms are grappling with the question, ‘Is record dry powder good or bad?’
While there may not be a clear answer yet, it is evident that firms have a large task ahead of them as they figure out how to deploy their hoards of capital.
Interested in fund performance? Download the latest PitchBook Benchmarks report, which includes a range of performance statistics across PE, VC, debt, real assets, fund-of-funds and secondaries strategies.
In the private markets, dry powder refers to the amount of committed, but unallocated capital a firm has on hand. In other words, it’s unspent cash that is waiting to be invested.
A venture capital firm, for instance, could use some of its dry powder to invest in a promising healthtech startup. A private equity firm could use its dry powder stockpile to buyout a distressed company. Even a corporation can reserve its dry powder in preparation for an add-on acquisition.
Historically, the term “dry powder” dates to the 1600s when warring armies used gunpowder to fire guns and cannons. Not only did the soldiers have to store stashes of the powder at any given time, but they had to keep it dry in order for it be effective in combat. This idea of a reserve that can be dipped into if needed has transcended time in various ways, including dry powder.
Advantages and disadvantages of dry powder
Dry powder enables investors to pursue promising opportunities when they arise. In a hypercompetitive environment, firms have to go head to head while bidding—and more dry powder could mean the difference between closing the deal or not. It also allows firms to put additional money behind their portfolio companies and fuel growth where they need to.It can also be thought of as a safety net in case of an economic downturn. In the world of alternative assets (where volatility and risk are a given) it can be extremely beneficial to have cash on hand. Firms or businesses with more dry powder are better positioned compared to their competitors, especially when the market becomes turbulent. At the same time, however, maintaining too high a level of dry powder could stifle growth or limit the value of investments.
In 2017, total dry powder levels in VC and PE hit unprecedented sums with more than $1.1 trillion available to fund managers worldwide. Today, that total has grown even larger. With more cash on hand than ever, firms are grappling with the question, ‘Is record dry powder good or bad?’
While there may not be a clear answer yet, it is evident that firms have a large task ahead of them as they figure out how to deploy their hoards of capital.
Interested in fund performance? Download the latest PitchBook Benchmarks report, which includes a range of performance statistics across PE, VC, debt, real assets, fund-of-funds and secondaries strategies.
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