The term dry powder gets thrown around a lot in the financial industry. What started as a slang term with historic roots is now a well-known phrase with relevance across the global capital markets. In this article, we’ll examine dry powder through a private equity and venture capital lens, specifically. Keep reading to explore what dry powder is within PE and VC, as well as the term’s history, how investors leverage dry powder, and how PitchBook’s data on dry powder can help you win what’s next.
What is dry powder in finance?
For venture capital (VC) and private equity (PE) firms, dry powder refers to the amount of committed, but unallocated capital a firm has on hand. In other words, it’s an unspent cash reserve that’s waiting to be invested.
What is the history of the term dry powder?
The term dry powder dates back to the 17th century when armies used gunpowder to fire guns and cannons amid conflict. The soldiers had to store stashes of the powder for use at a moment’s notice—and it had to be kept dry in order to be effective during combat.
Dry powder in venture capital (VC)
How much dry powder is there in VC?
According to data from the PitchBook Platform, there was $652.2 billion in cumulative dry powder in global venture capital as of December 31, 2023. That’s a slight decrease from 2022’s $686.2 billion. When looking at VC capital by overhang by vintage, 2022 represents the largest bucket at $204.9 billion, followed by 2023 ($150.4 billion) and 2021 ($128.1 billion). Note that 2024 dry powder totals have not been tabulated as of this article’s publish date.
Diving into dry powder in US VC, dry powder was at $296.2 billion as of the end of 2023. The Q3 2024 PitchBook-NVCA Venture Monitor report found that although dry powder remains high, data shows that company inventory has continued to increase over the past few years despite a narrative of significant company closures. More than 4,300 companies raised their first investment in 2023, and another 3,000 did through Q3 2024. Now, with high bars to clear and less capital available, the startup ecosystem is struggling to regain its footing for growth.
Capital overhang followed a similar pattern to global VC numbers, with 2022 representing the largest slice at $113.6 billion followed by 2023 ($74.2 billion) and 2021 ($65 billion).
Dry powder in PE
How much dry powder is there in PE?
According to PitchBook data, there was $1.5 trillion in cumulative dry powder in private equity globally as of December 31, 2023. That’s down slightly from $1.7 trillion in 2022. When assessing PE capital overhang by vintage, 2022 is the largest bucket at $451.7 billion, followed by 2023 ($426 billion) and 2021 ($308.8 billion). Note that 2024 dry powder totals have not been tabulated as of this article’s publish date.
Looking at private equity in the US only, dry powder was at $914.5 billion as of the end of 2023. That figure represents an 11.9% decline—the biggest ever—from 2022, when dry powder in US PE pushed through the $1 trillion mark. According to the Q3 2024 US PE Breakdown report from PitchBook, PE dry powder in the United States is shrinking and asset appreciation is roughly equal to the distribution rate, leaving new commitments as the likely culprit. The report says that the runoff in dry powder is the clearest indicator yet that US PE fundraising has in fact slowed, possibly to the tune of $100 billion.
Capital overhang in 2023 followed a similar pattern to global PE numbers, with 2022 representing the largest bucket ($289.7 billion), followed by 2023 ($283.8 billion), and 2021 ($198.9 billion).
Per PitchBook’s Q3 2024 European PE Breakdown report, the European market is on track for significant yearly growth, with a projected 27.5% increase in deal value and 11.5% increase in deal count. Substantial—near record-level amounts of—dry powder among sponsors, as well as improved market conditions and lower rates, are driving the trend. As a result, PitchBook analysts believe it’s likely that capital deployment will continue to intensify into 2025 as conditions become even more favorable.
How can investors use dry powder?
Dry powder can be used in a variety of ways—a VC firm could deploy some of its cash reserve to invest in a promising healthtech startup, for example. A PE firm could leverage its dry powder to buy out a distressed company. Corporations may reserve their capital in preparation for add-on acquisitions.
But deciding when and how to spend this cash isn’t always straightforward. In a stalled exit environment with liquidity constraints, it can be difficult for firms to maintain and efficiently use their capital. Even if they have more cash on hand than ever, many firms still grapple with how to best deploy it.
With that in mind, here are three potential uses for dry powder:
1. Fueling growth for portfolio companies
Investment firms often go head-to-head while bidding, and more dry powder could mean the difference between closing the deal or not—especially in a competitive market. When it comes to portfolio companies, investors may use their cash to support and fuel growth in the areas where they need to. At the same time, reserving too high a level of dry powder could stifle growth or limit the value of investments.
2. Addressing near-term liquidity issues
Dry powder 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 than their competitors, especially during prolonged periods of turbulence. Often, when a company needs short-term liquidity, it will turn to dry powder first. When a company does not have enough liquid assets or wants to find alternative solutions for short-term liquidity issues, it can look to other avenues.
3. Capitalizing on special situations and distressed-debt opportunities
Market volatility also presents opportunities for distressed investment if investors have cash on hand and some tolerance for risk. At a time when others may be hesitant to invest, some firms use dry powder to strategically acquire distressed assets at discounted prices. If the market rebounds, they hope to then achieve strong returns.
How entrepreneurs can use PitchBook’s dry powder data
Understanding how much dry powder an investor has can help founders reach out to the right firm. Remember, timing is key—a VC firm might be interested in your pitch, but if they don’t have enough money available for the transaction, you’ll likely have to try again. PitchBook lets you sort investors by the amount of dry powder they have, and provides details on investor preferences, previous investments and more. All of this information can be critical to founders as they raise funding for their business.
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.
