Dry Powder

Dry powder is capital that a fund has received as commitments from its investors but has not yet invested. It is available so the fund can act quickly when attractive opportunities arise. A lot of dry powder means that a fund still has plenty of capital for new deals.

For closed-end funds, the usual measure is committed capital that has not yet been called. How much is available for new deals additionally depends on reserves for follow-on investments and management fees. For an individual fund the figure measures capacity to act. For the market as a whole it indicates competitive pressure: where a large stock of uninvested capital meets a limited number of attractive targets, entry prices rise, which dampens future returns. The effect is reinforced by the limited investment period of usually around five years: calls for new investments are generally restricted once it ends. Calls for follow-on investments, agreed transactions or expenses may remain permitted under the fund agreement. Uncalled capital stays with investors. Towards the end of that period this creates noticeable pressure to act, which can weaken price discipline.

For sellers and their advisors the metric is practically useful, because it shows which investors are genuinely able to act and which are approaching a new fundraise. Dry powder should be distinguished from total commitments and from paid-in capital, with the difference serving as the starting point for determining remaining available capital. It should be noted that published figures cover the whole market and are aggregated across strategies and size segments. For a specific target only the portion attributable to funds with a matching strategy, size class and region is relevant. A high total does not automatically mean competition for every company. It should also be borne in mind that part of the capital is reserved for follow-on investment in existing holdings and is therefore not available for new deals at all.