The term, which started as slang, has grown to be pervasive across the financial industry.

What is dry powder?

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. As a highly liquid asset, investors and corporations alike can use dry powder strategically to gain financial success or ease financial stress. 

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 to be effective in combat. A reserve that can be dipped into is a prevalent theme across many industries and jobs, including the financial space.

Dry powder can be used in many different ways. For example, a venture capital firm could deploy some of its cash reserve to invest in a promising healthtech startup. A private equity firm could leverage its dry powder stockpile to buy out a distressed company and a corporation may reserve its capital in preparation for an add-on acquisition.

Deciding how and when to spend this cash reserve is not always clear cut, however. In early 2020, total dry powder levels in VC and PE hit unprecedented sums with more than $1.5 trillion available to fund managers worldwide. With more cash on hand than ever, firms are grappling with how to deploy it and the impacts it could have on returns.

3 ways investors use 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 stockpile to support and fuel growth in the areas where they need to. At the same time, however, maintaining too high a level of dry powder could stifle growth or limit the value of investments. 

2. Solving 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 compared to their competitors, especially during prolonged periods of turbulence.  

Often, when a company needs short-term liquidity, it will first turn to dry powder. 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. 

The COVID-19 pandemic had an unprecedented impact on the global economy and reignited fears over liquidity drying up. The black swan event forced investment firms to adjust their strategies, including finding liquidity outside of dry powder. We hosted a webinar on alternative ways to find near-term liquidity that is available to stream here

3. Capitalizing on distressed-debt opportunities

Market volatility also presents opportunities for distressed-debt investors. 2020 has been a case study in turbulence and, as mentioned above, firms have more capital on hand than ever. As of June 30, 2020, private debt funds had about $273 billion of dry powder available, according to PitchBook. "Around $66 billion of that capital is held by managers focused on distressed debt—a class of riskier investments in troubled companies with the potential to offer bigger returns—and they may now have a juicy opportunity to unleash that backlog of dry powder," according to the same PitchBook News article. 

Following the COVID-19 pandemic and economic downturn, more funds have gone to market in order to capitalize on the dislocation.

Examples of debt funds in the wake of the coronavirus:
  • The KKR Dislocation Opportunities Fund raised $2.8 billion in addition to $1.1 billion SMAs
  • The Oaktree Opportunities Fund XI is seeking to raise $15 billion and would be the largest distressed fund ever raised if the target is met 

How entrepreneurs and founders can leverage data on dry powder when fundraising

Understanding how much dry powder an investor has can help founders reach out to the right firm. 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.  

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