Private Equity: Dry Powder Finally Declines (Not by Much) | PineBridge Investments (2024)

FAQs

Why is dry powder bad for private equity? ›

While ample dry powder has benefits, excess dry powder has the potential to present such challenges as: Pressure to Deploy: As dry powder piles up, general partners (GPs) may feel mounting pressure to find suitable investments, potentially leading to rushed decisions and overpaying for acquisitions.

According to data collected by Preqin, April 2024 marks the first time since December 2014 that dry powder declined across the private equity industry. Granted, you may need to squint to notice the difference because the current mark is $3.911 trillion, which is only $400 million less than the level at the end of 2023.

In Case You Missed It: Global Private Equity Dry Powder Hit A Record $3.9 Trillion 🤯 The dry powder total as of Dec 2023 showed a significant increase from $2.39 trillion in Dec 2022, according to one of the world's leading consulting firms, Bain & Company.

In 2023, private equity firms faced significant challenges amidst a static market, soaring inflation, elevated interest rates, and slow deal activity. This confluence of factors resulted in an abundance of dry powder held by private equity firms.

Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and have grown nearly 20 percent per annum since 2018. Dry powder reserves—the amount of capital committed but not yet deployed—increased to $3.7 trillion, marking the ninth consecutive year of growth.

Dry powder: Available capital to fund managers for investment, i.e. committed capital that has not yet been called for investment. Unrealized value: Value of unrealized portfolio investments.

The remaining committed capital that has not been called is uncalled capital, also known as dry powder.

Even though dry powder sits with investors until it's called by private equity managers and deployed into an investment, as committed capital, dry powder is included as part of a private equity manager's assets under management.

With investors expecting deal activity to increase in 2024, private equity firms will prioritize five key areas in 2024. Firms will expand their deployment of artificial intelligence, setting the stage for large-scale transformation of the enterprise.

The origins of the phrase “dry powder” hearken back to the 17th century, when military battles were fought with guns and cannons that utilized loose gunpowder in combat. 1 In order for it to remain effective, the gunpowder had to be kept dry.

What is dry powder in M&A? ›

Dry Powder is a term referring to capital committed to private investment firms that still remains unallocated. Under the specific context of the private equity industry, dry powder is a PE firm's capital commitments from its limited partners (LPs) not yet deployed into active investments.

Dry powder refers to the reserves of liquid assets that a company or an individual holds, primarily to cover future obligations, undertake new ventures, or navigate through financially turbulent times. This term is often used metaphorically to describe cash reserves, but can also encompass other highly liquid assets.

Many PE firms would prefer to hold onto existing assets, rather than sell them at an undervalued price—leading to an accumulation of dry powder. As noted in PitchBook's 2023 Annual US PE Breakdown, dry powder has in PE has actually increased 9.3% since 2021.

As of the end of Q1 2024, VC funds have accumulated $317 billion of dry powder. This record amount of dry powder is the direct result of record fundraising in 2021 and 2022 and the slowdown in capital deployment over the past several quarters. In fact, about 72% of the dry powder is from 2020-22 vintage funds.

Turbulent market conditions are driving down private equity returns and hampering fundraising efforts, particularly affecting smaller/mid-market managers amidst a crowded market.

Dry powder is the cash on hand that the private equity firm can use to make acquisitions, investments, or other strategic moves. This readily available capital isn't just about having money on standby; it's about wielding it with precision and purpose to better position their platform in the marketplace.

A dry powder fire extinguisher is not to be used in any of the following situations: Class F fires; cooking fires, such as chip pan fires. Fires that are in enclosed spaces. Fires that involve electrical equipment which is over 1000v.

Dry powder, or the amount of money committed to private credit funds that has yet to be deployed, is at a record.

Dry Powder Principle: In finance, dry powder means the cash reserves a company or individual maintains to meet obligations in times of economic stress. At Capital Investment Advisors, we translate this for the happiest retirees. The Dry Powder Principle says investors should hold at least three years of dry powder.