Historically High PE Dry Powder Sustains Amid New Market Outlook

By: Allvue Team

February 28, 2023

As we entered 2023, the private equity industry braced itself for many changes, including higher interest rates, lower valuations, fewer exits and heightened due diligence. But one key element remains stubbornly unchanged – private equity dry powder levels.

The private capital industry closed out 2022 with a new dry powder record of $3.7 trillion globally. While fundraising may slow slightly in 2023, other economic factors will most likely make attractive deals hard to come by throughout the year. With this in mind, current high dry powder levels will not materially shrink any time soon – and private equity managers can count on pressure from their investors around this metric.


What is “dry powder” in private equity? 

At venture capital and private equity firms, “dry powder” is cash that’s been committed by investors but has yet to be “called” by investment managers in order to be allocated to a specific investment.  

Where does the term “dry powder” come from? 

This term dates back to the 1600s, when it referred to stashes of reserved (and still-dry) gunpowder that could be accessed during combat. In the sense of private equity, this reserved gunpowder is compared to investors’ committed capital – it’s there for the taking when private equity managers have a demonstrated reason (rather than battle, an investment with exciting potential to generate returns for the manager and their investors) to access it.  

Is private equity dry powder included in a manager’s AUM? 

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. 

How much private equity dry powder is there? 

Dry powder in private equity sits around  $3.7 trillion from the end of 2022. Private equity buyout funds are the leading category in terms of dry powder levels with $1.1 billion in committed capital reserves. As Bain & Company points out, the rare appealing deal will attract intense competition from bidders. In 2022, 65% of North American buyouts involved multiple bidders or a formal auction process. With a dearth of appealing deals hitting the market, dry powder levels should stay stubbornly high throughout 2023.

Meanwhile, in the venture capital industry, dry powder levels clocked in at $298.5 billion as of September 30, 2022 – another figure that is likely to remain high as startup demand for capital has outpaced supply by 2.1x. In 2023, capital is not as cheap as it once was, and the growth-at-all-costs outlook is no longer widely embraced in venture capital, according to Pitchbook. This shifting dynamic lends itself to better investor terms for the VC managers with high dry powder levels, with those benefits also trickling down to their LPs.

Dry powder levels

Global private capital dry powder 2005 to 2022

How do private equity managers balance dry powder? 

While dry powder represents possibility, it also signifies pressure. Limited partners expect their investment to be committed in a timely manner, and with trillions of capital on the sidelines, competition to find the next unicorn is tougher than ever. 

General partners face the delicate balancing act of meeting their LPs’ timing expectations while still performing ample due diligence for any investments. Also, the risk of holding too much uncommitted capital and not being able to deploy it is always present – especially now, in our current environment of stubborn inflation, questions of a recession and action by monetary policy bodies worldwide.

Private equity managers’ resources for managing dry powder 

Needless to say, GPs have their work cut out for them in managing their active deals against their dry powder reserves. In addition to the regular fundraising needed to keep dry powder levels steady, deal management and portfolio monitoring must be precise. Along the way, strategic LP communications are essential to address any concerns that funds are lying fallow. One GP’s “dry powder” can quickly become an LP’s “missed opportunity,” especially as LPs already face a precarious balance of their own by overseeing their private equity pacing models and cash management activities. 

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Automated workflows through private equity software can streamline processes to save time, reduce risk, and ensure committed capital is being managed efficiently. The right tools can also help alleviate stress on valuable employees during a time when talent retention is a challenge. 

No matter how mature your PE firm is—whether you’re just getting started or have over $1B in committed capital – Allvue has solutions to help manage the front-to-back-office workings of your firm.  

Reach out to learn more about how Allvue solutions can help your firm make superior investment decisions. 

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