Private Equity Dry Powder Hits New Highs (And Brings Old Challenges)

March 14, 2022

Private equity growth shows no signs of slowing down. In 2021, activity bounced back from a pandemic-related pause and hit new highs for deal value, exit activity, and deal count.

Even as possible challenges such as rising interest rates and increased regulation lie ahead, the influx of private equity dry powder, strong fundraising activity, and heightened interest in private equity should continue to bolster the alternative investment sector.

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How private equity dry powder has grown

Per PwC, US private equity investment in the second half of 2021 surged 48% from the same period in 2020. Illustrative of this growth was an all-time high of dry powder, which reached $920 billion in October 2021.

What is “dry powder”?

At venture capital and private equity firms, “dry powder” is cash that’s been committed by investors but has yet to be allocated to a specific investment. This term dates back to the 1600s, when it referred to stashes of reserved (and still-dry) gunpowder that could be accessed during combat.

Globally, uncommitted capital has grown nearly 17% annually since 2015, reaching a new record of $1.81 trillion in January 2022. The largest 25 firms – led by Blackstone, KKR & Co. Inc., and Ardian – hold 25% of this uninvested capital. Additionally, roughly half of this capital is relatively “fresh,” according to Pitchbook, with a vintage year of 2019 or later.

As the amount of private equity dry powder has risen, the time to collect it has compressed. Preqin data reports that the average fundraising cycle between 2013 and 2018 declined by 10 months. This pace continued to quicken throughout 2021.

Holding steady, meanwhile, is the level of dry powder relative to unrealized assets. This ratio has been holding around 30% for the past 10 years or so, due to shorter investment periods, higher market valuations, and other factors. In other words, firms have been investing capital at a similar rate as they’re raising it.

The risks of too much dry powder

Many fund managers worry the stockpiling of capital could be too much of a good thing. 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 currently 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 – in the event of a recession or other market pullback – is always present.

The key to staying balanced

Needless to say, GPs have their work cut out for them. 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. And our Private Equity Essentials set is a comprehensive package that helps streamline accounting, reporting, and investor communication efforts.

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

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