Dry Powder
Capital that a PE fund has committed from its limited partners but has not yet deployed into deals. High dry powder levels are a commonly cited driver of valuation competition among sponsors.
Why Dry Powder matters in interviews
Dry powder is the industry's shorthand for undeployed capital, and it comes up in any market-conditions conversation. Interviewers use it to check that a candidate follows the industry rather than just the technicals.
How it works in practice
Dry powder is capital that limited partners have committed to a fund but which the general partner has not yet invested. It sits as an unfunded commitment, drawn down as deals are signed.
High aggregate dry powder pushes entry multiples up: more committed capital chasing a broadly fixed universe of quality assets increases competition in auctions and compresses expected returns.
It also creates deployment pressure. Funds operate an investment period, typically five years, after which uninvested commitments generally expire — which can push discipline in the wrong direction late in a fund's life.
What candidates get wrong
- Describing it as cash held by the fund. It is a commitment from LPs, called down when needed, not money sitting in an account.
- Missing the link to valuations. The connection between dry powder levels and entry multiples is the point of the concept.
- Ignoring that high dry powder coexists with slow deployment when bid-ask spreads between buyers and sellers are wide.
Dry Powder: frequently asked questions
What does dry powder mean in private equity?
Capital that limited partners have legally committed to a fund but which has not yet been invested in deals. It is an unfunded commitment drawn down as transactions close, not cash held on the fund's balance sheet.
Why does high dry powder push up entry multiples?
Because it increases the amount of capital competing for a roughly fixed supply of high-quality assets. More bidders in each auction raises clearing prices, and higher entry multiples mechanically reduce expected returns unless offset by operational improvement or a higher exit multiple.
Go deeper
This term comes up constantly in private equity interviews and on the desk.
Private Equity interview prepRelated Private Equity terms
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