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Dry powder

Committed capital that a private fund has not yet called or invested, available for future deals.

Industry-level dry powder is watched as a measure of competitive pressure. Large accumulated commitments chasing a limited number of assets tend to raise entry prices, which lowers expected returns for the vintage that deploys into them.

At the fund level, dry powder is also a defensive asset. Reserves held for follow-on rounds allow a manager to support portfolio companies through a funding drought instead of being diluted by whoever will write the next cheque.

Note that dry powder sits on the investor's balance sheet, not the fund's, until called. It is a contingent liability for the limited partner and should be treated as one in any liquidity plan. See capital-call and vintage-year.

Related: capital-call, vintage-year, private-equity, venture-capital, illiquidity-premium, limited-partnership

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.