What is Dry Powder and Why is it Good News for Business Owners?

By Generational Equity


If you follow the private equity industry at all, you hear the term “dry powder” used quite a bit. Also called “capital overhang,” these terms refer to the amount of committed capital that has been given (or promised) to private equity (PE) firms that has not yet been invested.

As you can imagine, since equity firms exist for one purpose (to invest these funds in companies and organizations that will generate an ample return for their investors), as the size of dry powder grows, it is a very good indicator of equity firms’ future investment patterns.

Simply put: PE firms have quite a bit to invest right now. This is how a recent article on Bloomberg Business Week described the situation:

Investors give private equity managers their capital with the expectation that they’ll make it grow. But today these managers are sitting on a record $963.3 billion of dry powder, as they call money that they’ve raised but have yet to invest. The size of that pile, and the fact that it keeps rising, is making everyone antsy.

Why? Because until these funds are invested, limited partners (the folks that provide the capital for PE firms) are not earning the returns they have been promised. This makes them “antsy” (a.k.a. anxious).

But you might ask, is $963 billion really that much? How does this compare to the past few years? Although the following chart is only tracking data through EOY 2016, it does graphically show you just how much dry powder has grown over the years.

Source: Bloomberg Business Week

Look at the chart above and compare 2000 to today’s $963 billion. Pretty shocking growth, I would say. Why the dramatic expansion? Because these investors are savvy and they know that PE firms that operate in today’s market are experts at finding well-run businesses, investing capital and expertise into them, and growing them into significantly larger companies.

For a great visual on how this process works, take a look at this video: Private Equity at Work: Who Benefits from Private Equity

Why does the amount of dry powder continue to grow? This is what Bloomberg Business Week had to say about that:

Investors are pouring money into private equity in search of yield, driving near-record fundraising levels and speeding up the pace of inflows. On the spending side, managers are having a harder time finding attractive deals.

Bingo! And we come to our main point of why this is good news for business owners: PE firms can’t find enough well-run businesses to invest in! If you hire experienced M&A advisors like our team at Generational Equity, you might be surprised to learn just how many equity firms are out there looking for companies just like yours.

Given the huge amount of capital available for investment, and the challenge buyers are having to find enough good deals, if you own a company today, you are duty-bound to begin investigating your options of how and when you should exit. Here are just a few examples of business owners we have worked with to close successful transactions with equity firms in the form of “partial sales”:

If you are interested in learning more about how all this dry powder could benefit you and your company, make some time today to reserve a place at a Generational Equity exit planning conference near you. These are highly educational, complimentary, and you will leave with a full wealth of knowledge that you didn’t have before. Use the following links to learn more:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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