The mountain of dry powder — money that investors have committed to private equity and venture capital funds — has set a new record high, as firms anticipate that deal markets will continue improving.
Since December 2023, private equity and venture capital funds have added $49.44 billion to their cash reserves, nearly twice as much as they did during the previous 12-month period, bringing the total to more than $2.62 trillion, according to S&P Global Market Intelligence.
To some observers, it is an astonishing sum of ready money considering how little there was two decades ago. In 2000, there was just $157 billion of dry powder. But as the private equity and venture capital industries have grown, so has the total. At the time of the financial crisis, there was roughly $900 billion in dry powder and it shrunk slightly during the years that followed. Since reaching a then-record of $1 trillion in 2015, the total has steadily grown every year. Investors have kept the cash promises coming, even as inflation, rising interest rates, geopolitical conflicts, and economic uncertainty have put deal markets on ice. Private equity funds have raised tens of billions of dollars since 2020.
Investors are optimistic, buying into asset managers’ pitch that the thawing deal market will continue to warm up and there are good companies out there in need of capital.
“Chances for private equity to chip away at the mountain of dry powder are improving. Private equity-backed deal activity, running slower since inflation and interest rates spiked in 2022, ticked up in the first half of the year, raising hopes for continued improvement in the second half,” Glenn Mincey, head of private equity for KPMG, said in an S&P report. “When that deal market comes back, it will come back much more quickly and more robustly than anticipated.”
Record dry powder is not a proxy for the health of the private equity and VC industries. A short list of the largest managers accounts for a disproportionate share of the cash. The 25 firms with the largest war chests collectively have $556.19 billion of uncommitted capital, more than 21 percent of all dry powder globally, according to S&P Global Market Intelligence. Topping the list of managers are KKR (which has had a celebratory five-years stretch) and Apollo Global Management, which each have more than $40 billion in dry powder. Ten others have at least $20 billion and the rest have at least $12 billion.
“Some of the mega-funds that have a proven track record over the years, they had very little difficulty in fundraising, and you kept seeing the size of their funds increase,” Mincey said, adding that funds outside the top tier were struggling with fundraising.
Some firms may be flush with cash and new records are being set, but that doesn’t mean these managers are out of the woods. Interest rates remain higher and buyers and sellers are still having trouble seeing eye to eye on valuations, George Casey, the global chairman of corporate practice at law firm Linklaters, said.
Asset managers are pulling out all the stops to get deals done but markets remain relatively dull.
“There are still some lingering concerns about the economy, about inflation, about the fact that interest rates are not being cut as quickly as people were expecting early in the year. And with interest rates higher, it’s more difficult for market participants, particularly on the PE side, to finance their deals,” Casey said.
