Returns and fees
What is dry powder?
Committed capital not yet deployed.
Optionality with a cost: undeployed capital earns nothing and drags returns, but capital deployed into a hot market at the wrong price is worse.
The upside of a good year: investors re-up and hand you fresh capital. The catch is that a larger fund has to find larger deals, so the hurdle you must clear quietly rises with the raise.
A worked example
A $1bn fund that has invested $350m has $650m of dry powder. If it charges a 2% fee on commitments, LPs are paying $20m a year whether that money is working or not, and that pressure is what pushes managers into deals late in a cycle.
Where it catches you in the game
- Cash is your dry powder; running it to zero ends the run.
- A strong year can close a fundraise that adds cash and AUM but nudges your return expectation down.
It comes up most on the venture capital desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what dry powder does to your returns.