Dry powder attempts to keep up with pricey deal markets

High deal values have eroded cash reserves, heading into a potentially major correction for private equity

A quick glance shows that GP cash reserves began the year at historic highs. These pale in comparison, however, with total assets under management in March 2022, following over a year of superlatives.

According to Preqin data, the proportion of global private equity dry powder to AUM fell to 23% in early 2022. That nadir, at least a 20-year low, was reached as the balance of available cash rose to a record $1.68tn globally (Fig. 1). These competing trends came on the heels of a year of record fundraising and deal valuations.

Private equity funds raised $920.3bn in 2021 across 3,361 funds. The former, a record high, and the latter, a close second to 2018. This supply of available capital, however, still failed to keep up with the deal market as fund managers faced an inflated market and elevated valuations ate into cash reserves. 

However, the decrease in dry powder reserves didn’t impact all PE assets equally. Global buyout funds showed cash reserves of $810bn, or about 27% of total AUM (Fig. 2). While still a low, the balance continued its downward trend, beginning with 2020’s $909bn. The average buyout deal last year rose sharply to $576mn, up from $401mn in 2020 (+44%), and 2018’s previous high of $446mn (+29%).

Venture capital’s share of dry powder fell to just 16.8% of AUM, despite increasing in absolute terms each year since 2013. Total cash reserves held by global venture capital firms in March were estimated at $410.9bn. During 2021, the average venture capital deal cost $36.7mn, 60% higher than 2020’s $22.9mn.

After nearly a year of falling equity valuations, investors want to know how much cash their GPs have on hand. While neither the number, total, nor average size of 2022 private equity deals will touch 2021’s triple crown, this year will likely still rank among the highest on record in all three categories. 

Demand for private capital assets has been significant despite volatile markets. Regardless, we should expect dry powder numbers to trend higher as more recent data comes to light. Fundraising has slowed, which will slow the growth of absolute dollars held by funds, but deal values have also dipped. Furthermore, GPs have shown more reserve with late-year deal numbers, on pace to revert to their means in a year that could be make-or-break for those looking to bolster their performance records and reputations.