What is 'Dry Powder'
Dry powder is a slang term referring to marketable securities that are highly liquid and considered cash-like. Dry powder can also refer to cash reserves kept on hand by a company, venture capital firm or person to cover future obligations, purchase assets or make acquisitions. Securities considered to be dry powder could be Treasuries, or other fixed income investments, and can be liquidated on short notice, in order to provide emergency funding or allow an investor to purchase assets.
BREAKING DOWN 'Dry Powder'In its most basic form, dry powder is a term that refers to the amount of cash reserves or liquid assets available to deploy, when needed. These cash reserves and marketable securities are usually kept on hand to cover future obligations that may or may not be foreseen. Therefore, the term dry powder can be used in situations of personal finance, in the corporate environment, and in venture capital and private equity investing.
For example, having dry powder on hand can provide investors with an advantage over others who may be holding less liquid assets. For example, if a venture capitalist expects IPO markets to sour, he might decide to pull back on new investments and instead keep cash on hand in case he needs to provide additional funding to his current portfolio companies. In this case, the venture capitalist is keeping his existing powder dry.
Dry Powder in the Corporate Environment
When a company refers to its dry powder, it is speaking about the amount of its cash and current assets that can be used to fund working capital needs. If, for example, a company decides to invest almost all of its cash in long-term inventory that cannot be easily sold, it is reducing the amount of dry powder it has for the future.
If, in this example, the economy takes a downturn, and customers reduce the amount of purchases they make, the company would be stuck with illiquid inventory and monthly operating costs that it still needs to fund. In this case, a reduction in dry powder is not a good thing.
Dry Powder for Venture Capitalists
Dry powder is commonly used in the venture capital and startup world. This is because all venture capitalists want adequate cash on hand to either invest in a new opportunity or provide additional funding to portfolio companies to fuel growth. Therefore, many venture capitalists keep their powder dry, choosing to abstain from most investments rather than depleting the fund's capital too quickly.
Dry Powder for Personal Finance
Similarly to corporations and venture capital funds, people need to keep dry powder in case of future obligations or opportunities. When a person keeps their powder dry, it means that they are keeping some, or all, of their net worth in cash or marketable securities that can be drawn on quickly, if needed.