What is dry powder?
Dry powder is a slang term for very liquid marketable securities that are considered to be cash. Dry powder can also designate the cash reserves held by a company, a venture capital company or an individual to cover future obligations, buy assets or make acquisitions. Securities considered dry powder can be treasury bills or other short-term fixed income investments that can be liquidated in the short term to provide emergency financing or to allow an investor to purchase securities. assets.
Understanding dry powder
In its most basic form, dry powder is a term that refers to the amount of cash reserves or liquid assets available for use. These cash reserves or short-term negotiable securities are generally kept to cover future obligations which may or may not be foreseen. Therefore, the term dry powder can be used in personal finance situations, in the business environment and in venture capital or private equity investment.
Having dry powder can give investors an advantage over those who may have less liquid assets. For example, a venture capital investor may decide to hold a significant strategic amount of cash to take advantage of private equity investments that may come up for immediate financing. This money would colloquially be called dry powder from the venture capitalist.
Key points to remember
- Dry powder means low-risk, highly liquid cash or marketable securities that can be converted into cash.
- Funds held in the form of dry powder are kept in reserve for deployment in an emergency.
- The term is often used in terms of venture capitalists, where the dry powder allows them to invest in opportunities as they arise.
Dry powder in the corporate environment
When a company refers to its dry powder, it talks about the amount of its cash and current assets that can be used to finance its 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 reduces the amount of dry powder on hand. If the economy subsequently slows down and customers reduce their purchases, the company will be stuck with illiquid inventory, but will still have monthly operating costs to pay. In this case, the reduction of dry powder was uninformed. Businesses generally have sufficient dry powder to maintain their daily operations.
Dry powder for venture capitalists
Dry powder is a term commonly used in the world of venture capital and startups. Indeed, all venture capitalists want to have sufficient liquidity to invest in a new opportunity or provide additional financing to portfolio companies to stimulate growth. As a result, many venture capitalists have dry powder on hand, choosing to refrain from most investments rather than depleting their capital too quickly.
Dry powder for personal finance
In the same way as companies and venture capital funds, individuals must keep the powder dry in the event of future obligations, opportunities or emergencies. When a person keeps their powder dry, it means that they hold at least part of their personal net worth in cash or marketable securities which can be used quickly if necessary.