McKinsey: Mounting Dry Powder Is Nothing to Worry About

Uninvested capital in the private markets has reached $1.6 trillion but hasn’t outpaced growth in deal volumes, finds McKinsey & Co.


Dry powder at private capital firms has reached yet another record high — but it’s nothing to be concerned about, according to McKinsey & Co.

In a new report on the private markets industry, the consultantcy argues that rapidly accumulating dry powder is “not nearly the problem that some have suggested.” As assets under management at private capital firms have climbed — reaching $4.7 trillion last year — so have the piles of uninvested capital, which hit an all-time high of $1.6 trillion in 2016, according to data provider Preqin, which tracks alternative-investment firms. Private equity funds, with $869 billion available to allocate, accounted for roughly half the total dry power. Real estate, private debt, natural resources, and infrastructure firms, meanwhile, each reported between $100 billion and $300 billion in uninvested capital last year.

And the year-over-year growth rates are staggering: Total dry powder grew 26.8 percent from 2015, with unused infrastructure capital piling up the fastest, at 68.1 percent. Total assets under management, meanwhile, grew 10.2 percent in the past year.

These rising levels of uninvested capital have accumulated as general partners face an increasingly competitive landscape with fewer attractive assets available, the report states. According to McKinsey, investable opportunities around the world have shrunk as valuations have gone up, leading to a drop in global private equity deal activity for the first time in seven years.

According to data provider PitchBook, disclosed deal volume fell from $786 billion in 2015 to $716 billion in 2016 — and deal count fell even more dramatically, from 21,800 to 17,000.

But whereas deal volumes are down this year, overall growth is positive — and has not yet been outstripped by dry powder, according to McKinsey.

Characterizing dry powder as “inventory” for private equity firms, the report states, “‘Years of inventory on hand’ has remained fairly constant in private equity even as dry powder has grown, because deal volume has kept pace.” As of 2016, private equity firms averaged between one and two years’ worth of inventory over three-, five-, and seven-year periods.

“The growth in dry powder may not be as worrisome as it appears at first blush,” the report concludes.