What does 'dry powder' refer to in private equity?

In private equity, 'dry powder' specifically refers to the funds that have been raised by a firm but have not yet been invested. This term is commonly used to highlight the capital reserves available for potential investments, indicating the amount of money a firm has on hand to pursue new opportunities without needing to raise additional funds.

Dry powder is crucial for private equity firms as it gives them the flexibility to act quickly on new investment opportunities, especially in competitive landscapes where timing can be critical. Having substantial dry powder also signals to investors and the market that a firm is well-capitalized and capable of making strategic investments.