Dry powder—committed but uncalled capital—has become a shorthand for either opportunity or risk depending on who's talking. Bears argue that elevated dry powder signals capital that can't find attractive deployment opportunities. Bulls counter that it represents firepower for future deployment when opportunities emerge.
Neither interpretation is quite right. Dry powder analysis requires context: how does current dry powder compare to fundraising levels, and what are the deployment dynamics of different strategies? The ratio of dry powder to funds raised—and how it varies across strategies—reveals more than the absolute numbers.
Direct Lending Creates Its Own Assets
Despite raising more than half a trillion dollars after 2020, direct lending dry powder as of September 2025 stood at approximately 2.5 times funds raised that year—not dramatically different from the historic range of one to two times.
How is that possible? The answer lies in the fundamental nature of direct lending: it creates its own assets. Unlike distressed strategies that require market dislocation to generate opportunity, direct lenders originate loans to finance acquisitions, refinancings, and growth capital needs. When private equity does deals, direct lenders can deploy.
This self-generating quality means that dry powder accumulation follows different patterns than event-driven strategies. Capital raised eventually gets deployed because direct lenders manufacture their own deal flow rather than waiting for external events to create opportunity.
The implication: elevated absolute dry powder in direct lending is less concerning than it might appear. The strategy's deployment dynamics differ fundamentally from strategies that depend on market dislocation.
Distressed: Capital Being Quickly Absorbed
Distressed strategies, which do not create their own assets, showed strikingly different dynamics. Dry powder relative to funds raised halved in 2025. The tripling in fundraising identified in 2025 was quickly absorbed by deployment opportunities. The ratio appears to be at a nine-year low.
This suggests distressed managers are finding ample opportunity to deploy capital. Whether those opportunities ultimately generate strong returns depends on execution, but the capital isn't sitting idle. Distressed dry powder isn't building up—it's being put to work.
Special Situations: A Different Story
Only special situations saw a meaningful jump in dry powder relative to capital raised, now sitting at an all-time high ratio of approximately five years of deployable capital. This resulted from a 50% increase in dry powder during the first nine months of 2025 combined with a 47% decline in fundraising.
The math is straightforward: when fundraising slows while existing capital remains uncalled, dry powder ratios rise. For special situations, this suggests either a deployment challenge (managers struggling to find attractive opportunities) or patience (managers waiting for more compelling entry points).
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Special situations spans a broad range of strategies, so generalizations are dangerous. But the elevated dry powder ratio warrants attention. Is it disciplined patience or deployment difficulty? The answer will become clear as the cycle progresses.
Reading the Tea Leaves
Dry powder ratios encode useful information, but interpretation requires understanding strategy dynamics.
For direct lending, elevated dry powder matters less because the strategy creates its own assets. Deployment depends on M&A and refinancing activity, which will eventually generate opportunity.
For distressed, low dry powder ratios signal active deployment. The question shifts to whether managers are deploying wisely or simply putting capital to work.
For special situations, elevated ratios could signal discipline or difficulty. Watching how these ratios evolve—and whether fundraising recovers—will clarify the picture.
The Bottom Line
Aggregate dry powder figures tell an incomplete story. Ratio analysis—dry powder relative to fundraising, tracked over time and across strategies—provides more useful signal. The current data suggests direct lending deployment dynamics remain intact, distressed capital is being actively deployed, and special situations bears watching. As always, manager-level analysis matters more than asset class averages.
Source: Preqin dry powder and fundraising data. Dry powder as of September 2025; fundraising through December 2025.