You may have heard about the unprecedented level of “dry powder” in the market. In the M&A world, we refer to dry powder as the cash reserves businesses keep on hand to fund acquisitions or future business investment. In the last few years, private equity firms have amassed record amounts of investor dollars, aka dry powder. These firms are under considerable pressure to deploy those assets and generate returns for their investors.
The more dry powder there is in the market, the more pressure there is to use that money (i.e., acquire businesses). This pressure increases competition and drives up multiples. And, it’s created a wider buyer pool for businesses in the lower middle market as private equity firms shift their focus down market in order to find new opportunities.