Industry-level dry powder is watched as a measure of competitive pressure. Large accumulated commitments chasing a limited number of assets tend to raise entry prices, which lowers expected returns for the vintage that deploys into them.
At the fund level, dry powder is also a defensive asset. Reserves held for follow-on rounds allow a manager to support portfolio companies through a funding drought instead of being diluted by whoever will write the next cheque.
Note that dry powder sits on the investor's balance sheet, not the fund's, until called. It is a contingent liability for the limited partner and should be treated as one in any liquidity plan. See capital-call and vintage-year.
Related: capital-call, vintage-year, private-equity, venture-capital, illiquidity-premium, limited-partnership