Lost Money as an LP? It's Not Just the Interest Rates...Part 1 of 2

We work with sponsors all over the country, and a familiar pattern keeps coming up. When we ask how things are going, the conversation quickly shifts to the pressure they’re feeling from interest rates not dropping as quickly as expected.

While we sympathize—it’s not an easy environment—we also see a deeper issue when we review their original offering documents and models: many of these deals had problems from the start. Rate pressure just exposed them.

In our transparency reports, we often flag recurring symptoms of a potentially weak deal: unclear GP cash equity ("skin in the game"), limited market experience, and gaps in legal protections. These red flags are common and show up early in our 19-point due diligence checklist.

Unfortunately, the macro backdrop isn’t helping.

Last week, the House passed a new tax bill that likely puts more upward pressure on interest rates. Here's why:

• Typically, when interest rates rise, the dollar usually weakens. When they fall, the dollar strengthens as global buyers are converting into dollars to buy treasuries.

• Tariffs, like those recently proposed against China, historically boosted the U.S. dollar. That’s because less trade means fewer dollars are exchanged into foreign currencies (e.g. yuan)—strengthening the dollar and weakening the, less sought out, target country’s currency.

• But a stronger dollar is inflationary at home—making imports cheaper in dollar terms, yes, but also forcing the Fed to tread more cautiously with rate cuts.

  
  

This tension has even spilled into politics. April saw another public spat between Trump and Powell over the pace of rate policy.

Markets are noticing. So are rating agencies. Moody’s just downgraded U.S. debt from Aaa to Aa1.

As of today, we’re seeing:

1. The dollar index is down 8% year-to-date.

2. Treasury yields remain elevated.

3. The odds of a SOFR rate cut this summer have collapsed.

   
   

On April 28th, just 6% of traders expected the Fed to hold rates steady in July. Now? 75% do. And expectations are worsening the further out you look.

Bottom line: Be cautious. If someone’s asking you to invest in a deal—especially one structured with preferred equity—check the assumptions. Or better yet, check in with us first: info@true-gp.com.

How Long Til the Deal's Under Water?