Cost of Capital as the New Gatekeeper of Brazilian M&A

The late-January monetary backdrop leaves little room for ambiguity: in Brazil today, cost of capital is not a background condition for M&A; it is the main filter through which transaction viability is determined.¹ With the Selic maintained at 15.00% and effective from 29 January, buyers remain in an environment where leverage is expensive, financing structures are more constrained and return thresholds are materially harder to clear than in looser cycles. That alone is enough to explain why the market remains active but highly selective.

The practical effect of high rates goes beyond a general reduction in appetite. Higher funding costs reduce the range of assets that can support debt, compress the valuation multiples that buyers can justify and push transactions toward structures that preserve more downside protection.² Chambers’ 2025 review of Brazil’s private-equity market was explicit on this point: persistently high interest rates kept financing expensive, put downward pressure on valuation multiples and encouraged greater use of earn-outs, vendor financing and private credit. That is more than a technical adjustment. It means pricing, process design and capital structure have become inseparable.

This is why cost of capital has become the real gatekeeper of Brazilian M&A. A buyer may still like the strategic logic of a business, admire its growth profile and see operational upside after closing.² But if the financing package cannot support the acquisition at the required return, that interest will not convert into price in the way sellers expect. In a lower-rate environment, the distance between strategy and finance can narrow almost automatically. In the current one, it does not.

That reality is showing up differently across buyer classes. Strategic acquirers with stronger balance sheets or internal cash generation often retain more room to act than financial sponsors or smaller corporates that depend more heavily on external debt.² The result is not a market-wide absence of demand, but a market in which demand is more unevenly distributed. Some assets continue to attract capital because they sit in sectors where scale, regulatory visibility or operational synergies are compelling enough to justify movement despite higher rates. Others may still be strategically attractive, but struggle to generate a financeable path to closing.

For sellers, this creates an important discipline that is not always intuitive. Valuation is no longer best understood simply as a function of precedent multiples or category excitement.² It is increasingly a function of how financeable the asset is under today’s conditions. Can the business support leverage? Does it have recurring earnings quality? Is the cash-flow profile stable enough for a buyer to underwrite with confidence? Does the operating model reduce execution risk or expand it? These questions matter more when the cost of funds is high because mistakes are punished more quickly.

This also helps explain why the Brazilian market stayed resilient during 2025 without becoming euphoric. The broader 2025/2026 market commentary confirms that deal activity held up despite rates reaching 15% during the year, the lack of IPO liquidity and persistent macro concerns.³ But resilience should not be mistaken for ease. What it really suggests is that buyers continued to act where strategic necessity was strong, while becoming more rigorous about what they pursued and how they financed it. The market did not ignore the cost of capital; it adapted around it.

For the Brazilian mid-market, this distinction is especially important. Many founder-led and family-owned companies still approach M&A conversations as if price is fundamentally a narrative exercise. In the current cycle, that is rarely enough.² Buyers can still pay well for quality assets, but they must be able to explain the economics internally and often to lenders or investment committees as well. The burden therefore shifts toward companies that can demonstrate earnings durability, operational maturity, reasonable capital intensity and a post-closing value-creation path that is not purely aspirational.

There is an additional structural consequence. When cost of capital remains high for long enough, it changes market behavior even beyond the immediate rate cycle. Buyers become more disciplined in how they think about risk allocation and valuation.² Sellers become more aware that price alone is not the only dimension of a deal worth negotiating. Financing solutions become more creative, and some assets that might once have relied on exuberant external funding begin to look more attractive as add-ons to stronger platforms. In that sense, today’s cost-of-capital discipline may leave a longer-lasting imprint on Brazilian M&A than the rate level itself.

The conclusion, therefore, is not simply that high rates are “bad for deals.” That would be too simplistic. The better conclusion is that high rates are now governing how deals get done, which buyers remain competitive, which sectors can still support value and what kinds of structures are needed to bridge the gap between strategic interest and executable reality.¹² In late January 2026, cost of capital is not merely influencing Brazilian M&A. It is setting the terms of engagement.