The Perfect Storm for the Brazilian Capital Market
Falling interest rates, foreign capital and a rising Ibovespa create the conditions for a new IPO window in Brazil
Gustavo Campagnoli (Junior at GNPoli)
The Brazilian capital market is currently going through a moment of convergence of positive factors: the consolidation of the interest rate cutting cycle, the Ibovespa setting new all-time highs and a significant inflow of foreign capital into the country. This combination is a storm of factors that may culminate in the opening of a strategic window for Brazilian companies to go public, something essential for the thin issuance market, which has not seen a new listing in five years.
The current inflection is intrinsically anchored in recent signals from domestic monetary policy. On April 29, COPOM (the Monetary Policy Committee), a body of the Central Bank, decided to cut the benchmark interest rate (Selic) by 0.25 percentage point for the second meeting in a row, bringing it to 14.5% per year. Although still extremely high, the successive cuts indicate that, in an optimistic scenario, the rate should enter a downward cycle and reach 10% over the next four years, according to the Focus Bulletin. This downward path of interest rates works on two fronts to lift asset valuations. First, there is a reduction in companies' cost of capital, making financial leverage and the financing of expansion projects easier, boosting the growth of their operations and, consequently, of their shares. At the same time, the discount rate applied to company valuations is compressed. In practice, their future cash flows are worth more in the present, improving their value prospects, lifting share prices and making going public (IPO) much more profitable for issuers.
In addition, the drop in the Selic rate changes the dynamics of how investors allocate money. As fixed-income returns lose steam, the opportunity cost of keeping capital in government bonds or CDBs rises; basically, investors start to miss out on gains by not taking on risk. As a result, equity products become more attractive, forcing wealth to migrate toward the stock exchange. This portfolio rebalancing generates consistent demand for stocks, increasing market liquidity and risk appetite, paving the way for the Ibovespa to reach new highs and attract volume to new listings.
IPOs (#) and Evolution of the Selic Rate (%) (Source: IBGE)
However, the recent peak of the Ibovespa, the index that measures the performance of the most traded stocks on B3, is not solely the result of the domestic factor of a possible interest rate cutting cycle. The global geopolitical scenario has also played an important role in this phenomenon. U.S. incursions into the Middle East, followed by the closure of the Strait of Hormuz, through which 20% of the world's oil supply passes, put institutional investors on alert; in the face of the risk of shortages and instability, they began fleeing the countries at the epicenter of the global financial market. In search of markets that were geographically distant from the conflict and had energy matrices less vulnerable to these disruptions, emerging markets became destinations for this capital.
In this context, Brazil emerged as a strategic haven for foreign investors. While other emerging markets face severe structural challenges, such as the real estate crisis in China and geopolitical uncertainty in Eastern Europe, Brazil benefits from mature institutions and a stock exchange made up of highly relevant companies, suffering proportionally less than other developing countries and standing out as the main candidate to receive these investments, along with Colombia and South Africa. The massive inflow of this capital is, in practice, the main growth engine for the Brazilian market, since foreign investors account for 60% of the volume traded on B3. By flooding the market with liquidity, their billion-real buy orders create buying pressure, pushing stocks higher. From the perspective of the global investor, operating with a stronger currency, the country is seen as “cheap” compared to global peers, which sustains a strong upward price trend even though prices are already at high nominal levels.
Net Capital Inflows and Outflows (R$ billions) (Source: Elos Ayta)
All these macroeconomic factors culminate in a “perfect storm” for the primary capital market. It is important to understand that the absence of new listings over the last five years was not due to a lack of qualified companies or robust expansion projects, but rather to a weak economic situation that held back listings. With interest rates at restrictive levels, the opportunity cost made market valuations unattractive to founders and controlling shareholders. Nevertheless, several companies are ready and waiting for the ideal IPO window to open, such as Madero, Kalunga and Havan.
In recent years, these companies have been going through structural processes typical of the pre-IPO stage. These include the professionalization of management, the adoption of more robust corporate governance practices, such as independent boards and greater financial transparency, and balance sheet restructuring, often with reduced leverage and improved margins.
In the case of Madero, during the pre-pandemic period, the company adopted a highly expansionist strategy, opening dozens of company-owned units and diversifying its brands. This move, although it boosted revenue, was financed mostly by debt. With the shock of the pandemic, the fragility of this structure became evident: the group accumulated approximately R$1 billion in debt, with heavy short-term pressure and insufficient cash generation to sustain its pace of growth. The company's response was a restructuring process through a debt “reprofiling” focused on cash generation and predictability. Recent figures reflect the company's success, as it has returned to profitability, increased its revenue and reduced its indebtedness. Beyond internal adjustments, there is also a strong effort to demonstrate predictability of results, execution capability and resilience to economic cycles. Companies that manage to combine strong cash generation with financial discipline tend to attract greater interest and better multiples at the time of the offering.
Thus, the Brazilian capital market is heading toward a rare moment, in which the structural decline in interest rates reduces the cost of capital and raises valuations, while the rise of the Ibovespa and the return of foreign capital attract additional liquidity. These factors converge in favor of unlocking the primary market, potentially ushering in a new IPO cycle. After years without issuances due to a lack of favorable conditions, there is now a set of companies better prepared to thrive in the market. The case of Madero illustrates this shift well: a company that went through difficult times, professionalized itself by shifting its focus to cash generation and debt repayment, and has become one of the main candidates to go public in a new window in the future.
