How High Interest Rates Can Affect Business…

British consultancy LEK advises on the plans of equity investment funds and companies. Paulo Fandor, his partner in Brazil, tells us how high interest rates hinder business development in practice

How does the 10.75% Selec ratio affect companies’ investment decisions? What determines whether a project will be approved is the internal rate of return, IRR, which represents its profitability. In Brazil, we have always operated with a double-digit internal rate of return. With Selec, we’re talking about an IRR of 15% to 20% per year for a startup.

Is this the only effect? Contributors also shorten the time required for projects. In normal times, about 30% of the investment is expected to be returned within five to ten years. Now this share is at least 40%.

Does insecurity cause companies to hoard cash?Uncertainty makes going to the bank to request a loan for new projects expensive. Asking shareholders for money becomes even more difficult.

Are you afraid of aliens?Yes, one large private equity fund told me that it would rather leave its money invested in Brazilian government bonds than take the risks of investing in companies here.

With reports from Camilla Patti

Published in VEJA, September 2024, VEJA Negócios Issue No. 6