Commercial Awareness 2023/24 Thread

[Aga123+]

@Seun TO, @justkeepswimming, @Aga123+, @Arianne Kez, @AB141

A little accountability check in - did you manage to follow through today?

I've been following through on my commercial awareness strategy - I've been doing a full hour in the morning as it was easier than splitting up the time.

I have also been keeping up with key commercial terms that I don't understand and using any free time I have to research them to build up my understanding as well.

 

[Yash]

News Story: CVC/DIF Infrastructure deal

CVC has acquired a significant stake in Dutch infrastructure fund DIF Capital Partners for about €1bn. There are good reasons for the acquisition, particularly to diversify CVC's portfolios. Returns from infrastructure do not tend to correlate with bonds and other equities.

However, I think the major driver is increasing AUM (assets under management). AUM in infrastructure has expanded at a 17.8% compound annual rate in the decade to 2022. DIF has €16bn of AUM, bulking up CVC’s own €140bn AUM.

This is an interesting move, as the Private Equity firm announced its plans to go public again in mid-August. For a firm with a "kill-what-you-kill" profit distribution model for dealmakers, an IPO raises the possible issue of a conflict of interest.

• Limited Partners (LPs) are purely concerned with profitable deal-making; hence, the rumination for dealmakers to maximise profits lines up incentives with LPs really well.
• Shareholders, on the other hand, would be concerned with the size of AUM. This is because they would be paid out by the management fee the PE firm charges.

This acquisition arguably prioritises potential shareholder interests to have as successful as possible an IPO. This is further demonstrated by how CVC will not fully own the group until 2028.

LPs, though, do not appear deterred as CVC in July was able to raise a record-breaking €26bn ($29bn) for the largest PE fund in history. This is despite rivals such as Carlye, Blackstone, and Apollo Global cutting targets in such a turbulent macroeconomic environment.

How might this impact Law firms?

CVC moving away from its traditional buyout strategies demonstrates a trend of shifting towards multi-strategy approaches. I think this might force Law firms to adapt by providing a more full-service offering, especially in regard to industry and sector expertise, as PE firms' targets and strategies change.

 

[Jaysen]

Hi @Jaysen slightly late to this thread. I follow the FT podcast every morning before catching up on important stories for the day.

I have one question for you, could you please explain what does negative goodwill mean? This is in relation to the UBS takeover of Credit Suisse. Found the article very interesting and it seems that the integration of both banks will happen in the next 3 years rather than the initially agreed period of 4 years.

For law firms, I think this would create work for technology lawyers who would be involved in drafting licensing, software and distribution agreements to facilitate the move from physical to online medium and assist in procurement of software licenses to protect IP assets digitally. I also think litigation would play a massive role in resolving disputes arising out of shareholder dis content due to share price valuations.

This is a good explanation of negative goodwill. It's an accounting term - you'll often hear about goodwill in the opposite direction (a company paying more to buy a company than the value of its assets). The link to the law firms sounds relevant, I would only see if you can be more specific/develop each point fully.

Great to see listening to the podcast. Do you find you remember what you listen to?

 

[Jaysen]

News Story: CVC/DIF Infrastructure deal

CVC has acquired a significant stake in Dutch infrastructure fund DIF Capital Partners for about €1bn. There are good reasons for the acquisition, particularly to diversify CVC's portfolios. Returns from infrastructure do not tend to correlate with bonds and other equities.

However, I think the major driver is increasing AUM (assets under management). AUM in infrastructure has expanded at a 17.8% compound annual rate in the decade to 2022. DIF has €16bn of AUM, bulking up CVC’s own €140bn AUM.

This is an interesting move, as the Private Equity firm announced its plans to go public again in mid-August. For a firm with a "kill-what-you-kill" profit distribution model for dealmakers, an IPO raises the possible issue of a conflict of interest.

• Limited Partners (LPs) are purely concerned with profitable deal-making; hence, the rumination for dealmakers to maximise profits lines up incentives with LPs really well.
• Shareholders, on the other hand, would be concerned with the size of AUM. This is because they would be paid out by the management fee the PE firm charges.

This acquisition arguably prioritises potential shareholder interests to have as successful as possible an IPO. This is further demonstrated by how CVC will not fully own the group until 2028.

LPs, though, do not appear deterred as CVC in July was able to raise a record-breaking €26bn ($29bn) for the largest PE fund in history. This is despite rivals such as Carlye, Blackstone, and Apollo Global cutting targets in such a turbulent macroeconomic environment.

How might this impact Law firms?

CVC moving away from its traditional buyout strategies demonstrates a trend of shifting towards multi-strategy approaches. I think this might force Law firms to adapt by providing a more full-service offering, especially in regard to industry and sector expertise, as PE firms' targets and strategies change.

Really glad to see your own reflections in here! There's a couple of points I wonder if you can expand on:

What do you mean by the 'kill-what-you-kill' point?
What do you mean by 'the rumination for dealmakers to maximise profits lines up incentives with LPs really well'?

 

[Jaysen]

Hey all - I hope your commercial awareness journeys are going well.

One thing I noticed is that it can be carve out the time unless I have something to prepare for. In your case, it might be a mock interview, it might be finding someone on TCLA to deliver a practise presentation with, or just committing to post a summary in this thread of what you're reading.

The other thing I notice is how difficult it can be to know what to track given how frequently the news changes. Everything can feel important.

In the meantime, here’s a couple of stories I have been reading:

1. Arm’s IPO: Arm will be listing on the Nasdaq. Its valuation is lower than expected, but it'll still be the largest IPO this year. This is interesting for a few reasons: There are questions over whether it’ll revive the IPO market for tech companies. Softbank, its owner, is sharing a slice of its shares in Arm and is expected to use the capital to throw cash on more startups. Arm is also a semiconductor company, which licences its chip designs so widely that it is found in almost every smartphone. Nvidia tried to buy the company in 2020 but this was blocked by regulators. Finally, many of its customers, which are almost some of the world’s biggest companies, are cornerstone investors.
   
   
2. China’s Economy: The economy is facing a variety of challenges right now, from its property market (a crisis started by new regulations to curb the debt held by companies), to a slowdown in exports (thanks to rising interest rates/inflation which is impacting demand for Chinese goods, geopolitical tensions, among other things). Given China's role in the global economy, both in terms of supply and demand, this could lead to many challenges for global businesses reliant on the economy.

 

[justkeepswimming]

WeWork Renegotiating Almost All Leases Globally
The NY Times article explained that as the future of WeWork looks more and more bleak, it has decided to renegotiate all of its leases and pull out of underperforming locations. This is to reduce WeWork's costs in terms of leasing office space.

A quick recap on why WeWork is struggling:
A major reason is the shift towards working from home which has made their office-sharing service less desirable. The once billion-dollar business is now struggling to stay afloat as attitudes and working behaviours have changed post-pandemic

Some other issues WeWork is battling:
WeWork eventually went public in 2021 (they listed on a stock exchange). However, since their stocks were being traded for pennies, they decided to do a reverse stock split just last week.

A reverse stock split (from Investopedia) is when a company consolidates the number of existing shares into fewer and higher-priced shares. They divide the existing no of shares by either 5 or 10. It can signal a company in distress since it is raising the value of otherwise low-priced shares.
eg. 100 shares = 100p,
Dividing the no of shares by 10 you are left with 10 shares = 100p
Previously one share = 1p, and now one share = 10p
(Remember the value of the company does not change, only the stock price value changes)

There is still substantial doubt about the company's future.

Practice areas involved:
- Real estate reviewing leasing contracts
- Corporate or Disputes negotiating new terms with landlords
- Finance team would be involved in determining how they'll finance the new leases.
- It appears that WeWork is struggling financially so the restructuring lawyers may also be brought in to review the company's position and possible ways of reducing costs.
- Litigation or arbitration if the landlords aren't cooperative with the new lease terms.
- Tax involved in determining the tax structure of the deal
- Employment team if the locations being dropped have some employees attached to it, or employees taking care of it.
I'm not entirely sure who would be in charge of determining which locations are underperforming but perhaps also the restructuring lawyers?

Impact on clients:
With the shift in working cultures, many office spaces are going unused. Even law firms' own! Many of the law firms' other clients may also be in a similar position of renegotiating leases, or perhaps leasing out their office spaces to others. Work in the real estate departments and litigation teams would increase with all these negotiations.

If there is anything I missed or stated incorrectly, please comment below!

 

[ADKM]

This is a good explanation of negative goodwill. It's an accounting term - you'll often hear about goodwill in the opposite direction (a company paying more to buy a company than the value of its assets). The link to the law firms sounds relevant, I would only see if you can be more specific/develop each point fully.

Great to see listening to the podcast. Do you find you remember what you listen to?

Thanks for the link Jaysen. Yes, I have found that I remember stories as I have been listening and catching up with them consistently.

I think consistency is key because I’ve realised some stories (sector wise/location wise) are recurring. For example, now when I read about the tech sector or Saudi Arabia/ME’s desire to diversify their economy, having prior knowledge about them makes it easier to follow the premise and come up with your own opinions. I think it helps in the objective analysis of the business world which I think is crucial in developing commercial awareness

 

[Yash]

Really glad to see your own reflections in here! There's a couple of points I wonder if you can expand on:

What do you mean by the 'kill-what-you-kill' point?
What do you mean by 'the rumination for dealmakers to maximise profits lines up incentives with LPs really well'?

Thank you!

1)
Apologies, I made a typo here. I meant 'eat-what-you-kill'. Similar to how US law firms tend to remunerate partners, deal-makers at CVC enjoy a lot of upside for a successful exit. In a sense, they are remunerated meritocratically. However, this also applies where exits are unsuccessful; the deal-maker will have to cover the downside, and the loss is not shared across other deal-makers, as it would be in other PE firms with more of a profit-sharing model like Apollo Global.

For example, Nick Clarry was responsible for successful deals with Formula One and Samsonite, but much of the carried interest he enjoyed was needed to cover a part of the €400mn loss on a deal with Autobar.

2)
An eat-what-you-kill remuneration incentivises profitable deal-making, which is in LP's best interests. I.e., if a PE firm makes $1bn profit on an exit, approximately 80% of it would be enjoyed by LPs (assuming no hurdle rate). Out of the $200mn remaining, we can expect roughly 30% to go to the team responsible for the deal at CVC. If this percentage were lower, there would be less incentive to be profitable, as the reward for being profitable is diminished.

Hence, deal-makers are incentivised to be profitable through the opportunity to enjoy large percentages of carried interest. This will be attractive to LPs as they know the deal-makers will likely maximise profits and thus their returns.

There may be an argument that if deal-makers are to also cover large losses, it could result in risk-averse behaviour and hurt profits. However, this has not appeared to be the case at CVC. Rather, the CVC model forces dealmakers to fight to rescue the companies they have bought, meaning deals rarely lose money. This was the case with Samsonite, which, after 2008, CVC had written off €750mn of equity it had invested. Ultimately though, CVC made one-and-half times its money after restructuring the business and listing in Hong Kong in 2011.

 

[stone’sthrow]

There has some M&A movement in the natural gas industry which also signifies a move towards the cleaner use of energy. I dont really know how this impacts law firms 😀 but I guess if I was asked a question about what an investor should buy or do I could say invest in natural gas

Hey, where did you read about the M&A movement in the natural gas industry?

 

[Jake Rickman]

News Story: CVC/DIF Infrastructure deal

CVC has acquired a significant stake in Dutch infrastructure fund DIF Capital Partners for about €1bn. There are good reasons for the acquisition, particularly to diversify CVC's portfolios. Returns from infrastructure do not tend to correlate with bonds and other equities.

However, I think the major driver is increasing AUM (assets under management). AUM in infrastructure has expanded at a 17.8% compound annual rate in the decade to 2022. DIF has €16bn of AUM, bulking up CVC’s own €140bn AUM.

This is an interesting move, as the Private Equity firm announced its plans to go public again in mid-August. For a firm with a "kill-what-you-kill" profit distribution model for dealmakers, an IPO raises the possible issue of a conflict of interest.

• Limited Partners (LPs) are purely concerned with profitable deal-making; hence, the rumination for dealmakers to maximise profits lines up incentives with LPs really well.
• Shareholders, on the other hand, would be concerned with the size of AUM. This is because they would be paid out by the management fee the PE firm charges.

This acquisition arguably prioritises potential shareholder interests to have as successful as possible an IPO. This is further demonstrated by how CVC will not fully own the group until 2028.

LPs, though, do not appear deterred as CVC in July was able to raise a record-breaking €26bn ($29bn) for the largest PE fund in history. This is despite rivals such as Carlye, Blackstone, and Apollo Global cutting targets in such a turbulent macroeconomic environment.

How might this impact Law firms?

CVC moving away from its traditional buyout strategies demonstrates a trend of shifting towards multi-strategy approaches. I think this might force Law firms to adapt by providing a more full-service offering, especially in regard to industry and sector expertise, as PE firms' targets and strategies change.

Just want to say I think this is a really good appraisal of some fairly complex aspects of investments and fundraising, as well as how CVC is navigating the IPO market. Well done!

 

[Yash]

Thanks for the link Jaysen. Yes, I have found that I remember stories as I have been listening and catching up with them consistently.

I think consistency is key because I’ve realised some stories (sector wise/location wise) are recurring. For example, now when I read about the tech sector or Saudi Arabia/ME’s desire to diversify their economy, having prior knowledge about them makes it easier to follow the premise and come up with your own opinions. I think it helps in the objective analysis of the business world which I think is crucial in developing commercial awareness

This is a good explanation of negative goodwill. It's an accounting term - you'll often hear about goodwill in the opposite direction (a company paying more to buy a company than the value of its assets). The link to the law firms sounds relevant, I would only see if you can be more specific/develop each point fully.

Great to see listening to the podcast. Do you find you remember what you listen to?

Hey, I was scrolling on LinkedIn and saw UBS just posted an explanation of negative goodwill if it is useful!

UBS on LinkedIn: What is negative goodwill?

Wondering what exactly is negative goodwill? Click through below for a quick breakdown on this key financial term. #shareUBS

www.linkedin.com

 

[justkeepswimming]

[Wilko Update] BBC: Poundland owner to take on up to 71 Wilko stores

Yesterday evening, Pepco, the owner of Poundland, announced they would take control of 71 Wilko leases after the chain collapsed. The stores will be rebranded into Poundland stores by the end of the year. While Wilko staff will not move over directly, Pepco announced they will prioritise Wilko staff in hiring.

This is the latest update in the Wilko Saga. While this situation is an unfortunate one, the winners cannot be ignored. Competitors seem to be eyeing Wilko's collapse to acquire some of their assets cheaply. Earlier B&M announced it would take 51 stores. Other competitors may be waiting on the sidelines as the IP and branding of Wilko is still up for grabs.

Departments involved:
M&A
- Corporate lawyers responsible for structuring these deals. This kind of M&A isn't the one we're used to learning about but it should not be forgotten as in current times we are likely to see a rise of distress M&A and other similar situations.

Real estate
- As leases are being transferred over, the issue of terminating and transferring leases would be handled by real estate

Banking & Finance
- structuring the deal, how is Poundland paying for it? How to structure the deal to get the most value for the creditors

Litigation
- any disputes between various stakeholders

Employment
- As the workers are not being directly transferred over, handling the redundancies or severance packages would be their role

IP
- The IP is still up for grabs, the IP team could value the leftover IP to make it more attractive for potential buyers

Feel free to add anything I've missed. Would love to hear your thoughts on the situation.

 

[justkeepswimming]

Hi all, hope you're well and staying commercially aware.

The Market Maker podcast on Spotify and Apple is a really good place to hear a financial perspective and a breakdown of current events in markets.

Yesterday they had a podcast explaining the Arm IPO. They talked it through quite well and it's easy to follow.
Episode Name: The Deal Room: Arm IPO explained

There is also a podcast from mid-August called The Deal Room: The Venture Fund that changed everything! and this explains the rise of WeWork and its owner as well as the relationship with Softbank.

Many other eps could be relevant to your interests so check them out.
It's a really good podcast that focuses on two topics per ep and walks you through them nicely.
I think it'll help your commercial journey if you enjoy podcasts over reading!

 

[ashwright]

Thanks @Jaysen for a great session - really insightful! I plan to spend 1 hour a day (30 minutes in the morning and 30 minutes during lunch) to read up on commercial news stories. I also plan to use the TCLA Commercial Awareness Tracker to help me analyse, practice and recall the key points of the stories.

Hi there! May I ask where you access the Commercial Awareness Tracker from?
Thank you!

 

[lawful_neutral216]

Hi all, hope you're well and staying commercially aware.

The Market Maker podcast on Spotify and Apple is a really good place to hear a financial perspective and a breakdown of current events in markets.

Yesterday they had a podcast explaining the Arm IPO. They talked it through quite well and it's easy to follow.
Episode Name: The Deal Room: Arm IPO explained

There is also a podcast from mid-August called The Deal Room: The Venture Fund that changed everything! and this explains the rise of WeWork and its owner as well as the relationship with Softbank.

Many other eps could be relevant to your interests so check them out.
It's a really good podcast that focuses on two topics per ep and walks you through them nicely.
I think it'll help your commercial journey if you enjoy podcasts over reading!

Just listened to the episode- thank you for the suggestion!

 

[Aga123+]

Hi there! May I ask where you access the Commercial Awareness Tracker from?
Thank you!

TCLA Commercial Awareness Tracker

To use this page, click

thecorporatelawacademy.notion.site

 

[ashwright]

Thank you so much!! I really appreciate your help 😄 May I ask the orginal source of this resource? Thank you 😄

 

[justkeepswimming]

Apple just can't catch a break.

The new iPhone 15 comes with USB-C charging port rather than Apple's unique lightning connector. This new feature is not Apple's own decision but rather forced on it by the EU's policy that requires all phone manufacturers to adopt a common charger by December 2024.

Now this could be viewed from the angle of just another big tech crackdown by regulators but there is more to it.

Apple is facing further problems in the EU as France ordered Apple to remove their iPhones from the market due to radiation concerns. They ordered Apple to update the software or remove the devices in 15 days. Despite arguing that iPhones has been certified by multiple international bodies and complies with the radiation standards, Apple has decide to update the software to prevent similar statements from other countries and of course to avoid further bad press.

But the company's troubles do not end there. China, Apple's largest international market, bringing in 20% of last quarters earnings, brought trouble for the company this week. Unfortunately, Apple is caught in the US/China trade wars as state employees across China were told to stop using iPhones by various govt agencies. This announcement knocked $200 billion off Apple's share value last week! (Yikes) With Huawei, a chinese-competitor, releasing a new smart phone, troubled waters lie ahead for Apple indeed.

However, this could just be a political play as Apple did not receive the cold treatment other US tech titans have in the past such as Google, Meta and Twitter which suffered outright bans and various restrictions. China's lack of public directive against Apple also hints at this. Perhaps there may be hope.

Safe to say, Apple has had a tough few weeks.

 

[Jake Rickman]

Apple just can't catch a break.

The new iPhone 15 comes with USB-C charging port rather than Apple's unique lightning connector. This new feature is not Apple's own decision but rather forced on it by the EU's policy that requires all phone manufacturers to adopt a common charger by December 2024.

Now this could be viewed from the angle of just another big tech crackdown by regulators but there is more to it.

Apple is facing further problems in the EU as France ordered Apple to remove their iPhones from the market due to radiation concerns. They ordered Apple to update the software or remove the devices in 15 days. Despite arguing that iPhones has been certified by multiple international bodies and complies with the radiation standards, Apple has decide to update the software to prevent similar statements from other countries and of course to avoid further bad press.

But the company's troubles do not end there. China, Apple's largest international market, bringing in 20% of last quarters earnings, brought trouble for the company this week. Unfortunately, Apple is caught in the US/China trade wars as state employees across China were told to stop using iPhones by various govt agencies. This announcement knocked $200 billion off Apple's share value last week! (Yikes) With Huawei, a chinese-competitor, releasing a new smart phone, troubled waters lie ahead for Apple indeed.

However, this could just be a political play as Apple did not receive the cold treatment other US tech titans have in the past such as Google, Meta and Twitter which suffered outright bans and various restrictions. China's lack of public directive against Apple also hints at this. Perhaps there may be hope.

Safe to say, Apple has had a tough few weeks.

I think this is a great appraisal of Apple's newest product. I would encourage you try and demonstrate how this might be relevant for law firms.

 

[justkeepswimming]

I think this is a great appraisal of Apple's newest product. I would encourage you try and demonstrate how this might be relevant for law firms.

This could impact law firms in various ways.

Firstly, this demonstrates another big tech crackdown. With regulators putting more obligations on big tech and becoming more active in enforcement, firms with big tech clients would need advice on how to comply with obligations, pre-empting future obligations, and disputing claims against government agencies or regulators. Tech firms are facing a lot of heat from new obligations such as the DMA, law firms can assist in helping companies understand, dispute or prepare for their obligations.

Secondly, one of the reasons why the common charging port policy came into force was for sustainability. Achieving net zero by 2050 is still the aim, law firms will be advising firms on how to remain focused on their targets, avoiding greenwashing claims etc.

Thirdly, geopolitics. The China/US trade wars are heating up. Law firms may be advising clients in deciding where to open up their next factories/warehouses or buildings/offices etc. to keep these considerations in mind. They may be advising US firms out of China, or finding a viable alternative country for production e.g. Vietnam or India. They may be advising the company with stronger operations in China on ways to mitigate the risk of being caught in the crossfire. A business may want to be closing business in one of these areas, law firms could assist in that. The moving of business from one country to another would require a strong international firm.