Commercial Awareness 2023/24 Thread

[Jake Rickman]

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.

Your first two points are excellent examples of how to link an interesting commercial development to law firms. Well done! I also agree with your third point, but would just point how from a strategy perspective, it is less straightforwardly clear how your analysis (which I agree with) directly follows on from the commercial news item in particular. I generally find it easier to stick to fewer points in an application and interview setting so you can flush them out in more detail.

 

[justkeepswimming]

Disney Announces $60 Billion Investment in Theme Parks Over the Next Decade

News Briefing (from FT)
After Disney's recent announcement of plans to invest $60 billion in theme parks over the next 10 years, shares fell by 3%.

But I think this is a good decision.

Pros:
1) Strong Performance of Theme Parks: Disney theme parks have been a significant revenue driver, accounting for one-third of the total group revenue last year. With people eager to resume outdoor activities following COVID-19, I expect the revenue generated from theme parks to continue rising.

2) Shift in Travel Preferences: Recent challenges in the airline/airport industry, along with frequent climate-related disasters, have made domestic travel and staycations more appealing. This trend could benefit Disney's theme parks, as a domestic holiday option for those living in countries with Disney parks.

3) Financial Boost for Disney+: Disney+ has been facing financial challenges, with declining ad revenues and a shrinking subscriber base. The investment in theme parks may help Disney maintain profitability. I believe the Parks to be a very strong weapon that competitors like Netflix don’t have

Cons:
1) Financial Concerns: Disney already has a substantial debt of around $44 billion. While the company claims to have a strong balance sheet, investors are concerned about how this investment will be funded. Rumoured asset sales may help lower leverage ratios, but the financial burden remains a point of concern

2) Economic Uncertainty: Investors are cautious in the current economic climate. While central banks’ monetary policies appear to be working at lowering inflation, there is no indication of a reversal in interest rate hikes. Borrowing costs are rising, and shareholders are eager for dividends, adding pressure on Disney's financial decisions

I believe the theme parks are Disney's unique strength that sets it apart from pure streaming platforms like Netflix. If anyone has been to Disneyland you will know it is near-impossible to not spend money. I am keen to see how Netflix will respond, will they perhaps follow suit and build a park of its own? (unlikely, although I have several ideas for them if they want to ask me).

Impact on Law firms:
1) Corporate: Building more rides and expanding theme parks involves drafting and negotiating contracts, which would require the expertise of corporate law departments
2) Banking & Finance: Securing funding for the project would involve banking and finance experts who would assess Disney's current financial position and recommend the best financing options
3) IP: Given Disney's extensive portfolio of intellectual property, safeguarding these assets or entering into partnerships would require strong protection of intellectual property rights.
4) Dispute Resolution/Arbitration: Managing potential shareholder disputes, should they arise, would necessitate legal expertise in dispute resolution.
5) Tax: Structuring the deal to minimise tax implications would also be a critical aspect of the investment strategy.

In summary, Disney's ambitious investment in theme parks carries both opportunities and challenges, and it will likely require extensive legal and financial expertise to navigate successfully.

Feel free to comment your thoughts!

 

[justkeepswimming]

Testing my commercial awareness with a discovery I made today:

Balconi Snack (not sponsored) ALL IMAGES ARE FROM GOOGLE and are just to help your understanding of the story.

An hour ago, I got up for a quick snack (a Balconi latte bar) and discovered that where they usually have a mini cardboard tray, it was no longer there. I had eaten a box (don't judge) in March of this year which had a cardboard tray holding the cake inside the plastic packaging (the second picture shows what it usually looks like). Now no cardboard.

Intrigued by this change, I decided to use this as a case study and test out my commercial awareness skills.

I googled my observation and found a statement from the company, Valeo Foods Italy, stating that they were going to reduce their packaging usage, which would save 8,500 trees and 250 million litres of water annually. While they have presented this change from an ESG perspective, there are a few other ways they may have benefitted:

1) Cost reduction
Unlike some other products, which suffer a whole production change when they switch to greener packaging eg by replacing a material, Balconi has simply removed one element of the package. The cardboard box was not part of the outer plastic packaging. They will have benefitted from the reduction in the cost of production after removing one step of the process.

Secondly, the reduction in materials needed would have reduced production costs as well.

Thirdly, reduction in transportation costs as one leg of the process has been cut out.

2) Time efficient
By removing one element of the package, they will have shortened the supply chain, reducing the time it takes to get the product to the customer. A shorter supply chain is both time-efficient and more secure. They can respond to changes in consumer demand or regulatory environment quicker. A shorter supply chain also reduces the risks one can face from supply chain problems.

3) Likely to lead to improved inventory management as the materials needed have been reduced.

4) Could fund future packaging changes
The statement also claimed that they will be working to reduce packaging further in the future. What is left of the package is the plastic wrapper, I am not sure how much further they can reduce that. They may look to switch out the material which may be costly, however, the cost-benefits of removing the cardboard tray may help balance out the costs generated by creating new packaging.

5) Improved consumer perception
Consumers will view this brand as trying to be environmentally friendly and those consumers who value this may be more inclined to shop from them.

Interesting notes:
One thing I would like to highlight is the announcement was from 2021, yet I experienced the change in September of 2023. This just shows the time it takes for a change to filter through the market and reach end-users.

Another interesting thing that popped up during my research is that Valeo Food Group was acquired by Bain Capital for $1.5 billion in an auction in May 2021. Could the change of control have influenced this change?

Moving towards sustainability is not a new trend. We are likely to see a lot of these changes across the market. Valeo Group will have to be cautious about the statements they make in regard to their green initiatives as such claims are being scrutinised by regulators.

How law firms could help:
Corporate
The supply change changes would have required contracts to be renegotiated. They would be reviewing contracts to see when and how the company can swiftly break away from all the suppliers involved in creating and supplying the cardboard packages.

Disputes
Any disputes that arise from these discussions may need the disputes team to resolve/negotiate.

Real Estate
If any buildings, assets, equipment or fleets were involved in the process of this, the real estate team will be involved in reviewing those contracts to see how to handle, dispose of, or divest the company of these assets.

Banking & Finance
Financing future changes to the packaging would require assistance from banking & finance lawyers

ESG
If a law firm has a dedicated department to ESG, the lawyers could be reviewing the environmental claims and ensuring there isn't a chance of greenwashing allegations to come from this.

This was just an exercise to test my own commercial awareness, not promoting the brand or anything. Feel free to add anything.

 

[justkeepswimming]

Your first two points are excellent examples of how to link an interesting commercial development to law firms. Well done! I also agree with your third point, but would just point how from a strategy perspective, it is less straightforwardly clear how your analysis (which I agree with) directly follows on from the commercial news item in particular. I generally find it easier to stick to fewer points in an application and interview setting so you can flush them out in more detail.

Thank you! I will keep this in mind in the future.

 

[Yash]

Commercial issue: SEC Regulation of Private Funds

The US Securities and Exchange Commission recently imposed new rules demanding greater disclosure and compliance from Private Equity, Venture Capital, and Hedge Funds. Some hail these regulatory demands as the most significant ever.

These can be summarised in 4 brackets:

1) Standardisation of quarterly disclosure of performance, fees, and expenses

2) Limits on "side letters", which are arrangements that give certain fund investors preferential terms

3) A ban on fund managers passing through to the investors legal expenses connected to Advisers Act violation

4) Mandatory audits for private funds, with certain asset sales requiring a third-party valuation opinion.

The SEC has estimated that new requirements for audit statements and quarterly performance reports would cost the industry $961mn annually, and the regulation of the unequal treatment of investors and disclosure of fund expenses another $938mn.

There has been considerable pushback for these regulations, with six industry groups filing suit to stop the new private regulation rules from going into effect.

Is Regulation Necessary?

Arguments against the regulations on commercial grounds have come in waves.

Increased compliance requirements increase barriers to entry in what is otherwise a highly concentrated industry.

The inability to have preferential treatment will hurt fundraising (bracket 2). Fund managers would not be able to give customisable offerings to potential investors. We can see how vital this is in the UK, given the use of the 'English Limited Partnership' for master funds to this end. Given how difficult fundraising is in this macroeconomic environment, this exacerbates the issue.

Minor violations of the Advisors Act (bracket 3) are routine parts of settlement deals and are a cost of doing business with many fund managers. However, the new SEC rules would result in funds having to internalise the cost of such settlements.

Finally, some feel the industry already gives investors plenty of disclosure, mainly because funds must compete for investors. Failing to disclose to potential investors hurts the fund's competitiveness; hence, they already disclose enough information as investors see fit. It is important to note that private fund investors are not similar to your average consumer, as they are well-represented by highly qualified professionals and have a lot of negotiation leverage. They can protect themselves. Over-regulation here is disregarding the freedom to contract.

However, there is praise for the regulations.

Pension funds are significant investors in these private funds. Hence, improving accountability and transparency is justified to give individuals contributing to pension funds 'colour' as to what is happening with their investments.

Furthermore, the SEC has also argued that "investors of all stripes are victims of fraud". The inability of institutional investors to protect themselves was evident with FTX, which BlackRock and Third Point backed.

There are informational and bargaining asymmetries to the detriment of investors. Fund structure complexity can make it difficult for institutional investors to know hidden conflicts of interest, fees, and expenses.

Some argue the competitiveness of the private funds market can be overstated. The presumption that institutional investors have all the leverage, especially when negotiating with 'mega-funds', can also be doubted.

Impact on Law firms

At first glance, over-regulation seems to be great for law firms, as legal compliance would suggest private funds would be more inclined to seek legal advice from law firms. However, private funds seek to recruit more staff to navigate the increased regulatory burden. In-house legal teams will likely grow as funds poach from legal departments at traditional asset managers and banks, including the SEC. Therefore, law firms would initially be consulted heavily in the run-up to the 18-month run-up to the effective date of the rules. However, funds will likely bolster their internal legal and compliance teams to deal with regulatory burdens.

The effects of the regulation may hamper fundraising and hamper profitability for these funds. This could impact the deal volume in the Private Equity space and, thus, harm law firms heavily reliant on Private Equity for revenues.

 

[justkeepswimming]

(I drafted the response on OneNote hence the difference in format)

 

[axelbeugre]

Testing my commercial awareness with a discovery I made today:

View attachment 5266 Balconi Snack (not sponsored) View attachment 5267 ALL IMAGES ARE FROM GOOGLE and are just to help your understanding of the story.

An hour ago, I got up for a quick snack (a Balconi latte bar) and discovered that where they usually have a mini cardboard tray, it was no longer there. I had eaten a box (don't judge) in March of this year which had a cardboard tray holding the cake inside the plastic packaging (the second picture shows what it usually looks like). Now no cardboard.

Intrigued by this change, I decided to use this as a case study and test out my commercial awareness skills.

I googled my observation and found a statement from the company, Valeo Foods Italy, stating that they were going to reduce their packaging usage, which would save 8,500 trees and 250 million litres of water annually. While they have presented this change from an ESG perspective, there are a few other ways they may have benefitted:

1) Cost reduction
Unlike some other products, which suffer a whole production change when they switch to greener packaging eg by replacing a material, Balconi has simply removed one element of the package. The cardboard box was not part of the outer plastic packaging. They will have benefitted from the reduction in the cost of production after removing one step of the process.

Secondly, the reduction in materials needed would have reduced production costs as well.

Thirdly, reduction in transportation costs as one leg of the process has been cut out.

2) Time efficient
By removing one element of the package, they will have shortened the supply chain, reducing the time it takes to get the product to the customer. A shorter supply chain is both time-efficient and more secure. They can respond to changes in consumer demand or regulatory environment quicker. A shorter supply chain also reduces the risks one can face from supply chain problems.

3) Likely to lead to improved inventory management as the materials needed have been reduced.

4) Could fund future packaging changes
The statement also claimed that they will be working to reduce packaging further in the future. What is left of the package is the plastic wrapper, I am not sure how much further they can reduce that. They may look to switch out the material which may be costly, however, the cost-benefits of removing the cardboard tray may help balance out the costs generated by creating new packaging.

5) Improved consumer perception
Consumers will view this brand as trying to be environmentally friendly and those consumers who value this may be more inclined to shop from them.

Interesting notes:
One thing I would like to highlight is the announcement was from 2021, yet I experienced the change in September of 2023. This just shows the time it takes for a change to filter through the market and reach end-users.

Another interesting thing that popped up during my research is that Valeo Food Group was acquired by Bain Capital for $1.5 billion in an auction in May 2021. Could the change of control have influenced this change?

Moving towards sustainability is not a new trend. We are likely to see a lot of these changes across the market. Valeo Group will have to be cautious about the statements they make in regard to their green initiatives as such claims are being scrutinised by regulators.

How law firms could help:
Corporate
The supply change changes would have required contracts to be renegotiated. They would be reviewing contracts to see when and how the company can swiftly break away from all the suppliers involved in creating and supplying the cardboard packages.

Disputes
Any disputes that arise from these discussions may need the disputes team to resolve/negotiate.

Real Estate
If any buildings, assets, equipment or fleets were involved in the process of this, the real estate team will be involved in reviewing those contracts to see how to handle, dispose of, or divest the company of these assets.

Banking & Finance
Financing future changes to the packaging would require assistance from banking & finance lawyers

ESG
If a law firm has a dedicated department to ESG, the lawyers could be reviewing the environmental claims and ensuring there isn't a chance of greenwashing allegations to come from this.

This was just an exercise to test my own commercial awareness, not promoting the brand or anything. Feel free to add anything.

So interesting! Thank you for this! @justkeepswimming

 

[axelbeugre]

View attachment 5274

(I drafted the response on OneNote hence the difference in format)

This is extremely insightful! Thank you so much for sharing @justkeepswimming

 

[justkeepswimming]

Summary of the news:
On the evening of Tuesday 9th October, a fire broke out in the parking lot of Luton Airport, which quickly turned into a blaze. The fire caused extensive damage to numerous cars and the parking lot infrastructure. As a result, 125 flights were suspended, and even though some flights resumed on Wednesday afternoon, delays are still expected to continue into Thursday.

D - Direct impact on law firms
It is difficult to highlight the direct impact on law firms. However, if there were employees of the firm planning a trip via Luton on the day, they may have to rearrange their schedules. Getting to the office might be difficult if the firm has an office located near the region.

I - Indirect impact
1) Compensation to consumers
Lawyers may be looking through the contracts to understand consumer rights against the airport or airlines regarding the disruptions to their journeys. They will be helping the companies understand whether the airlines or airports are responsible for arranging new flights under such conditions.

2) Compensation to Airlines
Luton airport may be liable to airlines. Lawyers may be advising airports on their liabilities and responsibilities.

3) Disputes
Many disputes could arise between:
a) consumers and airlines
b) consumers and airport
c) airlines and airport
d) if another organisation owns the parking lot, then the parking lot and all other parties

4) Insurance claims
A flurry of insurance claims could arise:
a) the damaged cars and consumers with car insurance
b) delayed flights, if the airlines could recoup their loss of profits, if there is a clause in the airlines' contract that insures them against delays under such conditions
c) the damaged parking lot could have insurance in case of fires etc

P - Position
In the short term:
1) Hotels and restaurants in the airport and surrounding area will benefit from the passengers stranded there.
2) Transport facilities could both benefit and be at risk here
a) Buses or trains could benefit as passengers need to find alternative ways home if their cars are damaged or if no taxis are coming into the airport
b) taxis and Uber services could be disadvantaged as they cannot benefit from arriving or stranded passengers as the police direct traffic away.

Long-term impact:
The airline industry has been suffering many setbacks for various reasons lately, many of which are not entirely related:
a) The storms in Greece that suspended flights
b) Fires in Hawaii and California suspending flights
c) Wars and Conflicts in Ukraine/Russia/the Middle East suspending further flight destinations
d) Earthquakes in Turkey
e) Heathrow/Gatwick signal issues that severely disrupted flights

While many of these issues are unrelated, they paint a negative picture of flight journeys and airports, making consumers think flights may be risky. With the holiday season fast approaching, they may reconsider their international holidays and opt for more domestic staycations and trips in light of these developments.

If this shift in consumer behaviour does happen, airlines may consider diversifying their offerings and acquiring staycation organisations. Law firms can help in the M&A due diligence process in such conditions. The corporate team may also be involved in reviewing airlines' contracts and helping them prepare or protect themselves against the loss of profits or increased costs caused by instances listed above.

When drafting or negotiating new contracts, law firms will be acutely aware of the growing frequency of these risks arising. Therefore, they will put forward arguments or clauses to protect the airlines' or airports' interests, depending on which side they are on.

 

[axelbeugre]

Summary of the news:
On the evening of Tuesday 9th October, a fire broke out in the parking lot of Luton Airport, which quickly turned into a blaze. The fire caused extensive damage to numerous cars and the parking lot infrastructure. As a result, 125 flights were suspended, and even though some flights resumed on Wednesday afternoon, delays are still expected to continue into Thursday.

D - Direct impact on law firms
It is difficult to highlight the direct impact on law firms. However, if there were employees of the firm planning a trip via Luton on the day, they may have to rearrange their schedules. Getting to the office might be difficult if the firm has an office located near the region.

I - Indirect impact
1) Compensation to consumers
Lawyers may be looking through the contracts to understand consumer rights against the airport or airlines regarding the disruptions to their journeys. They will be helping the companies understand whether the airlines or airports are responsible for arranging new flights under such conditions.

2) Compensation to Airlines
Luton airport may be liable to airlines. Lawyers may be advising airports on their liabilities and responsibilities.

3) Disputes
Many disputes could arise between:
a) consumers and airlines
b) consumers and airport
c) airlines and airport
d) if another organisation owns the parking lot, then the parking lot and all other parties

4) Insurance claims
A flurry of insurance claims could arise:
a) the damaged cars and consumers with car insurance
b) delayed flights, if the airlines could recoup their loss of profits, if there is a clause in the airlines' contract that insures them against delays under such conditions
c) the damaged parking lot could have insurance in case of fires etc

P - Position
In the short term:
1) Hotels and restaurants in the airport and surrounding area will benefit from the passengers stranded there.
2) Transport facilities could both benefit and be at risk here
a) Buses or trains could benefit as passengers need to find alternative ways home if their cars are damaged or if no taxis are coming into the airport
b) taxis and Uber services could be disadvantaged as they cannot benefit from arriving or stranded passengers as the police direct traffic away.

Long-term impact:
The airline industry has been suffering many setbacks for various reasons lately, many of which are not entirely related:
a) The storms in Greece that suspended flights
b) Fires in Hawaii and California suspending flights
c) Wars and Conflicts in Ukraine/Russia/the Middle East suspending further flight destinations
d) Earthquakes in Turkey
e) Heathrow/Gatwick signal issues that severely disrupted flights

While many of these issues are unrelated, they paint a negative picture of flight journeys and airports, making consumers think flights may be risky. With the holiday season fast approaching, they may reconsider their international holidays and opt for more domestic staycations and trips in light of these developments.

If this shift in consumer behaviour does happen, airlines may consider diversifying their offerings and acquiring staycation organisations. Law firms can help in the M&A due diligence process in such conditions. The corporate team may also be involved in reviewing airlines' contracts and helping them prepare or protect themselves against the loss of profits or increased costs caused by instances listed above.

When drafting or negotiating new contracts, law firms will be acutely aware of the growing frequency of these risks arising. Therefore, they will put forward arguments or clauses to protect the airlines' or airports' interests, depending on which side they are on.

so interesting! @justkeepswimming

 

[NJS]

Wasn’t really sure where to ask this, but was thinking about writing about the recent IPO boom and the potential CVC IPO for a commercial awareness question to a firm that is strong in private equity.

Had a good read of this article

CVC mooting IPO launch (again)

CVC mooting IPO launch (again) Image Credit: Postmodern Studio / Shutterstock.com What do you need to know this week? Private equity giant CVC Capital Partners is rumoured to be revisiting its ambitions to offer up to 10% of its shares to...

www.thecorporatelawacademy.com

And was just wondering if there is a good linkage between IPOs and PE? (Hopefully you get what I’m asking?)

 

[Eneser]

Hey! Anyone here doing the commercial awareness competition with aspiring solicitors

 

[Eneser]

Hey! Anyone else here doing the aspiring solicitors commercial awareness competition, 2023

 

[Jaysen]

Wasn’t really sure where to ask this, but was thinking about writing about the recent IPO boom and the potential CVC IPO for a commercial awareness question to a firm that is strong in private equity.

Had a good read of this article

CVC mooting IPO launch (again)

CVC mooting IPO launch (again) Image Credit: Postmodern Studio / Shutterstock.com What do you need to know this week? Private equity giant CVC Capital Partners is rumoured to be revisiting its ambitions to offer up to 10% of its shares to...

www.thecorporatelawacademy.com

And was just wondering if there is a good linkage between IPOs and PE? (Hopefully you get what I’m asking?)

This would be very relevant. It's interesting that CVC is making the decision to IPO (and you can take this in a relevant direction as to what you feel this means for the private equity market).

 

[justkeepswimming]

(From the FT Big Read) Private equity: higher rates start to pummel dealmakers:

News brief:
The higher interest rates have been affecting the private equity market.

Earlier this year, Carlyle Group appeared to be close to taking over a healthcare software company, Cotiviti, for $15bn. However, despite being one of the most powerful pe companies, Carlyle could not raise all of its roughly $3bn equity commitment. An attempt to renegotiate the $15bn valuation resulted in the deal being dropped by the owner of Cotviti, Veritas Capital, another PE firm.

This shows two of the many problems facing the industry:
1) PE firms are having trouble selling at the prices they want
2) PE firms are having trouble funding the deals they want

Why are high-interest rates affecting PE firms:
Post-financial crisis, PE firms thrived on cheap debt to acquire struggling companies for profit.

However, now, with the hiatus of new money flowing into PE funds and existing investments facing refinancing pressures, PE is facing troubles.

New tactics:
In such conditions, PE firms are resorting to various kinds of financial engineering. One of which is to borrow money at fund level rather than company level. This means the pe firms are taking on debt themselves. As the firms are financially stronger than the companies they are buying, they are seen as a safer option to lend to, allowing them to get better interest rates on their debts, meaning lower.

Affect on law firms:
Directly there is very little effect.

Indirectly:
Law firms make a lot of money from PE deals. They will need to understand the changing environment and all the new methods of acquiring financing that these PE firms are turning to to understand best how to advise them and to show their expertise in advising them in such situations.

Position:
Some believe this is a rough path for PE, while others think it signals a longer problem.

PE thrives in low-interest rates. While the UK and US have paused interest rate hikes, the BOE has stated that it will not reduce rates anytime soon. We are in this higher interest rate period for some time, it seems. Law firms and investment banks will be closely watching and trying to come up with solutions to keep pe alive.

 

[Aga123+]

(From the FT Big Read) Private equity: higher rates start to pummel dealmakers:

News brief:
The higher interest rates have been affecting the private equity market.

Earlier this year, Carlyle Group appeared to be close to taking over a healthcare software company, Cotiviti, for $15bn. However, despite being one of the most powerful pe companies, Carlyle could not raise all of its roughly $3bn equity commitment. An attempt to renegotiate the $15bn valuation resulted in the deal being dropped by the owner of Cotviti, Veritas Capital, another PE firm.

This shows two of the many problems facing the industry:
1) PE firms are having trouble selling at the prices they want
2) PE firms are having trouble funding the deals they want

Why are high-interest rates affecting PE firms:
Post-financial crisis, PE firms thrived on cheap debt to acquire struggling companies for profit.

However, now, with the hiatus of new money flowing into PE funds and existing investments facing refinancing pressures, PE is facing troubles.

New tactics:
In such conditions, PE firms are resorting to various kinds of financial engineering. One of which is to borrow money at fund level rather than company level. This means the pe firms are taking on debt themselves. As the firms are financially stronger than the companies they are buying, they are seen as a safer option to lend to, allowing them to get better interest rates on their debts, meaning lower.

Affect on law firms:
Directly there is very little effect.

Indirectly:
Law firms make a lot of money from PE deals. They will need to understand the changing environment and all the new methods of acquiring financing that these PE firms are turning to to understand best how to advise them and to show their expertise in advising them in such situations.

Position:
Some believe this is a rough path for PE, while others think it signals a longer problem.

PE thrives in low-interest rates. While the UK and US have paused interest rate hikes, the BOE has stated that it will not reduce rates anytime soon. We are in this higher interest rate period for some time, it seems. Law firms and investment banks will be closely watching and trying to come up with solutions to keep pe alive.

Great topic summary @justkeepswimming

I read this article as well - LittleLaw has an article on this as well ➡️ https://www.littlelaw.co.uk/p/private-equitys-public-misery (If anyone needs to understand how PE firms are working around the high interest rates to still obtain cheap debt)

 

[justkeepswimming]

Great topic summary @justkeepswimming

I read this article as well - LittleLaw has an article on this as well ➡️ https://www.littlelaw.co.uk/p/private-equitys-public-misery (If anyone needs to understand how PE firms are working around the high interest rates to still obtain cheap debt)

Yes! I liked LittleLaw's summary; it helped me get the main gist of the article before diving into the slightly more challenging Big Read.

 

[Yash]

The Prospects of Private Credit

Ahead of the Finance Commercial Awareness Office Hours, I thought this would be quite topical.

The world's largest asset manager, BlackRock, recently predicted that the Private Credit Market will double to $3.5 Trillion by 2028. The market is expected to grow at about 15% CAGR (Compound Annual Growth Rate) over the next five years.

What has propelled the growth of Private Credit?

For investors (LPs), it promised smoother and stronger returns compared to High-Yield bonds and Leveraged loans.

Since these are private (thus mostly untraded) assets, their value is not as volatile as leveraged loans or traditional bonds. Note that Private Credit lacks a secondary market. Therefore, valuations for private debt are done over a longer period. This is not the case for loans and bonds.

This is also enabled by the lack of transparency on credit risk throughout the deal's lifecycle. There is limited regulation and standardisation of documents compared to Broadly Syndicated Loans (BSL), for example.

Furthermore, direct loans were more attractive when interest rates were rising. Usually, direct loans adopt a floating rate instead of the fixed rates that public market bonds pay.

Finally, and maybe most importantly, banks have been pulling back lending. With higher interest rates and scarce capital to lend (due to banks being required to maintain higher levels of capitalisation), private lenders can negotiate better origination fees for looser covenants.

What are driver trends going forward?

It is important to note that though Private Credit started out as lending to SMEs who otherwise did not have access to bank loans and BSLs, the trend now has been to lending to Private Equity portfolio companies and to GPs themselves (see below). Hence, Private Equity trends will determine Private Credit trends to a large extent.

We can expect the increasing deal size to continue. There are advantages to investing in larger companies. Bigger companies tend to grow because their products or services are high-quality, have strong management teams, usually have a compelling PE sponsor, and are likely to be more diversified. All of this de-risks the investment.

Another is Net-Asset-Value (NAV) lending. NAV lending involves providing finance to the GP of a Private Equity Fund; the lender's loan is secured against the underlying assets in the fund's portfolio. Hence, GPs are generating liquidity at the NAV of the portfolio.

This has grown quickly, as NAV facilities offer a route to liquidity to provide a bridge for LPs waiting for returns from the sale of assets whilst also being a source of capital to keep driving value creation (I think you can see the controversy behind this).

What are the potential limiters going forward?

It follows that since banks are pulling back lending, non-banks are taking up risks that banks are unwilling to take. Lenders that take that market share tend to be hardest hit during a downturn.

High-interest rates are great for investors up to a certain point. Such expensive debt can crush companies. UBS forecasts that the default rate of private credit borrowers will spike to 10% next year. Already through August, US Corporate bankruptcy filings have jumped to 459, exceeding the combined total of the last two years.

This may lead to much more conservative lending and create a credit crunch for Private Credit as well.

Also, as the SEC continues to implement regulations of private funds, the advantages Private Credit has will be diminished if it is subject to a burden of compliance and disclosure requirements. Goldman Sachs eyeing up and preparing for a potential secondary market also indicates this advantage may be lost.

How does this affect Law firms?

Law firms with strong Debt finance teams and Private Equity clients can capitalise. The nature of these lending agreements means that there is more scope for negotiation as covenants do not have to be as tight, creating more scope for drafting and a greater ability to tailor deals to the client's needs.

We have already seen this with Kirkland advising Finastra (portfolio company of Vista Equity Partners) on its $5.3bn refinancing from Oak Hill Advisors. However, a challenge for these law firms is that their debt finance teams are debtor-orientated, normally representing the Private Equity sponsor.

I'd like to think that there may be some lateral hires to bolster the creditor side of their debt finance teams to capitalise on these deals on both sides.

 

[justkeepswimming]

Disney released their Q4 results, which were quite promising.

Disney Q4 results:

• Disney+ added almost 7 million core subscribers.
• Losses narrowed after increasing subscription prices, additional layoffs
• Experiences operating income increased by over 30%
• ESPN, which is usually lumped into the overall Disney results, earned itself a spot as it pulled nearly $1 billion in profit, demonstrating the value of sports and the power of the ESPN brand

Overall, the results looked good for Disney. The return of former CEO Bob Iger has also brought back Disney's magic.

Streaming:
It is worth noting that Disney has not had a significant Frozen-type hit for quite some time. A BBC article in October revealed concerns that the actors' strike could halt animation production later this year. With the strike ending, will Disney be able to pick up the pace in creating and releasing content in time for summer 2024, an important time for films?

Additionally, Disney has already forecasted that, by Q4 2024, the combined streaming business will be profitable. Disney stated they would purchase more sporting rights and hope to build ESPN into the preeminent digital sports platform. It also recently acquired the remaining third of Hulu that it did not originally own. This consolidation may become a trend in the coming months as larger entertainment companies acquire smaller ones to diversify an improve their offerings to remain competitive.

Consolidation may take the form of M&A deals, which law firms will be keen to get involved in. Many law firms have dedicated Media & Entertainment practice areas. But IP will be key as the licenses and usage rights of the prominent stories/characters each media platform has created will be a central aspect of these deals.

With the SAG strikes ending, a prominent issue cited in both Netflix and Paramount's results, this could allow streaming platforms to reconvene creating content, hopefully minimising potential losses from the aftermath of the 118-day strike.

Law firms may also be involved in helping studios/ entertainment giants comply with the new deal proposed. This may include drafting new employment contracts and managing the risk of AI, as a prominent part of the SAG strikes was ensuring there were protections for actors with the increasing use of AI.

Parks/Experiences:
While Disney experience offerings did well, some cracks are beginning to show in US consumers' spending as there were lower results in the domestic parks and resorts.

This might be something Netflix should look into more deeply as it recently announced opening its own experience initiatives in the US. While this could be a brilliant idea for diversifying income streams, it is not immune to the cost of living crisis affecting the streaming industry.

With new parks and experience initiatives, law firms could be involved in an array of tasks from drafting contracts, reviewing potential property/land to be used, the rights and licenses affiliated with those properties, employee contracts, and construction contracts if they are creating it themselves, licensing and IP of the relevant franchises being used in these parks etc.

Information has been collected from Disney's report itself, Wake Up To Money Podcast, Financial Times, BBC News

 

[justkeepswimming]

Answer drafted on OneNote, hence the format difference.
Information taken from: Financial Times, BBC News, The Guardian, LinkedIn, Watson's Daily ...and many others...