Call for commercial awareness topics!

[Jake Rickman]

Happy Friday!

I thought I would put it to the community to see if there are any commercial topics you might want TCLA to cover in the commercial newsletters or premium weekly newsletter, or even to discuss in the forums.

 

[jo123]

• boost in telecoms and how regulations and supply chain issues could affect this
• the rise in private healthcare - what does this mean for law firms that have heathcare sectors. on the other hand why has Aviva's shares fallen? (https://www.cityam.com/private-health-boom-helps-push-aviva-to-another-positive-quarter/)
• globalisation - has it weakened?
• digital markets act

 

[Jake Rickman]

• boost in telecoms and how regulations and supply chain issues could affect this
• the rise in private healthcare - what does this mean for law firms that have heathcare sectors. on the other hand why has Aviva's shares fallen? (https://www.cityam.com/private-health-boom-helps-push-aviva-to-another-positive-quarter/)
• globalisation - has it weakened?
• digital markets act

Hi Jo,

Thanks for these suggestions. These are all areas I have not looked at much myself so will do some digging and see about generating an article or two on them in the next couple of weeks.

To your point about private healthcare, I am not sure what specifically you mean by the rise in private healthcare. But if you're referring to private health insurance, I would think this is more of a boon for law firms with reputable insurance practices rather than healthcare (or life sciences, as most firms tend to call it). That said, there may be an indirect link between the increase in private healthcare and the growth of the life sciences industry, provided that life science companies like pharmaceutical research businesses have more sales in markets where private healthcare is more prominent. (This is the case in the US).

I think the theme of globalisation could be critiqued on the basis that the supply chain crises that ripped through the world last year had many businesses reconsidering the supply and delivery of their goods. As a result, businesses have started reverting to "pre-globalisation" means of supply chain organisation, such as by relying on domestic manufacturers rather. This to me seems like a topic that requires lots of data.

 

[sxw517]

Big Oils renewed focus on gas and oil exploration and what this means for the renewables market/transition to net-zero.

 

[Jake Rickman]

Big Oils renewed focus on gas and oil exploration and what this means for the renewables market/transition to net-zero.

Hi there,

Just wondering if you have any articles or links in mind when generating this topic? And if you are interested in just oil & gas as a sector, or its impact on other sectors more generally?

 

[sxw517]

Hi,

Predominantly interested in RE sector, however, found it interesting to read of the new exploration projects by oil majors, contrary to what had previously been communicated by the companies.

articles I have read on this topic include:

Why Big Oil won’t be Big Renewables anytime soon | Semafor

Record profits from fossil fuels are giving some companies cold feet on the energy transition, but that won’t change where the market is headed.

www.semafor.com

Focus: Oil giants drill deep as profits trump climate concerns

Oil and gas companies have intensified the hunt for new deposits in a long-term bet on demand, as they reinvest some of the record profits from the fossil fuel price surge driven by the Ukraine war, according to data and industry executives.

www.reuters.com

 

[Jake Rickman]

Hi,

Predominantly interested in RE sector, however, found it interesting to read of the new exploration projects by oil majors, contrary to what had previously been communicated by the companies.

articles I have read on this topic include:

Why Big Oil won’t be Big Renewables anytime soon | Semafor

Record profits from fossil fuels are giving some companies cold feet on the energy transition, but that won’t change where the market is headed.

www.semafor.com

Focus: Oil giants drill deep as profits trump climate concerns

Oil and gas companies have intensified the hunt for new deposits in a long-term bet on demand, as they reinvest some of the record profits from the fossil fuel price surge driven by the Ukraine war, according to data and industry executives.

www.reuters.com

Funnily enough, we published an article on this topic at the same time as the Semafor article, which if memory serves was when a few of the oil supermajors released their round of Q1 2023 earnings.

My read is that this analysis from our 8 Feb article still stands:

Out of all the sectors, Energy remains at the centre of the ESG (Environmental, Social, Governance) debate. Despite the (often intense) pressure placed by certain investors and policymakers on the industry to abandon hydrocarbon investments and embrace renewables, the uncomfortable fact is that, in the short term and under certain market conditions, as a subsector of Energy, Oil & Gas remains wildly profitable.

While a substantial portion of investors prioritise “ESG-compliant opportunities” (an ill-defined concept), thereby shying away from adding supermajor stocks to their portfolios, this is far from universal. Many investors remain married to the dividend yields and capital growth supermajor stocks provide them.

As a result, supermajors struggle to balance the conflict between the long-term drive to renewables with the short-term profit that follows spikes in the demand for oil and gas.

Oil & Gas as a sector is a fiercely cyclical, and when demand surges as it did following the loosening of lockdown restrictions and outpaces the supply, you tend to see extremely strong earnings from the large oil companies. No matter what the appeal of ESG is in a long-term sense, equity portfolio managers struggle to stay away from the returns on these stocks.

The contrarian in me wonders if the upsurge in ESG-focused industries and investments prior to the past few months was at least partially a response to the muted earnings posted in Oil & Gas prior to the industry's change in fortunes. I had a look just now at the year-over-year (YoY) earnings for BP, Exxon, and Chevron between 31 December 2018 and 31 December 2022 and they all follow a similar pattern of severe YoY declining profitability from 2018 to 2021, with all posting pre-tax losses in 2021. While this is an extremely superficial analysis, I suppose you could argue that investors — and with them, market commentators more generally — were more willing to embrace renewables and sing their virtues because they had little to lose by not backing Big Oil.

I guess my point here is that when asking about large industry thematics as we are now doing, it is worth looking at the underlying profitability, because the market tends to chase short-term returns even if it runs contrary to what we know is in our long-term interests. In other words, we know that hydrocarbons are existentially bad for the environment but supply/demand factors and our continued reliance on hydrocarbons still makes them profitable from time to time.

But again, this is a cynical perspective. Even if Big Oil has revised downwards the extent to which they are cutting their investments in hydrocarbons, the fact remains they are in the process of rebranding and repositioning themselves for the long-term move to renewables. Is this greenwashing? Probably at least partially so. Big Oil has to hedge itself against the political, social, and ecological forces at play here. In this sense, I think the tension between short-termism and a long-view really comes into play here. The board of the supermajors knows that if they don't seize on the chance for short-term returns (surging demand for oil/gas), they will lose out to their competitors who will.

As to your point about the real estate industry, I wonder how an analysis of the factors discussed here and their implications for the sector might differ. My amateur understanding is that the nature of (commercial) real estate development and investment — building permanent, fixed structures designed to give investors steady rental yields far into the future — means that investors/developers have to always think about the long-term. Nearly every new commercial real estate developer these days spends half of their marketing materials on how their developments are the greenest and most sustainable ones yet. They have very little to gain by not embracing sustainability, because commercial tenants under ESG pressures of their own would be reluctant to sign a 15 year lease in an older, energy inefficient development.

(All this said, this is more speculation than anything else. I know very little about Oil & Gas and even less so about Real Estate. Just want to encourage discussion!).

 

[sxw517]

Seems like a reasonable assumption to make, after all, they are following the money...

I agree, the communications and press releases of Big Oil that have previously seemed to commit to moving towards cutting investments in hydrocarbons now seem as though they were lip service to ESG-concerned investors.

Interesting take though, some would say quite cynical, but I tend to agree with you.

With regards to 'RE', I was referring to renewable energy.

 

[Asil Ahmad]

I have been following the recent investment into the music industry by private equity firms. I wanted to know if this investment is going to peak over the next year or will private equity firms continue to invest in music catalogs.

 

[Jake Rickman]

I have been following the recent investment into the music industry by private equity firms. I wanted to know if this investment is going to peak over the next year or will private equity firms continue to invest in music catalogs.

Hi Asil,

A fascinating topic. I will go away and do some research.

I will say that my understanding of the general premise behind the acquisition of a musician's catalogue by private equity firms is that they are a steady source of earnings uncorrelated from market trends. The reasoning behind this is that people will listen to Bruce Springsteen regardless of what is happening in the world.

My thinking therefore is that private equity investment in this asset class will increase where there is more market volatility and investors are looking for a long-term place to park their cash that is unlikely to be affected by short-term themes like inflation or asset devaluation (which are macro issues private equity firms are currently dealing with). It would be good to get some numbers to back this up (or invalidate my theory).

 

[Asil Ahmad]

Hi Asil,

A fascinating topic. I will go away and do some research.

I will say that my understanding of the general premise behind the acquisition of a musician's catalogue by private equity firms is that they are a steady source of earnings uncorrelated from market trends. The reasoning behind this is that people will listen to Bruce Springsteen regardless of what is happening in the world.

My thinking therefore is that private equity investment in this asset class will increase where there is more market volatility and investors are looking for a long-term place to park their cash that is unlikely to be affected by short-term themes like inflation or asset devaluation (which are macro issues private equity firms are currently dealing with). It would be good to get some numbers to back this up (or invalidate my theory).

Thank you very much for this Jake.

This started since 2016 but the rise in this investment has increased since last year when Blackstone was one of the bidders for the Pink Floyd music catalog.

I think this trend is going to increase more into later this year but will be interesting to hear your thoughts on this after you research more into this area.

 

[ADKM]

Recently, came across a really interesting piece on the FT where Christopher Nolan spoke about his latest release, Oppenheimer. He said that Oppenheimer is very much a cautionary tale. America wanted to overtake Nazi Germany in the nuclear arms race but J Robert Oppenheimer resisted this move saying measures need to be taken to control the international nuclear arms race, but his opinions were met with stiff resistance from the US Congress. The idea was for the US to retain sovereignty as the foremost nuclear power in the world.

In the present era, Nolan compares this with the AI trend. My view on this topic is that I feel Nolan makes a very strong point saying this aggressive pursuit of AI investments is only for profit. I don't think he is wrong, ultimately if AI continues to progress without being regulated, it will only affect the end consumer. However, I also think this lack of regulatory oversight presents lots of work for regulatory/tech/data-privacy lawyers in terms of having a say in developing legislation to control AI. I also think with AI booming so much, and investors looking for investment opportunities, corporate/M&A/private equity lawyers will always be inundated with work in terms of advising clients on potential acquisition strategies or JVs. But if AI is regulated, I believe the environment will become more streamlined and investments can start coming from varied avenues and industries, consequently opening up more work for commercial lawyers. Would love to know your thoughts on this @Jake Rickman

 

[Jake Rickman]

Recently, came across a really interesting piece on the FT where Christopher Nolan spoke about his latest release, Oppenheimer. He said that Oppenheimer is very much a cautionary tale. America wanted to overtake Nazi Germany in the nuclear arms race but J Robert Oppenheimer resisted this move saying measures need to be taken to control the international nuclear arms race, but his opinions were met with stiff resistance from the US Congress. The idea was for the US to retain sovereignty as the foremost nuclear power in the world.

In the present era, Nolan compares this with the AI trend. My view on this topic is that I feel Nolan makes a very strong point saying this aggressive pursuit of AI investments is only for profit. I don't think he is wrong, ultimately if AI continues to progress without being regulated, it will only affect the end consumer. However, I also think this lack of regulatory oversight presents lots of work for regulatory/tech/data-privacy lawyers in terms of having a say in developing legislation to control AI. I also think with AI booming so much, and investors looking for investment opportunities, corporate/M&A/private equity lawyers will always be inundated with work in terms of advising clients on potential acquisition strategies or JVs. But if AI is regulated, I believe the environment will become more streamlined and investments can start coming from varied avenues and industries, consequently opening up more work for commercial lawyers. Would love to know your thoughts on this @Jake Rickman

Your points raise some philosophical and existential questions. Assuming you intend to workshop this for an application/interview question, I would suggest distilling these ideas down, because it is quite a lot of content to cover in ~250 words or a couple of minutes.

A few thoughts:

• While the connection between the existential threat of AI which Nolan discusses in the FT article and the commercial world is an interesting point of conversation, I am not sure that it has much relevance in an application/interview setting. That is, it feels a little academic and abstract.
  
  
• I also would argue that only a small number of commercial law firm practice groups will have any hand in drafting whatever future laws emerge to govern AI, so the relevance for commercial law seems a bit spurious. They are more likely to advise regulators and commercial parties on the effects of new laws, rather than drafting them outright.
  
  
• As far as substance to discuss in an interview, I am not sure I follow you when you draw a connection between the regulations governing AI (or the lack of regulation) and the volume of M&A/PE transactions. However, this is an interesting point and one that I have not seen covered anywhere else. Can you explain a bit more what you mean with this? If your point is that there will be loads of new businesses that offer AI solutions, which will translate to more deals as they get purchased by larger companies, I would probably agree. This seems like a good point to develop further.

As a bit of feedback, my strategy for discussing commercial news in an interview setting is to keep things as simple as possible by focusing on only a couple of themes. Your points here cover loads of different commercial themes: AI, deal volumes, regulation, the role of private practice law firms in drafting legislation... You simply will not have enough time in an interview or word count in an application question to make a strong conclusion that this is tangibly relevant to law firms. I would really just focus on a single aspect of AI. I think the most fruitful one would be its role in growing transaction volumes.

--

Speaking more conversationally, I think I agree with Nolan that AI does raise serious existential concerns. However, in my opinion, the problem with new technology is that it is hard to cut through the noise. This raises another point, which is that I personally find that the talk around AI to be overly-sensational (similar to how all the buzz around crypto and blockchain was last year before the crypto market collapsed.

This is my opinion, but all the talk about how "disruptive" AI is poised to be really seems like speculation. It may be the case that it puts everyone out of a job, but I think the more likely outcome is that over the next 10-15 years, it modulates how office workers do their jobs, similar to how personal computing has changed the business world over the past few decades. (Though I recognise the importance of law firms investing in AI capabilities because if they do not, they risk being left behind).

 

[Asil Ahmad]

Hello, Jake hope you are well. I was reading in the FT this morning about Fitch strips US of triple A rating after borrowing stand-off. Would love to hear your views on this and an explanation of this as am not aware of this and what this means. Thank you in advance.

 

[futuretraineesolicitor]

Hello @Jake Rickman hope you are doing well. Just wanted to ask you for tips regarding how I can go about building my commercial awareness from scratch. I have not been following the news at all to be honest but if I were to set a target of becoming more commercially aware of what's going on in the business world in the next 6-8 months, what sources should I use? For me, I am quite comfortable with Watson's Daily but is there any other resource that you can suggest? Or, do you have any other tips in general. Thanks in advance.

 

[Jake Rickman]

Hello, Jake hope you are well. I was reading in the FT this morning about Fitch strips US of triple A rating after borrowing stand-off. Would love to hear your views on this and an explanation of this as am not aware of this and what this means. Thank you in advance.

Hey Asil,

I saw the headline but have not yet read the article, though I think it is a great topic to raise.

Fitch, together with S&P and Moody, are known as the big three credit rating agencies. Their role in the financial markets is to review the creditworthiness of both large businesses (e.g., Walmart, BP, etc) and governments (sometimes called sovereign borrowers). They do this by assessing the likelihood that the entity will default on any of its outstanding credit/debt obligations. They then assign a rating to the "credit" (as the entity is called), which signifies to investors and the market the creditworthiness of the credit.

Based on memory, the three CRAs have different ranking systems, but usually it is some variation of AAA, AA+, AA, AA-, A, BBB, etc. with "triple A" or AAA indicative of the lowest risk of default, and C ratings the highest risk of default.

Sovereign borrowers include the US Federal Government (as well as the UK Government, and nearly every other government in the world). Government raise money to fund everything from the military to schools to roads etc, primarily through either taxes and issuing bonds. If you are considering investing in a government bond, you want to know what the risk of default it so you can gauge how good of an investment it is.

Traditionally, US bonds have been seen as the safest kind of investment because of the US's role (traditionally) as the world's largest economy and a stable political system. In other words, if the US Federal Government sold you a 10 year $100,000 bond at 4%, you would be safe in assuming that you will receive that $100,000 back in 10 years, plus the interest payments throughout the course of the bond's life.

However, since the 1990s, there has emerged a political tactic propagated by the Republican Party (one of two primary political parties in the US) that basically allows them to threaten to make the Federal Government default on its outstanding debt as a way to force the other political party to agree to their political demands. On I think at least three occasions, most recently a couple of months ago, the US got very close to defaulting. This caused a degree of panic in the market, because if the US government's debt is at risk of non-payment, it would throw in to question all other sorts of debt whose price is dependent upon the current value of US bonds. I explain this in more detail in an article TCLA published a few weeks ago. You can read more about it here: US debt ceiling negotiations continue to stall ahead of deadline.


Hope that is helpful! Let me know if you have any follow up questions.

(Also I have not forgotten about your PE question re: music catalogue acquisitions — I will circle back on that soon!)

 

[Asil Ahmad]

Hey Asil,

I saw the headline but have not yet read the article, though I think it is a great topic to raise.

Fitch, together with S&P and Moody, are known as the big three credit rating agencies. Their role in the financial markets is to review the creditworthiness of both large businesses (e.g., Walmart, BP, etc) and governments (sometimes called sovereign borrowers). They do this by assessing the likelihood that the entity will default on any of its outstanding credit/debt obligations. They then assign a rating to the "credit" (as the entity is called), which signifies to investors and the market the creditworthiness of the credit.

Based on memory, the three CRAs have different ranking systems, but usually it is some variation of AAA, AA+, AA, AA-, A, BBB, etc. with "triple A" or AAA indicative of the lowest risk of default, and C ratings the highest risk of default.

Sovereign borrowers include the US Federal Government (as well as the UK Government, and nearly every other government in the world). Government raise money to fund everything from the military to schools to roads etc, primarily through either taxes and issuing bonds. If you are considering investing in a government bond, you want to know what the risk of default it so you can gauge how good of an investment it is.

Traditionally, US bonds have been seen as the safest kind of investment because of the US's role (traditionally) as the world's largest economy and a stable political system. In other words, if the US Federal Government sold you a 10 year $100,000 bond at 4%, you would be safe in assuming that you will receive that $100,000 back in 10 years, plus the interest payments throughout the course of the bond's life.

However, since the 1990s, there has emerged a political tactic propagated by the Republican Party (one of two primary political parties in the US) that basically allows them to threaten to make the Federal Government default on its outstanding debt as a way to force the other political party to agree to their political demands. On I think at least three occasions, most recently a couple of months ago, the US got very close to defaulting. This caused a degree of panic in the market, because if the US government's debt is at risk of non-payment, it would throw in to question all other sorts of debt whose price is dependent upon the current value of US bonds. I explain this in more detail in an article TCLA published a few weeks ago. You can read more about it here: US debt ceiling negotiations continue to stall ahead of deadline.


Hope that is helpful! Let me know if you have any follow up questions.

(Also I have not forgotten about your PE question re: music catalogue acquisitions — I will circle back on that soon!)

Thank you very much this.

This is really helpful and really great analysis.

No worries about the PE question know you are still doing research on it.

 

[Jake Rickman]

Hello @Jake Rickman hope you are doing well. Just wanted to ask you for tips regarding how I can go about building my commercial awareness from scratch. I have not been following the news at all to be honest but if I were to set a target of becoming more commercially aware of what's going on in the business world in the next 6-8 months, what sources should I use? For me, I am quite comfortable with Watson's Daily but is there any other resource that you can suggest? Or, do you have any other tips in general. Thanks in advance.

Hello there!

Some tips to develop your commercial awareness:

• TCLA publishes a weekly newsletter that covers at least two news topics relevant to law firms. When selecting these topics, at least one will be focused on some aspect of law firms as a business (which you can think of as an important subset of commercial awareness). The other is more general. Most recently, we have been looking at the effect of interest rates on banking profits, but other recent topics include M&A deals, private equity activity, insolvencies, and public equity market themes. You may find it helpful to read these once a week. You can look at the past articles here: Previously published articles.
• We are trying to encourage TCLA's community to engage with commercial developments together, rather than as something you do in isolation by yourself. To this end, we strongly encourage you to participate on the forum — asking questions (as Asil did earlier today), bouncing ideas off each other, and discussing strategies for staying engaged with the commercial world. We have also launched a new product for TCLA Gold subscribers to join the community in TCLA's Office Hours, which is a 1hr+ window to join myself and another member of the TCLA community (tonight we are lucky to have @Jaysen, TCLA's founder) in discussing various commercial news and developments.
• More generally, the more effort you put into your commercial awareness development, the more confident you will become in discussing this. To this end, I would encourage you to hone in one the areas which you find particularly interesting and try and study them in more detail. If you are a student, you should be able to get a free subscription to the Financial Times, which I cannot more strongly recommend. You can then view news articles by topic and get email alerts when new articles are published. Some of the topics that I pay closer attention to than others include:
  • Markets (so stock markets, bond markets, IPO markets, etc.)
  • Equities (this overlaps with markets more generally)
  • Law
  • Aerospace & Defence (this covers all big developments in the aerospace and defence sectors)
  • Private equity (this looks at the financial performance of the private equity market, as well as big private equity deals)
  • M&A (a recent high profile development was Three UK and Vodafone's mergers
• When you come across a concept you don't understand, do some research into it. Investopedia is a decent resource that I use sometimes. Likewise, please share your questions here on the Commercial Awareness forum. I am hardly an expert in any one aspect of the commercial world, but I am happy to try and answer your question and guide you to some further reading.

Hope you find that helpful! Just be patient and keep in mind that your commercial awareness does not happen overnight. You have to put in a little bit effort, ideally each day, to stay informed and stay curious.

 

[AlexJ]

Hi Jake, had you had any thoughts on the decision of HMG to grant new oil licences in the North Sea?

Personally I feel that campaign groups will try and find a way to challenge the grant of the licences, particularly with regards to any impact assessments (downstream affects of projects could potentially be included depending on the outcome of the case before the UKSC). I also think the financing of projects could potentially be difficult as lenders put pressure on to make greener choices, as well as investor pressure on oil majors to invest in renewables.

However a future labour gov may be in trouble if it tried to cancel licences granted, potentially facing claims under investment law.

For law firms I think they would be complicated projects to work on, the above would have to be factored into advice to potential developers. It would be high billing work due to the complexity involved and potential challenge, but potentially damaging to the reputation of a firm who took on the work, particularly firms who have been pushing ‘green’ credentials

 

[futuretraineesolicitor]

Hello there!

Some tips to develop your commercial awareness:

• TCLA publishes a weekly newsletter that covers at least two news topics relevant to law firms. When selecting these topics, at least one will be focused on some aspect of law firms as a business (which you can think of as an important subset of commercial awareness). The other is more general. Most recently, we have been looking at the effect of interest rates on banking profits, but other recent topics include M&A deals, private equity activity, insolvencies, and public equity market themes. You may find it helpful to read these once a week. You can look at the past articles here: Previously published articles.
• We are trying to encourage TCLA's community to engage with commercial developments together, rather than as something you do in isolation by yourself. To this end, we strongly encourage you to participate on the forum — asking questions (as Asil did earlier today), bouncing ideas off each other, and discussing strategies for staying engaged with the commercial world. We have also launched a new product for TCLA Gold subscribers to join the community in TCLA's Office Hours, which is a 1hr+ window to join myself and another member of the TCLA community (tonight we are lucky to have @Jaysen, TCLA's founder) in discussing various commercial news and developments.
• More generally, the more effort you put into your commercial awareness development, the more confident you will become in discussing this. To this end, I would encourage you to hone in one the areas which you find particularly interesting and try and study them in more detail. If you are a student, you should be able to get a free subscription to the Financial Times, which I cannot more strongly recommend. You can then view news articles by topic and get email alerts when new articles are published. Some of the topics that I pay closer attention to than others include:
  • Markets (so stock markets, bond markets, IPO markets, etc.)
  • Equities (this overlaps with markets more generally)
  • Law
  • Aerospace & Defence (this covers all big developments in the aerospace and defence sectors)
  • Private equity (this looks at the financial performance of the private equity market, as well as big private equity deals)
  • M&A (a recent high profile development was Three UK and Vodafone's mergers
• When you come across a concept you don't understand, do some research into it. Investopedia is a decent resource that I use sometimes. Likewise, please share your questions here on the Commercial Awareness forum. I am hardly an expert in any one aspect of the commercial world, but I am happy to try and answer your question and guide you to some further reading.

Hope you find that helpful! Just be patient and keep in mind that your commercial awareness does not happen overnight. You have to put in a little bit effort, ideally each day, to stay informed and stay curious.

Thank you for going into this level of detail. This was really helpful!