Commercial Awareness Flashcards
What is commercial awareness and why is it important?
Tell us about a time when you have demonstrated commercial awareness.
Introduce us to a news story that has interested you.
Intro - Given my interest in capital markets and the investment management industry, the proposals for a restructured UK capital markets regime have caught my attention recently.
C - The UK market has struggled to attract companies. The FT for instance had reported that London contributed only 5% to global IPOs from 2015-2020. This has also been made wrose after Brexit cut off the City from the EU and a decision by ARM to float in New York. Further, London has witnessed several private equity backed take-private deals, such as CVC’s acquisition of Ted Baker and CD&R’s acquisition of Morrisons.
D - In response, the FCA published its Primary Markets Effectiveness Review in May this year following Lord Hill’s UK Listing Review, outlining multiple proposals to enhance London’s appeal to prospective issuers. Yet, the proposals may overlook competitive issues and inadvertently discourage smaller companies from listing.
FCA’s main proposal is to streamline the existing bifurcated structure of the premium and standard listing segments by establishing a single listing category with a unified set of obligations.
It also advocates a shift to a more flexible approach to listings by removing some financial eligibility requirements currently applicable to the premium segment, such as the three-year historical financial information requirements and the need to provide a clean working capital statement (the issuer has, in its opinion, sufficient working capital for its requirements in the next 12 months).
However, in establishing a single listing category, some obligations currently applicable only to listings on the premium segment will carry over, such as the significant transactions and sponsor regimes.
Consequently, smaller issuers that might have listed on the standard segment will face higher regulatory burdens and be subject to greater disclosure standards. Therefore, whilst the proposals may simplify the IPO process and thus make London a more attractive listing venue, the overall burden on less mature companies may deter them floating on the single listing category.
Moreover the UK is less liquid and offers lower valuations than competitor jurisdictions, namely the US. As such, a broader approach targeting cultural change to UK capital raising is perhaps warranted alongside deregulation. For instance, it may be an appropriate to enable funds to invest into more illiquid assets and fast-growing young British companies to inject liquidity into the UK markets.
But going back to the impact of this broader push to reform the UK’s capital markets regime, I think overall it is a positive step forward that could see increased dealmaking in this space, once the macro headwinds pass.
What are collateralised loan obligations (CLOs)?
A security backed by a pool of debt - often corporate loans with low credit ratings or those taken out by PE firms to finance a leveraged buyout
In other words, they are a bundle of loans ranked below investment grade
An investor receives scheduled debt payments from the underlying debts and assumes default risk but in exchange is offered a greater diversity and potential for higher-than-average returns
What are subscription agreements?
An agreement that defines the terms of a party’s investment into a fund’s private placement offering
Often used as a formal agreement between an investor and a fund to purchase equity at an agreed-upon price
What are derivatives?
Financial contract whose value is dependent on an underlying asset, group of assets, or a benchmark
They can be traded on an exchange or over-the-counter
They are used to hedge a position or speculate on the directional movement of an underlying asset
For instance, interest rate swaps enable parties to mitigate risk if they are unsure on the direction of interest rate hikes
4 types of derivatives: futures, forwards, swaps and options
What is the securitisation process?
It is the process whereby assets, namely income-producing assets (eg loans), are bundled into a portfolio to be sold off as an investable security
The process involves two steps:
First step is that a company identifies loans and otehr income-producing assets it wishes to remove from its balance sheet and pools them into a portfolio to sell to an issuer such as an SPV
Secondly, the issuer finances the acquisition of the portfolio by issuing tradeable interest bearing securities
What are the responsibilities of a lawyer in an IPO?
What is sweet equity?
Management’s holding of ordinary share capital in a company
The shares allocated to management are often subscribed for at a lower price than the PE fund investor’s shares (ie higher upside) to incentivse management to perform well
What is a leveraged buyout?
The acquisition by a PE firm using a significant amount of borrowed capital (loans or bonds) to finance the acquisition.
The target’s assets are typically used as collateral, allowing PE firms to leverage the deal.
How does a reformed pension scheme facilitate a more liquid capital market climate in the U.K.?
The UK has the largest pension market in Europe yet UK pension funds have over the past 25 years reduced their allocation to British equities from around 50% to 6%
Accordingly, either by encouraging or compelling pension schemes to invest in UK equities, this will increase the liquidity in UK markets
However, it is just one method of increasing liquidity in UK markets - there should also be a push into boosting growth of UK businesses to make them more attractive to investors
But this requires a major focus on investment in skills and infrastructure
What are the differences between Rule 144A and Reg S debt offerings?
They both apply to private placements, so are only available to qualified institutional buyers.
However, Rule 144A debt offerings can only be offered to US based investors, whilst Reg S offers non-US based investors the ability to contribute capital.
What is an evergreen fund?
They are private funds that do not have a fixed end date.
What is a master feeder structure fund?
It consists of three funds: a master fund, an offshore feeder and onshore feeder fund.
These feeder funds pool capital from investors. The feeder fund then invests into the master fund. Accordingly, foreign and domestic investors can pool their capital into one investable private fund.
This allows for economies of scale given the consolidation of various portfolios and will thus have more favourable terms offered by brokers and institutions. Furthermore it is convenient for both domestic and foreign investors.
What is opaque or transparent for tax purposes?
Opaque is referred to when investors are regarded as owning units in the fund rather than fractions of the underlying asset - therefore any profit will be taxed at the fund’s level
Transparent funds are those where investors own a share of the underlying fund asset - therefore any profit earned on the share will be taxable
