Commercial awareness lessons from finance practice

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This article has been produced in collaboration with Mayer Brown International LLP.

Bridget Polkinghorne is a senior associate in the leveraged finance team at Mayer Brown International LLP. The team represents private equity sponsors, banks, private credit and hedge funds and other financial institutions in a variety of transactions, including leveraged buyouts, public-to-privates, dividend recapitalisations and refinancings.

What does ‘commercial awareness’ mean to you and how do you apply it in your work?

Commercial awareness, for me, is about understanding the market in which our clients operate and their business objectives in relation to a transaction. The goal is to be a trusted adviser to your client, which means not operating in a vacuum. I invest time in understanding each client's business and its commercial drivers on each transaction so that we understand what's important to our clients when drafting and negotiating a transaction. A lawyer who fails to understand the economic drivers behind a transaction or the competitive pressures a client faces is unlikely to deliver tailored advice that truly adds value. It's not enough to know the law.

You’ve worked in different jurisdictions, what’s that experience taught you about different deal cultures?

I have practised in New Zealand and London, two very different jurisdictions. Each has its own deal culture, pace of execution, client mix and competitive dynamics, but the fundamentals remain the same wherever you practise. Law is a service industry and people are at the forefront of everything we do. No matter where you are the objective is always the same: to deliver the best possible advice and outcome for your client. Building strong relationships, communicating clearly, working under pressure and understanding the commercial context of a transaction are important in every jurisdiction. Working across jurisdictions gives you a broader perspective on transaction structuring and negotiating documentation, and also forces you to adapt quickly to various deal cultures. I’d encourage students not to be afraid of seeking international experience if the opportunity arises.

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How do periods of economic uncertainty change the questions clients bring to you?

Our work broadly falls into two categories: first, supporting clients in financing the acquisition of an asset, typically a company being purchased by a private equity fund and second, advising them throughout the life of the loan agreement that funds that acquisition. That ongoing advisory work might involve helping a client finance smaller follow-on acquisitions (known as ‘bolt-on’ acquisitions) or simply staying in compliance with the restrictions set out in its financing documents. Periods of economic uncertainty have a marked effect on both categories and on the nature of the questions our clients bring to us.

With new acquisitions, uncertainty directly impacts a sponsor's ability to value a target company accurately and to build reliable financial models. To put it simply, when a private equity fund buys a company, it funds the purchase with a mix of its own money (equity) and borrowed money (debt). Without a crystal ball, it becomes much harder for a sponsor to work out the right balance between the two. The leveraged loans we work with carry floating interest rates, which means the interest a borrower pays moves up and down in line with the market. So when rates rise, the cost of borrowing increases and lenders become more cautious about how much they’re willing to lend due to factoring in a downturn/an impact on the businesses future revenue.

This can result in sponsors having to put in more of its own money or being less willing to purchase the asset at the proposed valuation. That said, private equity firms (and private capital lenders alike) continue to have significant capital to deploy and competition for valuable assets remains high, so deals still get done; even in difficult markets. But clients come to us with more detailed questions about how to structure their financing and allocate risk between the various parties, because there’s simply less room for error when the economic outlook is uncertain.

In terms of our existing portfolio of clients (ie, where a company has already been acquired and the money has already been lent) uncertainty can bring a pressing set of questions related to the borrower's financial health. Higher interest costs and a possible drop in the company's revenue can mean that a borrower is at risk of breaching what are called its ‘maintenance covenants’. These are financial tests it must pass at regular intervals, such as maintaining a certain ratio of earnings to debt. If a borrower fails those tests, the consequences can cascade: it may lose the ability to make further acquisitions, access undrawn portions of its loan facilities or make returns to its private equity investors. In times of uncertainty, we'll have more clients coming to us to help them navigating these situations. This can involve negotiating waivers or amendments between the parties (possibly relaxing covenant for a period) and helping lenders assess their own position and options. A lender wants to understand the strength of the security it holds over the borrower's assets, whether value could leak out of the borrower group and at what point they can step in if things go wrong.

Ultimately, as a service provider our role is to support our clients navigate the economic realities at any stage of the economic cycle. This requires not just a technical knowledge of the documentation, but also a broader awareness of market trends, how other deals are being structured and what is realistic to negotiate in the current environment. The combination of legal expertise and commercial awareness is required to deliver first rate advice and is essential to a successful leveraged finance practice. Every deal is different, the market is constantly evolving and we’re advising some of the most significant players in the mid-market. It’s something we at Mayer Brown pride ourselves on delivering.

You act for lenders, sponsors and corporates, what’s the first thing you try to understand about a client before you start advising on a financing?

The first step for us is always internal conflict checks. Mayer Brown acts for a range of clients globally so we must confirm there's no conflict of interest before accepting a new instruction. As a global law firm, there can be various dynamics that we need to be aware of.

Once conflicts are cleared, the priority is understanding the context and commercial drivers of the deal. The legal advice you give is only as good as your understanding of what the client is actually trying to achieve. So before diving into the documentation, we need to ask a range questions to understand the full picture:

• Is this a competitive auction process where speed is critical, or is it a bilateral negotiation where the parties have more time to agree terms?
• Does the sponsor have exclusivity to buy this target?
• Is the lender mandated or is it a competitive lender process?
• Is the client looking to maximise its leverage or preserve flexibility for future bolt-on acquisitions?

In a hotly contested auction, speed is critical, as a sponsor will need to submit its bid with its equity and financing package confirmed. For these instructions, we need to understand what the client's ‘must haves’ are as to negotiate effectively and efficiently. A proactive and commercially aware approach is appreciated by clients. Again, it's about being a trusted adviser not just a technician.

You’ve spent time on secondment at commercial banks, what did that teach you about how clients make decisions internally?

Secondments are hugely valuable and I have been fortunate enough to have two secondments – at Lloyds Bank (corporate loans team) and HSBC (mid-market financial sponsors team). There’s a saying: “see how the sausage gets made”. In private practice, you see the end product of a client's decision, but not always the layers of internal decision making behind it. A lending decision isn’t a simple yes or no – there are layers behind it. Each lender has its own process, typically via a credit committee or investment committee.

When a new instruction hits a lawyers desk; the lender has known about it and/or been working on it for months. When assessing a lending decision, the deal team prepares a detailed written submission setting out the terms of the proposed transaction, the risks involved, the borrower’s financial profile and the rationale for why the lender should participate. This is then scrutinised by senior stakeholders, who may approve, reject or approve with conditions. Committees look at factors such as the sponsor relationship, sector exposure and do the terms requested by the sponsor match their investment mandate.

A lot gets considered behind the scenes; it’s much more than a lender thinking an investment looks healthy and being confident it’ll get its money back. Currently private credit lenders are thinking carefully about sector exposure and how AI developments could affect their existing loan portfolios. On secondment, you‘re exposed to these discussions.

You also learn what it's like to work in house. You’re embedded within the client's team, providing legal support and advice in real time as deals progress and issues arise. This gives you an insight into what clients need from their external lawyers: not just technical excellence, but responsiveness, commercial pragmatism and clear, actionable advice.

I’d strongly advise any junior lawyer to seek secondment opportunities – they sharpen your sense of how decisions are made and help you understand the current terms in the market. Both of my secondments were post-qualification, but Mayer Brown also offers trainee secondments, which are a great opportunity too!

What’s one small habit trainees can adopt that’ll make them noticeably more commercially aware in a seat like finance?

Be curious! When you’re working on a transaction, don’t just focus on completing the task in front of you – ask/investigate: why a deal is being done, what key terms (eg, financial covenants) mean, why the lender needs a certain covenant and why the sponsor has structured an acquisition in a certain way.  

Ask questions, be genuinely interested in the answers and take the initiative to learn about the industry you operate in. Use your law firm’s knowledge portal and resources like Debtwire and the Financial Times. Read up and you may be able to connect some dots yourself.

Understanding what your team does and the context of the deals also gives you the ability to assess if the practice area is for you or not. Commercial awareness is a skill you can develop and I believe curiosity is the engine that drives it.

How can students start to build their commercial awareness?

Read, listen and follow. Consistently engaging with content is the best way to develop commercial awareness. It’s a bit like planting a seed and watering it. Thankfully, there are lots of free resources. You might not understand every detail but you can go on to research about a topic or subject you didn’t know.  

Even if you can’t access the Financial Times, skimming headlines will provide insights into what's happening in the market, and you can follow up with free news sources. Podcasts are also useful: there's a wealth of free content on business, finance, economics and entrepreneurship. Think outside the box – podcasts like The Diary of a CEO features founders, investors and leaders. The podcast’s creator, Steven Bartlett, has interviewed various AI experts, which is particularly useful given how widely AI is expected to reshape industries.

LinkedIn is also a great resource. Follow law firms and partners that operate in practice areas of interest. Law firms post deal announcements and thought leadership articles. You can also follow firms’ clients for insights into communication strategies and priorities.

It's all about cultivating a genuine interest in the commercial world and making a habit of feeding that interest. We're not expecting you to know everything but we’re expecting you to be curious and to engage with topics. Keep on top of what genuinely interests you, dive deeper and let that curiosity carry you forward.

For more on boosting your commercial awareness, check out our Commercial awareness hub, sponsored by Mayer Brown. Plus, read this LCN Says to find out more about life as a finance trainee at Mayer Brown.