Commercial Awareness Breakdown: 24–28 Feb 2020

Student Accommodation, Ethical AI and Twitter

Posted at youthlaw.co.uk…

Commercial Awareness Breakdown deconstructs three of the week’s commercial stories in an understandable and jargon-free manner. Terms bolded and underlined may be more difficult to understand and are explained at the bottom.

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1) Student Accommodation

IQ Student Accommodation, formerly owned by Goldman Sachs and the Wellcome Trust, has been sold to private equity group Blackstone for £4.7 billion, in what what is reportedly one of the UK’s largest ever private property transactions. IQ is one of the UK’s largest student accommodation operators, owning 67 premises housing nearly 30,000 beds in 27 of the country’s major university cities — with half of the firm’s portfolio being held in London.

Last year, Prime Minister Boris Johnson announced his Government’s aim to increase the number of international students studying in the UK by a third. Blackstone’s head of European real estate, James Seppala, wrote of a growing international demand for “UK higher education”. This has clearly reflected onto the housing market.

However, despite there being a record-breaking number of international university applicants in 2019/20, the demand from internal students is also high. UCAS, the Universities and Colleges Admissions Service, has reported that more than 706,000 students applied for full-time undergraduate positions in 2019/20, an increase of over 10,000 from the year before. The Guardian have predicted that, by 2030, international students will make up 45% of the total number of students studying in the UK.

For firms such as Blackstone, this news can only be promising. UK revenue from international students and other education-related services, reports the Wall Street Journal, reached £21.4 billion in 2017, a growth of 34.7% since 2010 and up 7.2% from 2016. By plotting this data into even a rudimentary scatter graph, we can see the trend highlighting possible UK revenues of upwards of £25 billion in 2020, or even around £35 billion in 2030.

Rob Roger, CEO of IQ, wrote that he was keen to work “with a partner of Blackstone’s calibre” whilst continuing to conduct IQ’s “ambitious growth plans”. Mr Roger also noted the current climate of the student accommodation industry, describing his firm’s position as a leader in the sector as “exciting”.

The accommodation operated by IQ is higher-end that what many other providers offer, with weekly rents running from £195 to £460. Blackstone, a firm with around $545 billion under management, plans to refurbish and rebuild many of the IQ’s assets. This deal was not just pursued by Blackstone, with other private equity firms having also shown significant interest. IQ reportedly considered an IPO to raise capital, but ended up deciding that the certainty of a sale process made it the preferable route.

2) Ethical AI

Two of the world’s leading technology firms, IBM and Microsoft, have signed an ethical agreement with the Vatican to ensure the development of AI is conducted in a way that ensures the protection of the planet and rights of all people. “Rome Call for AI Ethics” was presented on the 28th to Pope Francis by Microsoft’s president and IBM’s executive vice-president.

The pledge requires AI to safeguard humankind’s rights, along with introducing increased regulation. Furthermore, the document calls for a “duty of explanation”, ensuring technologies prove not just how artificial intelligence programmes come to their decisions, but also what their objectives are. Brad Smith, Microsoft’s president, noted that the technology “must be guided by strong ethical principles” which build upon the world’s “human rights traditions”. As one of the two firms (alongside IBM) with the most AI patents, it is reassuring to see Microsoft take an active step in the regulation of AI.

The Vatican’s involvement with such a pledge, it seems, stems from its focus on values and morals. Francesca Rossi, the AI ethics leader of IBM, noted the Vatican’s position not as “an expert on the technology”, “but on values”.

The European Commission recently published its own White Paper on the regulation of AI — the document focuses mainly on the riskier forms of AI, and introduces assessments to be implemented before the algorithms are to be used within the European Union. Ms Rossi advised the EU on their paper, and stated that a risk-specific approach is the most effective solution. Generic regulation may allow programmes to slip through the cracks, whereas over-stringent, blanket regulations would be too burdensome and onerous on AI companies. Rossi states that “AI has a lot of nuances”, and that it would not be “reasonable to put the burden on applications that can be very beneficial”.

AI is immensely exciting to many involved with the technology. The low error rates of AI programmes, combined with their speed, information handling capabilities and problem solving attributes, makes AI a very attractive option for many sectors. Medicine, law, finance and transport are all areas that would clearly benefit from the technology. However, the CEO of Google, one of the most innovative and forward-thinking firms in operation today, has also called for tighter regulation in the sphere of AI. Mr Pichai wrote that there are “real concerns about the potential negative consequences of AI, from deepfakes to nefarious uses of facial recognition”. Data and identity, it seems, are two of the areas most vulnerable to the increased use of AI technologies.

Further examples, provided by the European Commission in their publication, include AI cars malfunctioning and major security breaches. Such examples are clearly of concern as AI becomes more prevalent, and it is reassuring to see the larger technology firms, along with public authorities, balancing the potential risks of these new technologies with the obvious benefits they will bring to a huge number of sectors.

3) Twitter

Elliott Management, an American activist investment firm, has bought a large stake in social media platform Twitter in an attempt to remove its co-founder and CEO Jack Dorsey. Elliott are reportedly opposed to Mr Dorsey’s other priorities, particularly his position of CEO at Square, a digital payment company he founded in 2009. Mr Dorsey’s running of two large-scale public companies is rare, and is of significant concern to investors such as Elliott.

Elliott are known for pressuring boards, having recently announced plans to alter the governance of Japanese conglomerate SoftBank. Elliott seek to replace Mr Dorsey with a more dedicated CEO, and have nominated four alternative individuals to stand for election. Despite sounding somewhat hostile, it is reported that conversations between the investment firm and the social network have been productive. That said, Twitter has so far refused to comment on the matter.

Currently, Elliott’s stake in Twitter is unknown. However, for Dorsey, this is very much a takeover to be concerned of. Many tech firms choose to operate under a dual-class share structure. This format allows a company to operate more than one class of share, some of which have more/less voting power than others. As a result of this, companies’ founders have historically been able to maintain a majority voting stake whilst technically owning less than half of the financial value of the firm. Twitter does not operate under this model, meaning Mr Dorsey is susceptible to being ousted.

Twitter’s performance in 2019 was poorer than expected, with its shares having dropped by 20% in October, and its third quarter having produced poor results. With 2020 bringing several major global events, Elliott wants to ensure Twitter is best placed, technically and directionally, to deal with any issues that come its way.

Despite Twitter’s more recent financial performance being stronger than 2019 (having reached quarterly revenue of $1 billion), Elliot is still concerned about Dorsey’s recent announcement of his intentions to move to Africa for half a year to explore opportunities in blockchain. Perhaps for Dorsey, his further entrepreneurial plans will be easier to conduct independent from Twitter, however whether he wants to let go of his reign over his 14 year-old creation is uncertain.
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Difficult Terms:

Activist Investment — This occurs when an investor buys shares in a company in order to obtain seats on the company’s board to make governance/directional changes.

AI — Artificial Intelligence — Computer hardware and software with a degree of intelligence, designed to to work and react in a manner similar to humans.

Algorithm — A process or set of procedures followed by a computer.

Blockchain — A data storage system using records secured by cryptography.

Board — The board of directors of a company decides upon many matters, such as matters of governance and the company’s direction.

Capital — Money or assets owned by an organisation.

CEO — Chief Executive Officer — the most senior officer in charge of an organisation.

Deepfake — A combination of the words ‘deep learning’ and ‘fake’ — deepfakes are fake media in which one person’s face is replaced with another’s.

European Commission — A body of the European Union involved in proposing laws and managing the day-to-day business of the Union.

European Union — An international organisation in which different countries are members. The union imposes certain trade and legal requirements upon its members.

Majority Voting Stake — A majority shareholder in a company is a shareholder who holds a stake larger than 50%, meaning they can dictate the company’s direction through their voting power.

Patent — A legal instrument which gives an owner the right to forbid others from making and replicating an invention.

Portfolio — A collection of investments held by a fund, institution or individual.

Private Equity Group — A firm which uses its capital to privately invest in companies’ equity.

Quarter — A financial quarter is a three-month period in a financial calendar, the end of which normally requires publishing of financial reports. There are four financial quarters in a year — Q1, Q2, Q3 and Q4.

Real Estate — Real estate investment concerns investment in property and buildings.

Revenue — A company’s income from its regular trading.

Share — A financial unit of ownership interest in a company.

Stake — A percentage of ownership of a company.

The Vatican — An independent city-state in Rome.