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Reasons to consider an Escrow account that you might not have thought about

09 May 2022

A busy 2021 for corporate activity saw it dubbed ‘the year of M&A’. According to Refinitiv, over 63,000 mergers & acquisitions took place in deals worth more than $5.9trn and high levels of corporate activity have continued into this year, with more than $1trn worth of M&A deals during the first quarter of the year.

Dealmaking bounced back after the Covid-19 pandemic thanks to a stronger economic outlook, rising equity markets, cheap financing, plenty of dry powder on the sidelines, and the availability of distressed assets.

At the same time, there have been a considerable number of real estate deals, particularly during the latter half of 2021. US commercial real estate transaction volume surged last year after the pandemic, with total volume up by 74% compared with the prior year, according to PwC data. Demand for real estate assets has been driven by the low-yield environment, the potential for enhanced returns and greater certainty after the pandemic.

All this activity has led to a greater demand for Escrow agreements, due in large part to the vast sums involved in M&A and real estate deals.

 

How can Escrow services help?

Third-party Escrow agents can help mitigate risk for both buyers and sellers by holding assets or funds until a deal is completed. This can be especially important when there is any uncertainty over whether one party or another will be able to fulfil their obligations under an agreement, for example

an Escrow is often used to hold part of the purchase price for a warranty period during which the purchaser can confirm the representations and warranties made by the seller, with the retention automatically released to the seller if no warranty claim is submitted which could be some years later.

 

What else can Escrow be used for? 

It is not just M&A and real estate deals where Escrow services are used, however. There are many other situations where Escrow agents can help build trust and mitigate different types of risk.

Capital raising can be a risky business for an investment company if an investor reneges . Investors also need reassurance their capital will be put to good use. An Escrow agreement can ensure investors can access committed capital and ensure that cash is only accessed under certain conditions.

Two more examples where Escrow can be invaluable are in addressing funding shortfalls in a pension scheme, where the sponsor has agreed with the trustee to set funds aside to cover that shortfall, and in supply chains where they can be used to mitigate counterparty risk by a buyer to provide assurance that funds exist to pay for an order and that they have been reserved for that purpose.

Finally, for event organisers and ticket sellers, Escrow agreements can provide reassurances for both parties. This has been particularly important during the pandemic, where large events have been cancelled (often at short notice) due to Covid-19 measures. By holding ticket revenue in Escrow, the ticket seller knows it can reclaim money if the event is cancelled, and the event organiser knows the money is safe.

 

Choosing the right Escrow provider

While more firms are beginning to realise how Escrow can help their business, there are several attributes they need to look out for from a service provider.

Escrow advisers must prove that they are neutral and independent.  Furthermore, a professional, proactive and detail-oriented provider should have the right control frameworks to give their clients peace of mind.

Given the nature of some Escrow speed matters, responsiveness is an important factor too when choosing an agent – an Escrow agent should be able to act quickly and flexibly to help their clients.

 

How can Apex Group help? 

With many years of experience in handling both complex and simple arrangements, we provide a broad range of services, including banking through our own international bank, EDB.

We can offer Escrow services across all major currencies, different asset types and across multiple jurisdictions, and there are no minimum time periods or size of holdings.

The need to establish an Escrow account is often identified quite late in the transaction process, so we have tailored our service to be as quick and supportive to clients as possible. Our segregated bank accounts are multi-currency, and through our Global Custody network we can hold securities and cash. For cash transactions, we can open an Escrow account within two days.

We offer a range of different Escrow types – with cash accounts held offshore or onshore – with a dedicated team that can guide you through the process, from opening to full lifecycle management.

Contact our team here to find out more about Apex Group’s Escrow services and how we can help your business.

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