Re-engineering escrow investment returns

By SRS Acquiom

Ensuring Safe Assets While Improving M&A Escrow Investment Returns

The fundamental investment priority of an escrow is to ensure that the assets held in trust are safe and secure. Considering this primary goal and the need for immediate liquidity, escrow investments are typically not viewed as accounts that are associated with earning high yields. However, a creative and well-crafted escrow investment can offer the potential to contribute meaningfully to returns without sacrificing the safety of the escrow assets or the liquidity requirements.

As vehicles for the safekeeping of valuable assets, escrows are required to be secure and parties to an escrow agreement are necessarily focused on the safety and integrity of their escrow arrangements. As a result, escrow returns may garner little attention and any complication with escrow deposits are avoided. For example, elevated escrow returns may be cause for concern since higher returns within the same liquidity parameters typically correlate to increased risk.

Typically, the interest offered on a cash escrow is de minimis. However, depending on the size and duration, potential escrow returns can be significantly improved. Failure to mine this source of value may undermine the full optimization of transaction economics – especially in a rising rate environment where the opportunity cost of surrendering time value increases.

One way to enhance cash escrow return potential without sacrificing risk or liquidity is to purchase an escrow investment product that is managed as a pool. In such products, escrow assets are invested to meet the liquidity needs of the pool rather than the potential daily liquidity needs of each individual escrow. This can work to increase yield potential without increasing risk because a significant portion of escrows are held until the stated term. In addition, any portion of an escrow that goes out early as a result of claims does not go out overnight since most claims allow twenty to thirty days for a response and may be subject to negotiations or dispute resolution before an amount to be released is agreed upon by the parties. If releases from the escrow are scheduled or contingent on consent from parties to the agreement, then an overnight investing discipline may put unnecessary downward pressure on rates. Increasing the weighted average life of the investment portfolio will broaden the universe of eligible assets, unlocking an opportunity for higher return potential.

Ensuring Safe Assets

Finally, parties to the escrow agreement might consider the acceleration of all or a portion of the escrow interest to satisfy particular transaction costs. This would, of course, require an estimation of the available return, but capturing and directing the escrow return upfront, rather than over the life of the escrow, may be an interesting alternative for the escrow participants if available.

One should never lose sight of the fundamental objectives of an escrow arrangement – to ensure the safety of the assets held in trust and the required liquidity. Once these objectives are met, however, M&A deal participants should pay attention to the optimization and efficient delivery of returns on the escrow, which can add material value to the transaction surrounding the escrow agreement.

Equity Shield Plus is a funding agreement issued by AXA Equitable Life Insurance Company (New York, NY).  Securities offered through Acquiom Financial, LLC, an affiliate broker-dealer of SRS Acquiom LLC and member FINRA/SIPC. Escrow Shield Plus is not available in all states. Acquiom Financial does not make recommendations, provide retirement advice, or determine the suitability of any security for any particular person or entity. AXA Equitable and Acquiom Financial LLC are not affiliated companies.

Guarantees of principal protection are based on the claims paying ability of AXA Equitable Life Insurance Company (New York, NY). Liquidity limitations can apply if early termination is requested. Crediting rate may change in limited defined circumstances.

GE-129925 (09/2017)

"AXA" is the brand name of AXA Equitable Financial Services, LLC and its family of companies, including AXA Equitable Life Insurance Company (NY,NY), MONY Life Insurance Company of America (AZ stock company, administrative office: NY,NY), AXA Advisors, LLC (member FINRA, SIPC), and AXA Distributors, LLC (member SIPC). AXA S.A. is a French holding company for a group of international insurance and financial services companies, including AXA Equitable Financial Services, LLC. The obligations of AXA Equitable Life Insurance Company and MONY Life Insurance Company of America are backed solely by their claims-paying ability.

© 1999-2019 AXA Equitable Life Insurance Company

1290 Avenue of the Americas, New York, NY 10104

Image used for Space here