Expert Escrow Strategies in a Rapidly Changing Market

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Christy: Hello, everyone, and welcome to today's webinar, "Expert Escrow Strategies in a Rapidly Changing Market." My name is Christy DeMaio Ziegler, and I will be your webinar host from the CSC webinar team.

We are very fortunate today to have some amazing speakers, who will share their insight and expertise with us today, Jaap Veerman, Sven Haase, together with our moderator, Malin Holmlund. And without further ado, I'd like to pass this along to our speakers so they can further introduce themselves.

Jaap: Hello, everyone. My name is Jaap Veerman. I'm heading the CSC Escrow and Settlements team in the Netherlands. As we operate under a European PSD2 license, we cover the whole EU from our Amsterdam office. I started my career with CSC in 1996, and I'm responsible for escrow and settlements since 2009.

Sven: Thank you, Jaap. Hello, everyone. My name is Sven Haase. I'm a commercial director for capital markets. I'm based in London, and my main focus is on the European transactions, particularly in the German-speaking countries. I've been in capital markets for over 25 years, starting as an equity trader for Deutsche Bank in 2000, and moved into the agency and trust space in 2014. I joined CSC last year.

Malin: Thanks, Sven, and hello, everyone. My name is Malin Holmlund. I lead the UK Escrow and Settlement team, which is an FCA-regulated payment institution in the UK. I have been with CSC for seven years, holding various roles in escrow and settlements, prior to which I was a solicitor in a London City firm, working in asset financing. And I'm really pleased to be moderating such a fantastic panel of speakers today.

Now that everyone's had the chance to introduce themselves, let's kick off. So Jaap and Sven, we are thrilled to have you with us as we explore the latest escrow industry developments and real-world examples from complex deals. Today's session is designed to offer insight for professionals, including M&A experts, lawyers, private credit specialists, and wider capital markets participants who rely on escrow for mitigating risks and unlocking value in complex transactions. We're excited to hear your insights, and we hope you come away with some practical strategies and a clear understanding of how escrow can help maximize value in your transactions. So let's dive in.

As an initial question from the panel, have you noticed a shift in the industries relying on escrow services recently, and if so, what do you think is driving this change? Let's start with Jaap on this one.

Jaap: Well, we notice an increased demand for combined paying agent and cash escrow services. Such a combination of services relieves the parties on closing and provides cost-efficient, easy to implement cash security. The driver behind this, in our opinion, is the increased complexity of making tens or hundreds of international payments on closing.

Sellers, buyer, and their advisors prefer a specialist taking care of these complex closing obligations. If the same transaction also requires an amount to be put aside to secure the obligations of the sellers, such an additional escrow service is easy to implement into an agreed paying agent agreement. Next to that, we notice a shift from w, you, and I to cash escrows.

Malin: That's interesting. Thank you, Jaap. We certainly see the same shift in our market here in the UK. Sven, what are you seeing from your perspective?

Sven: I would kick off by saying that, first of all, escrows are not necessarily suited just to a particular industry. I think anytime there is a specific amount to be held for a specific period of time, where there's a limited number of payments, which can be a very high number of payments, as Jaap alluded to, so whenever there are specific conditions before releasing these funds, an escrow might be a suitable tool.

When it comes to industries, we've seen various escrows in the automotive sector, a sector that traditionally has lower margins, especially if you think about the large OEMs. And an escrow can potentially be more cost efficient compared to alternative solutions. So this cost efficiency might be reason for seeing more escrows, particularly in the automotive sector.

We also see escrows in industries or with companies that have cross-border operations, where there are international operations in international manufacturing locations, and in relation to that, for example, cross-border M&A activity. So the escrow can help mitigate the risk, especially as counterparts deal with one another in countries that they may not be as familiar with.

And another example of an industry where we've seen a pickup in escrow activity is regulated industries, such as health care and pharma, energy and utilities, food and agriculture. So these companies operate under a very tight, strict regulatory regime, and as such, they may prefer or we see a preference for working also with an escrow agent that is regulated, such as CSC, where we have the payments license in the UK and in Europe.

Malin: That's interesting, Sven. Perhaps echoing what you were saying and a comment on what we see across all of these transactions, be that dual escrow and paying agency mandates to the various industry sectors, is that speed is of the essence. It always has been. But in a world of increased connectivity and productivity, time scales are continuously getting shorter. So, Sven, how do you think an independent escrow provider can deal with the challenges of execution, such as speed, and in what types of transactions do you think independent providers might have an edge over their banking counterparts?

Sven: I believe non-bank providers can have an edge when it comes to speed and complexity risk of the underlying transaction. I've been working in the bank industry, also in the non-bank industry, so I've seen both sides.

In general, if you want to generalize, banks tend to move slower and might not always be able to match the urgency of a deal, especially when it comes to completing, reviewing the KYC of the contractual counterparties. And that can slow things down quite a bit. We often see escrows that are being requested towards the end of a transaction, so there's always time pressure.

But besides the speed, there's also the complexity risk that I mentioned. So we see that banks tend to shy away from deals that don't match 100% of their risk appetite or transactions that are not 100% in line with previous transactions. So we see very much that they focus on copy-paste, repeat transactions. And in that respect, an independent provider may have more flexibility. They can look into the specific details of a transaction, assess the various risk factors, and then review and opine whether or not such a transaction can be supported, even if it is not a copy-paste of a previous transaction.

That is also the case for legal documentation, where we see that banks will often have a gold-plated standard, gold-plated templates that they would only in extraordinary circumstances deviate from. So I think, again, that's where a non-bank provider can offer more flexibility.

Malin: Thanks, Sven. So to summarize, you mentioned the appetite of independent providers as well as their agility. Jaap, can I ask what are your thoughts on this?

Jaap: Well, an independent, regulated escrow agent, as CSC, is able to provide the client with above-market interest rates. The additional income of that interest rate will easily absorb the escrow costs.

Next to that, an efficient client acceptance procedure in line with all international laws and regulations is a critical aspect for the escrow parties. As an independent escrow provider, the client onboarding part is really our expertise, and we are therefore able to guarantee a timely onboarding, meeting the parties' deadlines. A bank-backed escrow provider will not always be able to guarantee that.

Malin: Thanks, Jaap. So adding on the earlier points about agility and appetite, you also mentioned the commercial incentive of interest income that independent providers are allowed to or are able to offer. I'd also add that non-bank providers are able to move payments faster than banking counterparts, and they're not only less constrained by their risk appetite, but also are often more open to considering deals outside of a particular framework, so quantum and tenure I'm thinking here, or also outside of existing relationships.

Expanding maybe a little on what we've just discussed, I'd also like to know what role you think independence plays in delivering better solutions for clients and especially in complex or high-value transactions. Should we start with Jaap with this one?

Jaap: That's fine. As an independent escrow and paying agent, we can onboard and facilitate complex transactions within a week time. Next to that, we are able to provide tailor-made escrow agreements, governed by basically any Western law. If for example, Malin, a transaction requires an escrow agreement to be governed by Finnish law with a European escrow bank account receiving, among others, Swedish kronas, we are able to provide that.

Malin: Thanks, Jaap. That's a really comprehensive offering in this increasingly cross-border world. Sven, what do you think?

Sven: Well, independence is key, and non-banks may have an advantage if they don't have any other role in a transaction, especially when it comes to complex or high-value deals where banks, investment banks often have other services that they pitch or they want to present or have been involved with, such as corporate finance, advisory, M&A work, lending, underwriting, etc. So being independent can make it easier for the transaction's parties to agree in the first place on using an escrow as a transaction tool, and also (b) then on choosing the best-suited escrow agent.

Malin: Thanks, Sven. Indeed independence is of utmost importance to protect the interest of all stakeholders at hand. But if we can, I'd like to move this to a real-world example. So Jaap, could you walk us through a recent escrow transaction, that you've worked on, that was particularly complex or unique and what made it stand out?

Jaap: Well, we have recently been mandated for a paying agent service with an escrow angle to it, for which we have to onboard nine parties, which means full KYC on these nine escrow parties and for which mandate we will have to make around 1,500 releases to 1,500 different payees. These extremely complex transactions cannot be facilitated by a bank. And even for independent escrow service providers, as CSC, it requires an experienced front, mid, and back office team. We are blessed to have these experienced teams.

Malin: That really is a very complex mandate indeed and needing of specialist skills to effectively execute. Perhaps tying this back to the first question and the trends that we're seeing in the industry, I would say that Jaap's example shows how escrow is no longer a rigid commodity product. The parties, the parameters, and the requirements of escrow are ever more complex and challenging. So on that note, I wanted to ask you, Jaap, as well about the challenges you've encountered in a recent deal and how you've overcome them.

Jaap: Yeah, we have challenges all the times. But last year, we were mandated to facilitate a combined cash and document escrow. But on top of that, the underlying transaction required our escrow agreement to be governed by Spanish law. All with a hard deadline of two weeks. As we are used to combined cash and document escrows, the biggest challenge for this transaction was to arrange an approved Spanish law escrow legal template for cash and documents within a couple of days. We were able to provide this in time without additional costs for the clients.

Malin: Thanks, Jaap. That is impressive. Accommodating such specific requirements on such short time frames really demonstrates a breadth and depth of capabilities.