Five Questions with Martin Woll, Head of Institutional Savings, AXA US

1. What is the purpose of an M&A escrow account, and how does it protect private equity buyers?

This is not an issue that the public, or a lot of people in the industry, are that familiar with. Most simply, M&A escrow is a risk-mitigation tool. It’s used to indemnify the buyer against any misrepresentation the seller might have made during the purchasing process. It’s typically used with a public or private buyer purchasing a private target. They’re typically held in escrow for 12-24 months … typically through at least one audit cycle, and approximately 10-20 percent of the purchase price is placed into this escrow account or product.

2. How do Dodd-Frank and other post-crisis regulations impact M&A escrow accounts?

These regulations have come together to address money market funds’ [a common form taken by escrow accounts] susceptibility to heavy redemptions in times of stress, and improve their ability to manage potential contagions. These regulations will also impact large depository institutions as well.

3. In what ways are these regulations causing institutions to change the structure or fees associated with an M&A escrow account?

Banks are going to be required to hold larger capital behind institutional deposits [like escrow accounts] … therefore reducing the returns on their equity. We’ve already seen some large depository institutions in the industry calling on their clients, asking them to reduce the size of their balances, as well as instituting fees for these accounts and just trying to shoo away the business.

The next one is [the implementation of] floating net asset values. This simply is, ‘I’m putting a dollar in, and I’m not necessarily guaranteed to get a dollar out.’ Institutional money market funds will have a floating net asset value regime, which essentially takes away your full principal protection, a necessity for the deal parties.

[Changes to gate provisions will] limit the amount that investors can take out in a given time, or given period of time… You could put money in, but you may not be guaranteed to get that money out within a day, a week, a month, or even six months.

The next one is deposit limits to money market funds. Some of these institutional money market funds are going to impose upper limits to the amounts that can be deposited into them.

Lastly, and certainly not least, are liquidity fees. This is true for money market funds as well as banks. They can subject withdrawals to liquidity fees, sometimes upwards of 200 basis points, essentially charging you to take your money out.

4. Do these changing regulations, post-crisis, affect private equity buyers’ ability to create downside protection? 

Absolutely, wholeheartedly, yes. This was always one of those businesses that was always business as usual. Everything else got negotiated and, as people were packing up their briefcases, closing their notebooks, they would say, ‘Oh, where are we putting the escrow?’ And they would say, ‘Oh, we’ll just put it at a big U.S.A. bank’ or wherever they want to put it at.

The perception of risk has essentially changed post-crisis. And it’s essentially inhibiting the ability of these institutions to manage their corporate cash, not just M&A escrows.

5. What steps can PE firms take to mitigate the challenges that new regulations pose to M&A escrow accounts?

You could choose to have no escrow, but the buyers would never agree to that. That’s analogous to buying a used car without a warranty, which I don’t think you’d ever want to do.

AXA, along with our partner SRS Acquiom, saw these regulations coming [and designed a product] to give the M&A parties full principal protection, including accrued interest, along with an advanced and competitive yield … and giving them immediate liquidity for those claims, if they choose to make a claim. 

This interview was edited and condensed by Sam Sutton

(Update: A previous version of this story misspelled SRS Acquiom.)