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Observations on recent escrow trends in PE deals: impact of increasing use of Rep + Warranty Insurance
Here at Nixon Peabody, we work on a lot of private equity-led M&A deals.  We represent PE funds when they both acquire and sell their portfolio companies and, just as often, we represent business owners and strategic acquirers in their efforts to purchase or sell those businesses.  There was a period of time several years ago where, almost universally, the M&A deals that we worked on (whether PE deals or strategic deals) would have require that a portion of the purchase price (very often in the 8% - 15% range) be set aside in a third party escrow in order to provide a pool of available cash to satisfy indemnification claims post-closing.
It seems, though, that times are changing.  While every deal stands on its own and is driven by its own specific leverage profile and strategic objectives, my experience is that escrow percentages in PE-driven deals generally seem to be declining overall and some PE deals even seem to be coming together with no escrows at all.
Grateful to learn more about their recent experience in the escrow market, we recently hosted the team from Citi Private Bank’s Law Firm Escrow Group who shared with us their observations concerning escrow trends in M&A deals over the last couple of years.  We asked Owen Ellsworth, a Director at Citi Private Bank, to share a few of these observations with our readers.  Owen has also observed the impact that Rep and Warranty Insurance has had on deal escrows, particularly in the PE space.  Owen tells us:

Rep + Warranty Insurance More Common in PE Deals
Within the Citi Private Bank portfolio, Rep and Warranty Insurance is most prevalent in deals that involve Private Equity sellers.  Even within that subset of deals, I’d say that we tend to see Rep and Warranty Insurance used the most when transaction value falls within the $100 million - $250 million range.
Rep + Warranty Insurance Not a Factor in Purely Strategic Deals:
That said, when we narrow our view to purely strategic deals (i.e., those with strategic buyers and sellers with no Private Equity player), the use of Rep and Warranty Insurance doesn’t seem to come into play nearly as much and the escrow holdbacks in those deals are still in the more traditional range of 8% - 10% of total purchase price.
Rep + Warranty Insurance Lowering Escrow Amounts in PE Deals:
In our experience, Rep and Warranty Insurance has impacted escrow percentages in Private Equity transactions.  In deals that involve a Private Equity seller, historically we would have expected to see anywhere from 8% - 10% of the total purchase price escrowed for indemnification purposes.  However, with the use of Rep and Warranty Insurance, we now see that escrow percentage routinely decreased to approximately 1% of the purchase price, which is escrowed to provide for payment of the Rep and Warranty Insurance deductible.  In some Private Equity deals, we are even seeing just an escrow for the purchase price adjustment, with no indemnification escrow being established at all.
Special Escrows Covering Items Excluded from Rep + Warranty Coverage:
Despite Rep and Warranty Insurance generally driving down escrow amounts in Private Equity deals, on the flip side we are also seeing certain transactions in our portfolio where “special escrows” have been established to deal with risks that are specifically excluded from coverage under the Rep and Warranty Insurance policy (e.g., IP claims in tech deals, healthcare (reimbursement) issues, environmental issues, etc.).
Many thanks to Owen Ellsworth and Citi Private Bank* for contributing this blog post!  Owen Ellsworth is a Director of Business Development for Citi Private Bank’s Law Firm Group and is dedicated to working with top tier Law Firms to service their client’s escrow needs.  Owen has over 15 years of diversified experience in financial services.  Prior to joining Citi Private Bank’s Law Firm Group, Owen served as an Executive Director and Head of the North America Escrow Product in the Corporate and Investment Bank at J.P. Morgan.  Prior to that, Owen was the Asia Pacific Escrow Product Head based in Hong Kong.
Citi Private Bank is a business of Citigroup Inc., which provides its clients access to a broad array of products and services available through bank and non-bank affiliates of Citigroup. Not all products and services are provided by all affiliates or are available at all locations.


The views expressed herein are for informational purposes only and are those of the author and do not necessarily reflect the views of Citigroup Inc. All opinions are subject to change without notice.


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