Shareholder Representative Services LLC (SRS), a firm specializing in managing deals after they close, is looking to redefine how sell-side shareholders convert escrow holdings to cash.

The San Francisco-based company is partnering with trading platform SecondMarket Holdings Inc. on a new offering that will allow private equity and venture capital firms to convert their illiquid escrow holdings to cash prior to the date in which they would be made available.

“We’ve been brainstorming about this for a couple of years,” SRS managing director Paul Koenig tells Mergers & Acquisitions. “We did a couple of trials in 2010, it worked really well and we started talking with investors a little under a year ago.”

That’s when SRS EscrowExchange LLC was formed.

"It's very similar to a PE fund," says Owen Dolan, vice president of New York-based SecondMarket. "They have a certain [amount] of capital, they identify escrow interests they want to buy and that’s the structure that makes the most sense to do this."

Neither company would disclose how much was raised, but Koenig said the fund has capital commitments from various “high profile individuals and entities.” He went on to say that EscrowExchange would essentially acquire a limited position in a qualified escrow account and allow the stockholder group or individual an early liquidity option in addition to maintaining majority interest.

“If I was the stockholder and wanted the cash now, who am I going to approach?” Koenig asks. “In the past there was no one in a position to be the buyer of that escrow interest.”

For example, if an angel investor gets 80 percent of the total merger consideration and the rest of the cash is locked in escrow for up to two years, EscrowExchange grants that holder the option of tapping it before it comes due or as a precaution against an indemnification event.

SRS has put in place certain procedures and requirements for each transaction to meet in order for shareholders to consider the option. On select M&A transactions where the seller hires SRS as the shareholder representative, participating stockholders may register on SecondMarket’s platform to verify their eligibility, set their offer price and agree to terms.

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