In the constantly changing world of private equity and venture capital, secondary investments have established a strategic position. The transactions, which are the resale of prior investor commitments in private funds or direct interests in portfolio companies, bring liquidity and choice to what is otherwise an illiquid asset class. As the secondary market grows, especially in India and other emerging markets, the focus on trust, transparency, and security has never been greater. Among the most revolutionary tools in the space is the use of escrow services, a solution that adds an essential layer of trust to de-risk transactions and enhance deal efficiency.

Understanding Secondary Investments

Secondary investments comprise the purchasing and selling of existing investor commitments to alternative investment or private equity funds. These usually happen when an investor, like a Limited Partner (LP), desires to sell out of a fund prior to its expiry. Buyers may include institutional investors, family offices, and high-net-worth clients seeking to diversify their portfolios at potentially discounted prices.

In the last decade, the secondary market has evolved as volumes have risen due to macroeconomic uncertainty, extended fund durations, and the necessity for greater liquidity. The secondary private equity market has recorded peak volumes in recent years, with ongoing upward estimations, as per Preqin.

As promising as this growth is, it also introduces complexity. Secondary transactions are by nature complicated as a result of valuation disparities, incomplete data, legal risk, and multiple stakeholder interests. The integration of escrow accounts into these transactions provides a strong answer to much of this difficulty.

Why Trust Is Critical in Secondary Transactions

In contrast to primary investments, where terms and capital commitments are negotiated upfront, secondary transactions tend to need retrospective analysis. The investors have to analyze current portfolios, determine risk exposures, and harmonize interests with incumbent fund managers and co-investors. Information asymmetry and incentive misalignment may lead to frictions.

This is where trust takes center stage. Buyers and sellers alike require confidence that the transaction will be made fairly, terms agreed upon will be fulfilled, and a neutral channel exists for resolving any possible disputes. Escrow accounts may serve this role, instilling confidence and disarming major obstacles.

The Role of Escrow in Secondary Investments

An escrow account is a money arrangement by which a third party maintains and controls payment of the funds necessary for two parties to a transaction. It guarantees that the buyer and seller fulfill the agreed terms before the funds or assets are released.

Escrow services in secondary investments can play a number of roles:

• Risk Reduction: Escrow keeps the buyer's money secure until the conditions—like due diligence, regulatory approvals, and approval from the fund manager—are met. This reduces the risk of non-performance.

• Neutral Custody: Escrow provider serves as a neutral third party, avoiding the requirement of trust amongst transacting parties and facilitating easier negotiations.

• Milestone-Based Releases: Transactions are complex and could be divided into more than one phase. Escrow accounts may be designed to make a payment in tranches against milestones or pre-defined deliverables.

• Dispute Resolution: Where there is a difference or delay, the escrow agreement can act as a legal template to bring about resolution without compromising on the transaction.

• Regulatory Compliance: In countries such as India, where financial regulations are dynamic, escrow accounts can play a critical role in ensuring RBI, SEBI, and other regulatory compliance.

Case Study: Escrow in Indian Secondary Markets

India's secondaries market is growing very fast, driven by the growth of alternative investment funds (AIFs) and startup unicorns. The regulatory and operational environment, however, is still fragmented. As per IVCA, India saw the growth of GP-led and LP-led secondary deals in 2023 and looks to grow further in 2025.

In this kind of environment, escrow solutions are not only convenient but are absolutely necessary. Transactions typically have multiple stakeholders, such as domestic and foreign investors, fund managers, and regulatory bodies. Escrow arrangements provide a method to reconcile these interests while protecting capital and ensuring regulatory compliance.

For example, in one recent secondary sale of a leading Indian fintech firm, escrow facilities were utilized to keep buyer funds in escrow pending SEBI approval and KYC checks. The escrow agreement had provisions for dispute resolution, milestone-based release of funds, and contingency management, ensuring that the process was hassle-free and transparent.

How Escrow Increases Transparency and Speed

Time is precious in secondary markets. Standard transactions, slowed down by paperwork and incompatible interests, may drag on for months. Escrow streamlines the procedure by electronic fund transfers, having documents centralized, and allowing real-time status reporting to all stakeholders.

Today's escrow providers, including Castler, are also connecting with APIs and smart contracts, making programmable escrow possible. Such capabilities provide quicker turnarounds, lower legal overhead, and low counterparty risk—all without sacrificing compliance or security.

This type of tech-enabled escrow in a digital-first economy becomes a facilitator, but most importantly, a catalyst for secondary market expansion.

Escrow's Role in Protecting Investors from Fraud

Secondary markets, especially in emerging economies, are vulnerable to misrepresentation and fraud. Whether it is overvalued valuations, concealed liabilities, or off-market sales, the buyers expose themselves to large risks.

An escrow service serves both as a shield and as a deterrent. A seller is not paid until each term has been independently confirmed. Documents can be audited, and ownership verified prior to fund release. In the case of fraud, in the unfortunate event that it occurs, funds held in escrow are safe and may be diverted or refunded in accordance with legal rulings.

In addition, escrow accounts can be tailored to incorporate provisions for indemnification, penalties, and arbitration, providing investors with yet another level of legal and financial protection.

The Emergence of Online Escrow Platforms

As seamless secondary transactions become more in demand, so is the demand for digital-first escrow solutions. Digital-first escrow solutions not only provide greater transparency but also scalability. Digital KYC, e-signatures, vaults for documents, and automated reconciliation are some of the features that make workflow streamlined and minimize operational friction.

Such platforms as Castler are leaders of this transformation, providing end-to-end escrow solutions to financial institutions, investment companies, and businesses. Castler's compliance mechanism and its integrations with top-tier banks guarantee that escrow transactions are safe and compliant.

Global Perspectives: Escrow in Secondary Markets Worldwide

Across the world, markets such as the U.S. and U.K. have traditionally used escrow services in secondary investments. Institutional investors typically require escrow arrangements as a condition precedent to closing transactions. These are being implemented in India, Southeast Asia, and Africa as the secondary ecosystem becomes more mature.

Internationally accepted escrow providers also collaborate with audit and legal firms in order to build credibility. This trend will increase as more cross-border secondary transactions become dependent upon escrow for dealing with currency exchange, compliance, and taxation issues.

Conclusion

As secondary investments are increasingly a staple of the private capital markets, trust, compliance, and transparency are no longer negotiable. Escrow solutions have established themselves as a trust component essential to the business—reducing risk, enhancing speed of transaction, and keeping all sides safe.

Castler is a pioneer in this area, providing not only escrow accounts but a full trust infrastructure for financial transactions. Through Castler, investors can conduct secondary transactions with confidence, assured that their capital is secure, processes are transparent, and compliance is effortless.

In an era of ever-more agile and borderless flows of capital, Castler equips investors and fund managers to navigate the secondary market environment with certainty and confidence.

To see how Castler can assist your secondary investment requirements, go to www.castler.com or contact us for a tailored approach.