Ex-Mittal Adviser Opens U.K. Bank With Wadhwani, Turner Help

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Rishi Khosla, once an adviser to Lakshmi Mittal, started a bank from scratch in the U.K. Its prospects have lured a former Bank of England rate-setter and a past top market watchdog to help out.

Khosla, 39, started OakNorth Bank Ltd. in 2013 to take on the nation’s largest lenders, who he believes under-serve small businesses. He won investment from former BOE monetary policy committee member turned investor Sushil Wadhwani, and added Adair Turner, the last chairman of the Financial Services Authority before it was scrapped, to his board this year.

OakNorth is the latest small lender seeking to erode the dominance of Britain’s four largest banks, which together control as much as 80 percent of the market. Wadhwani, whose career bridges hedge funds, central banking and academia, joins a group of wealthy financiers including Richard Branson and Steven A. Cohen who are backing some of the so-called challenger banks.

“Demand is even more significant than we thought,” Khosla said in an interview at OakNorth’s London offices in Cavendish Square. “Challenge to the big banks is the model, as well as addressing that unmet need. The market is far larger than what we would need to create a very successful business.”

Khosla is tapping a network of senior financiers to help build a lender that offers loans to businesses that major banks might ignore.

OakNorth secured a banking license from the BOE’s Prudential Regulation Authority in March, and aims to start taking deposits in the coming months. The bank made a 254,906-pound ($398,596) loss for the period from July 3, 2013 to the end of December 2014, according to its first set of accounts filed at the U.K.’s Companies House.

Wadhwani Stake

Wadhwani is an investor in the bank’s holding company, which is based in Jersey, Channel Islands, and the majority owner of that holding company is a Mauritius-based trust, company filings show.

As a member of the monetary policy committee of the Bank of England from 1999 to 2002, Wadhwani was known for arguing that the risks of inflation were overstated and interest rates could go lower. He said this month that he expects the BOE to raise rates this year, and that the U.K. should be weaned off “extreme monetary medicine.”

Wadhwani, 55, who runs London-based Wadhwani Asset Management LLP and is a partner at Caxton Associates LP, declined to comment about his stake in OakNorth.

Branson’s Virgin Money Holdings (UK) Plc leads a group of small British lenders taking on Lloyds Banking Group Plc, Royal Bank of Scotland Plc, HSBC Holdings Plc and Barclays Plc. Another challenger, Metro Bank Plc, has won investment from Cohen and other wealthy American backers including Ken Moelis, Richard LeFrak and Robert and Bruce Toll.

Mittal Connection

India’s billionaire Mittal steel family hasn’t invested in OakNorth, Khosla said, while declining to identify other investors. He also declined to comment when asked about Wadhwani.

A graduate of the London School of Economics who worked at ABN Amro Bank NV before moving to General Electric Co.’s private equity unit, Khosla, a Briton, was introduced to Lakshmi Mittal’s son Aditya through a university friend. The connection helped him to quit GE Capital with an offer to run the Mittal family-office private-equity investments. But he harbored a desire to run his own firm.

“Investing was great, but it felt like retirement,” Khosla says of his time working for the Mittals. “You’re one step away from the action.”

Copal, Moody’s

Before OakNorth, Khosla started Copal Partners with college friend Joel Perlman in 2002, a research provider that outsourced work to India. They later sold it to Moody’s Corp. in 2014 for an undisclosed sum.

The sale sparked controversy in India, where tax authorities argued the transaction involved avoidance measures because Copal was owned by a Mauritius-based firm. The islands off the southeast coast of Africa are often used by companies to route investment into India, because capital gains these firms make on Indian shares aren’t taxed in the Asian nation.

Delhi’s High Court ruled against the tax authorities in a case involving Copal, upholding the double taxation treaty between the two nations.

Khosla resigned from Moody’s as CEO and chairman of Copal within the past 12 months to concentrate on OakNorth. While the funds from the sale of his firm helped finance his British challenger bank, other backers of Copal including Deutsche Bank AG, Citigroup Inc. and Bank of America Corp. also made money.

Challenger Bank

“It was a phenomenal success story,” he said. “They all did really well out of that.”

After he turned his attention to OakNorth full-time, Khosla and Perlman, who is also a founder of the bank, decided he should become the lender’s third CEO in little more than a year.

“We’re used to being at the coal face,” he says of the change. “When I relinquished my duties at Copal it made sense for me to either be full-time executive chairman or take a CEO position. I like detail, and not everyone does. The regulator always preferred a non-executive chairman.”

Khosla replaced Chris Dailey, a former executive at Aldermore Group Plc, another challenger bank. Dailey had been in the role for six months since the departure of Richard Davies, a former head of U.K. operations at Barclays, who was the lender’s first CEO since its inception in late 2013.

‘Part Fintech’

After stepping into the executive role, Khosla brought in former Invesco Ltd. chief financial officer Ratan Engineer as chairman. Engineer was replaced after his death in April by Cyrus Ardalan, a former vice chairman of public policy and government at Barclays.

Although a banking license will enable OakNorth to take customer deposits to help fund lending, Khosla says he wants his firm to have the characteristics of a technology company and a private-equity firm, as well as the hallmarks of a traditional lender.

“Fundamentally, I don’t want a traditional bank culture,” he says. “I want to be part fintech, part fund, part bank. We’re not going to do what every other challenger bank is doing, which is piling into all of the same products.”

OakNorth plans to offer small companies loans that aren’t backed by assets such as real estate for amounts of less than 5 million pounds. Banks “typically don’t focus here,” according to Khosla, while financial technology firms and direct-lending funds lack the customer deposits that a banking license can bring to support that market segment.

IPO Plan

“For banks to understand all the financials, the cost is too high,” he says. “The whole approval process would be more than the fees. If you combine our technology and systems with the bank underwriting process, making that very efficient, you can make money out of it.”

Khosla said the bank plans to hold annual private fundraising rounds before selling shares in an initial public offering within five to seven years.

OakNorth wants investors who “believe in the gap in the market and the approach we’re taking,” he said of the private placements. “We want to build a robustly good business, and then if you want to tap larger funding requirements by going public, then that makes sense.”

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