Sunday, October 18, 2009

Kroll to launch credit ratings business

Posted in the FT by Brooke Masters:

Jules Kroll, the man who reinvented the detective agency as the modern multinational corporate security firm, now intends to apply his powers of deduction to the credit ratings industry.

Mr Kroll plans to start a business to challenge the big three credit rating agencies in the first quarter of next year.

The company, which aims to have $100m in annual turnover by the end of its third year, will specialise in giving second-opinion ratings on complex securitised products.

While it will employ quantitative experts much like those used by rivals Standard & Poor’s, Moody’s and Fitch, Mr Kroll also intends to bring his well-known investigative skills to bear. His analysts will not only construct models to predict the likelihood of failure, they will examine the underlying investments.

For a mortgage-backed security, this might mean finding out how many borrowers failed to make their first payment or spot-checking whether property valuations are in line with nearby homes.

Newly released from a noncompete agreement with his old firm, Mr Kroll is funding the start-up with some of the money he made from selling it to Marsh & McLennan. But he is also seeking between 10 and 20 large institutional investors to put in some seed money and give the as-yet-unnamed agency credibility and punch.

“I have no illusions about replacing the big guys,” he said. Rather, he hopes discerning investors will demand a Kroll-backed rating as an additional guarantee.

“What I am telling institutional investors is you basically have to take charge. This is your money. When people come to sell you products and offer you ratings from the oligopoly, you say to them you want a Kroll,” he added.

Just as the original Kroll attracted a higher calibre of investigator by paying bigger salaries, Mr Kroll hopes to hire top experts out of hedge funds and buy up specialist research houses.

He said: “The people who are selling these things are PhDs from MIT. If I can’t put the same kind of talent on the field [to challenge their assumptions], I can’t compete.”

The agency will be affiliated with K2 Global Partners, the risk consulting business that Mr Kroll opened last month in New York and London with his son Jeremy and Alan Bernikow, a former senior Deloitte & Touche executive.

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