Day after day, month after month, for
five long years, Thomas Steyer showed up at work wearing the
same tie, a vibrant red plaid with navy, green and white
stripes. His staff at Farallon Capital Management, the
secretive San Francisco hedge fund, begged him to try another
-- with no luck. Finally, one day in 1994, his assistant
managed to swipe the tie and had it, stains and all, mounted
like a deal trophy in a Lucite box.
Steyer's response? He simply went out
and purchased several dozen more just like it. "I went to
this place in London called the House of Scotland," he says.
"I walked in and said, 'Bring me all your red plaid ties!' I
bought every single one."
And he has worn one every day
Determination, willfulness and
self-confidence are on full display in Steyer's approach to
business as well. Since founding his multistrategy fund
operation in 1986, after a stint in risk arbitrage at
Goldman, Sachs & Co., Steyer has thumbed his nose at
convention while aggressively pursuing investments across a
wide sweep of markets in just about every corner of the
world, tenaciously holding on to many positions for years. In
investments, as in ties, Steyer stubbornly follows his own
This uncompromising approach has
served him and his investors exceedingly well. Last year, say
sources, Farallon Capital Partners, Steyer's flagship fund,
earned 16 percent net of fees, or 20.8 percent gross; from
inception Farallon has returned 16.7 percent annually net, or
21.9 percent gross, compared with just under 12 percent for
the Standard & Poor's 500 index. Demonstrating remarkable
consistency and a talent for managing risk, Steyer has never
had a down year; Farallon Capital's worst performance came in
the crash year of 1987, when it rose 3.2 percent. Steyer and
other executives at Farallon declined to discuss its returns
or specific investments.
As Steyer's reputation for investment
acumen has grown, assets at Farallon have soared from $15
million to more than $12.5 billion, placing it among the
biggest hedge funds in the world. It has attracted a roster
of blue-chip clients that includes elite university
endowments from Stanford University, where Steyer earned his
MBA in 1983, to his undergraduate alma mater, Yale
University, for which he manages hundreds of millions of
Along the way, Steyer, 47, a
protégé of Robert Rubin's at Goldman Sachs in
the early 1980s, has honed his connections to the uppermost
echelons of political power and influence. Rubin, secretary
of the Treasury from 1995 through 1999 in the Clinton
administration and currently chairman of the executive
committee of Citigroup, serves as an adviser to Farallon,
consulting on general economic, business and strategic
matters -- a role he has held since 2000.
Steyer has amassed his clout quietly.
Unlike hedge fund grandee George Soros, for whom, seemingly,
no thought goes unspoken or unpublished, Steyer has shunned
publicity, seeking privacy for himself and for his firm as
doggedly as he does undervalued assets. For a long while he
managed to have it his way, even as he and his colleagues
pursued a host of investments in such tricky markets and
politically sensitive places as Argentina, Indonesia and
That all changed last year, when a
coalition of student and labor union activists, fighting a
long-running battle with Yale, decided to turn their focus --
and ire -- on Farallon. Their apparent objective: to
embarrass the school by tainting Farallon, and other hedge
funds generally, making them seem as objectionable as
investments in South Africa in the 1980s.
"The purpose of this campaign is not
to take down Farallon," says Rose Murphy, a former Yale
graduate student in chemistry who now works as a senior
research analyst for labor union Unite-Here, which represents
several thousand Yale workers. "But I'd like to think that
we're going to stabilize world markets with better regulation
of hedge funds."
Last March, union organizers assembled
a coalition of campus-based organizations and launched a Web
site, Unfarallon.info, which combines information about
Farallon with news about labor disputes and environmental
concerns in the countries where the hedge fund has invested.
They orchestrated a series of guerrilla theater actions; in
one, a "transparency fairy" in a feathered mask waved her
wand outside the Yale University Investments Office in a
symbolic effort to make the endowment portfolio see-through.
The group's biggest beef: a partnership Farallon formed in
1995 with Yale to invest in a water-development project on
the 97,000-acre Baca Ranch in Colorado's San Luis Valley that
was designed to supply the state's fast-growing Front Range
cities, like Denver, Colorado Springs and Boulder. Activists
denounced Farallon for promoting what they called an
environmental disaster and demanded that Steyer meet with
them to discuss "the ethics of Farallon's investment
Much of the protesters'
characterization of Farallon was over the top, and some was
misleading: Steyer was already in the process of selling the
ranch to the Nature Conservancy when news of the investment
broke at Yale. And while Farallon, with its billions of
dollars, makes an easy mark, it's arguable that the
organizers' real target was, and continues to be, Yale's
president, Richard Levin, who leads the university's
negotiations with its unions.
Still, the outcry came as a rude
awakening for Steyer, who never expected to be demonized by a
gaggle of former graduate students with time to burn and a
proclivity for building Web sites. The protests spread beyond
Yale as activists on college campuses tried to turn Farallon
into the symbol of what they saw as the depredations of
unfettered global capital. Last May, Steyer was accosted on
Stanford's Palo Alto campus by students complaining about the
treatment of workers at an Australian lead and zinc
production company in which Farallon held a small stake.
The protests hurt on a personal level.
A voluble Democrat and a key fundraiser for John Kerry's
presidential campaign, Steyer sees himself as aligned with
student protesters, not capitalist oppressors. His wife,
Kathryn, is an avid environmentalist. And, at least in his
own mind, the Baca Ranch development easily passed the
no-harm environmental litmus test.
Steyer decided that the only way to
deal with public vilification was to abandon his own penchant
for privacy and open up. Last spring he wrote a lengthy
letter to the protesters defending his record. This fall he
spoke to Institutional Investor at length about his
approach to investing, his management style and some of the
mistakes he has made since founding Farallon.
"We spent a ton of time looking at the
environmental issues and trying to convince people we were
right," Steyer says of the Baca Ranch investment.
"Eventually, we got it through our thick skulls that we were
not going to convince anyone. Were we dumb? Yes, very! But we
weren't irresponsible or wicked."
Certainly his investors don't think
so. "In an era of corporate and personal corruption, Tom is
just off the other end of the scale -- he has tremendous
integrity," says F. Warren Hellman, former president of
Lehman Brothers and co-founder of private equity firm Hellman
& Friedman. Hellman invested $4 million of his own money
to launch Steyer's inaugural fund, HFS Partners (shorthand
for Hellman, Friedman, Steyer), which was renamed Farallon in
1990. "He's the last person I would describe as an ugly
But partnering with Farallon now means
having to run a political gauntlet, one risk Steyer never
anticipated his investors would face. It's a risk that other
hedge funds must increasingly contend with as intense
scrutiny from many quarters begins to reshape a
once-cloistered business. Regulators, led by the Securities
and Exchange Commission, are taking a closer look; so too is
a growing cadre of environmentalists, labor organizers and
student activists keen to uncover the workings of these
firms. Their inquiries, ironically, have been made possible
in good part by the flood of money coming to hedge funds from
institutions like public pension funds and university
endowments, which are far more susceptible to political
pressure than the wealthy individuals who once dominated the
ranks of hedge fund investors.
Steyer is all too aware of the new
political complexities of managing money for big
institutions, but he isn't about to back down from his
tough-minded investing discipline. Nor is he about to alter
his strategy -- he's just as determined as ever to scour the
world for value-oriented opportunities.
"We haven't changed what we're trying
to do, in terms of approach or outcome," Steyer says. "But we
may not get there the way we did before. Our investors have
got to recognize that it's a risky world, and it's getting
Farallon Capital takes its name from
an archipelago of rocky islands 27 miles west of San
Francisco's Golden Gate Bridge. Named Los Farallones, or "the
rocky promontories," by Spanish explorer Sebastian Viscaino
in 1603, the deserted, windswept islands retain an aura of
danger: After a series of great white shark attacks on scuba
divers over the past 20 years, few venture into the water.
The sharks hunt undisturbed.
Steyer may wish he were that lucky. As
the number of hedge funds has grown exponentially in the past
decade, investment opportunities have become harder to find.
Farallon has diversified both strategically and
geographically. From its start as a multistrategy arbitrage
operation, the firm rapidly expanded beyond traditional
merger arbitrage into other opportunities, largely
event-related. Farallon has since added distressed debt,
corporate restructurings and value investments (both long and
short), real estate related transactions and direct
investments in operating companies.