| Farallon Capital's Andrew Spokes|
ON AN EARLY MORNING IN OCTOBER, just as San Francisco was starting to emerge from the fog, Thomas Steyer, founder of Farallon Capital Management, strode across the ballroom stage at the historic Fairmont hotel. Wearing one of his signature plaid ties a fiery red sartorial flourish Steyer radiated casual power and confidence. His investors have come to expect no less. Since launching hedge fund firm Farallon more than a quarter century ago, Steyer has gained a reputation for aggressively pursuing investment opportunities across a wide sweep of markets around the world and tenaciously holding on to some positions for years. His ability to deliver steady returns has attracted a roster of blue-chip investors, and on that day about 200 of them were eagerly awaiting the chance to hear him speak.
But that morning was different from previous investor meetings, because Steyer, 55, had just announced his plans to retire.
A few days earlier he had written to his clients to tell them he intended to step away from the business at the end of 2012, and he named his comanaging partner, Andrew Spokes, as his successor. Although the timing was a surprise, the decision was not. For the past five years, Spokes, 47, has been working alongside Steyer at the firms San Francisco headquarters, gradually assuming greater control of Farallons $18.6 billion portfolio. In recent years most clients have called Spokes when they needed to know what was happening with a particular investment. But few people outside the firm are familiar with the genteel, boyish-looking Brit. Over the past few years, as Steyer has increasingly stepped into the media spotlight as the public face of Farallon, Spokes has remained the inside man.
Now the former Goldman, Sachs & Co. investment banker has taken on a more visible role as the leader of one of the worlds largest hedge fund firms and the pressure is rising. In Steyers absence Spokes will have to deliver profits in line with Farallons historical performance, satisfy clients expectations and keep the investment team focused. Everyone will be watching the numbers. Although the firm suffered a disastrous year in 2008, when its flagship fund, Farallon Capital Partners, lost 36 percent net of fees during the financial crisis humbling Steyer and his team its returns over time have been solid if somewhat unspectacular. Since its 1986 inception Farallon Capital Partners has delivered a net annualized return of 13.41 percent, besting the S&P 500 index, which has returned an annualized 9.55 percent during the same period.
Steyer emphasizes capital preservation, and that is no accident. Early in his career he observed that there are primarily two reasons financial businesses blow up: using too much leverage and being dishonest. The native New Yorker vowed to avoid both sins. As his fund grew he spent tremendous energy seeking to insulate his portfolio from downside risk a characteristic that set his business apart from its high-flying, more volatile peers. For 22 consecutive years, until the financial crisis, Farallon made money. That remarkable consistency helped attract investments from prestigious institutions including Yale University, where Steyer earned his BA in economics and political science in 1979, and Stanford University, where he got his MBA in 1983. Steyer has also won mandates from major pension funds and foundations, including the Canada Pension Plan Investment Board and the William and Flora Hewlett Foundation.
Given the change in leadership at the top of the firm, however, Spokes can no longer take those high-profile allocations for granted. If he wants to keep them, hell have to engage more closely with clients even as he assumes ultimate responsibility for Farallons investment portfolio. Steyer will be watching to see how he does. Although the hedge fund impresario doesnt intend to have any further involvement in the firm, he does plan to remain its largest investor. From here on out, Steyer told the assembled crowd at the Fairmont, Ill be sitting with you in those seats, looking back up at the podium.
The key to Farallons future lies in the firms understanding of ever-more-important cross-market interplays, whether they occur in the U.S., Asia or Europe. Onstage at the Fairmont, Steyer seized the opportunity to highlight Spokes international experience, underscoring his comanaging partners knowledge of various geographies and strategies. Since joining Farallon in 1997, Spokes has worked as an investor or team manager across most of the firms five portfolio strategies: credit, arbitrage, value investing, real estate and special situations. In late 1998 he was responsible for opening Farallons London office, which he ran for nearly a decade before moving back to San Francisco. He has also lived and worked in Hong Kong and New York. From Steyers perspective, Spokes ability to move fluidly across business cultures gives him a competitive edge. You need someone at the head of the organization who understands and is comfortable in different geographies, he says. Globalization has occurred.