transcript

Speaker 1:
[00:05] Our initial strategies of merger arbitrage that I've mentioned has really seen a new light of day effectively in the recent years with a much easier regulatory path to approval of deals and probably a very short window for corporations to do strategically transformative deals.

Speaker 2:
[00:24] Welcome to another episode of Goldman Sachs Exchanges, Great Investors. I'm Tony Pascarello, Global Head of Hedge Fund Coverage in our Global Banking and Markets Division. Today, I'm excited to be sitting down with Nicolas Giauque, the Managing Partner and Chief Investment Officer of Farallon Capital. Farallon is a multi-strategy firm, a 40-year track record and $44 billion in capital under management. Nicolas actually spent four years here at Goldman Sachs before joining Farallon in 1998. He became sole CIO and Managing Partner within the last two years. I'm excited to talk to him about his career, the opportunity set he sees today, and of course his view of this chaotic market environment. Nicolas, welcome to Great Investors.

Speaker 1:
[01:08] Thank you, Tony. It's a pleasure to be here.

Speaker 2:
[01:11] Farallon has an incredible track record. I think you've had only one down year since the firm was founded in 1986, which is remarkable. Tell us about the overall approach and how do you avoid serious drawdowns?

Speaker 1:
[01:25] Our focus has been 40 years now with just one mission, just extraordinary risk-adjusted return. So I think this intense focus on just this one simple mission is what has gotten us through all those 40 years with the performance that we've had. We certainly are very focused on generating performance, but also focused on capital preservation. We know the role that we fit in our investor's portfolio. And so I think that mission, a strong culture, which is based on excellence, integrity and humility, has also allowed us to achieve this with multiple CIOs. I'm now the third CIO and managing partner of the firm. So we've been able to do this consistently over time.

Speaker 2:
[02:09] You've been at Farallon for 30 years. How has the firm changed along that path?

Speaker 1:
[02:14] I think we've defined what we're good at. And our way of value added is really focused on four main blocks. The first one is that we have a deep knowledge of corporate events. And that can be in distress restructuring, that can be merger arbitrage. We always seek to provide liquidity where liquidity is scarce. And that can be in a disruption from a takeover where target shareholders might not want to receive the consideration that's being offered to them. And it can be in more macroeconomic driven disruptions, like in 2008, like in solving your crisis. We also try to take a longer term in our investment horizon, and that's particularly relevant in long short equities. And we want to be a trusted counterparty and a trusted advisor to our counterparties in the street, but also to our borrowers or the people that we invest with. And that becoming a trusted advisor can allow us to generate better returns. So that has been consistency. We've added multiple strategies, and so over time, the ability to reallocate capital across strategy has been the fifth key differentiating factor in generating returns. What's really changed over time since I joined 30 years ago has been becoming global. When I was hired, I was employee number two of the international offices. We started off in London, and since then, we have a thriving business in Japan, in non-Japan Asia with offices in Hong Kong and Singapore, in Latin America as well. So taking the strategies that we had thought through and developed in the US, bring them internationally, changing them, and that feeding back into our overall investment framework is what has really changed. At the same time, of course, we've also very deeply evolved our risk culture. We came from the old world of hedge fund investing. The rule number one is don't lose money. Rule number two, remember rule number one. You've heard this one before, I bet. And that's still very much true, but at the same time, there needs to be a risk infrastructure when the funds are larger, there's multiple strategies, and so we've gone very deep in evolving that. And the technology has really changed, yes. I think 25 years ago, when there was a merger deal, I would draw circles on a map about which shops needed to be closed or not. Now we have data scientists that are providing support to our investment professionals. We are rolling out AI tools to help them in their investment analysis.

Speaker 2:
[04:23] And if we get under the hood, give us a sense for what Farallon looks like today. How do you operate the fund? How do you deploy the risk?

Speaker 1:
[04:32] So I think the great strength of Farallon is our ability to cover multiple strategies in multiple geographies, and see it from a step away. And that gives us the ability to do the right allocation. So we're involved in merger arbitrage. So these are announced deals where there's typically a spread. We're taking, on the one hand, the risk of the deal does not happen. So process risk, but at the same time, we're also providing this liquidity to target shareholders. There's a natural, typically, alpha to be generated from the strategy. We invest in risk arbitrage strategy. So this is also where we're long and short, typically the same asset, but where the event that will crystallize the collapse of value is not a merger. We invest in various credit strategies, corporate and non-corporate, across the globe. And then we do long short investing. And then finally, we have some real estate strategies as well.

Speaker 2:
[05:18] Let's talk about the multi-manager model, which has become very popular of late in the way. Explain how you're similar, but maybe also quite different.

Speaker 1:
[05:28] Yeah, it's a very interesting question. I think when we started off, we, in a way, Farallon was one of the pioneers of the multi-strategy model, but it was a single-manager multi-strategy model. What's evolved over the time is just having these multi-managers within the multi-strategy. And so the way we're different is that we're one partnership, we all run with a one P&L mentality. All the partners are mostly interested about how well the firm does as a whole. And that allows us the ability to redeploy capital quickly. And in terms of our portfolio, it means that we have a substantially more concentrated portfolio. I think we're running at Farallon probably less positions and most multi-managers have pods, investment teams. So it's substantially more concentrated and we take more idiosyncratic risk in that fashion. But we can do it with substantially less leverage than the multi-managers. And so we control risk in a statistical and precise fashion as well, but more fundamentally by having lower leverage, but tolerating higher idiosyncratic risk on individual positions. And at the same time, I hope and expect that we're much more collaborative atmosphere for the small number of partners that work together. And so the greatest opportunities tend to fall between the cracks of the credit and the long short and the real estate teams and the global teams. And so that's a key differentiating strength of ours to deploy capital successfully.

Speaker 2:
[06:50] So if I go back to where we started, the firm was founded in 1986, again, only one down year along that path. What is the governing philosophy around balancing risk taking with risk management?

Speaker 1:
[07:03] Well, the DNA of the firm was merger arbitrage. And merger arbitrage investing is in a way very simple. You can very easily determine your downside, which tends to be the pre-deal price, and your upside, which is the deal price. And it forces you to think in probabilistic term, what is the implied market probability that I get from just looking at prices? And then what do I expect that probability to actually be based on my research? And so that format is what has driven our entire investment construct. It's all about thinking about the world in probabilistic term. The investment thesis is not a religion. It should be provable wrong. You need to put yourself, if you haven't figured out how you can lose money, then you haven't thought long enough. Forward, think about the post-mortem after the fact. How could you have lost money and visage that thing back through it? That's a scenario, put a probability on that. And all of our investments have these different probabilities. And we are in the positive expected value game ultimately. We need to assess this probability well and understand how we can lose money in any given investments.

Speaker 2:
[08:07] Tell us about a moment or two when that philosophy was really most tested.

Speaker 1:
[08:12] I think 2008 was certainly a difficult period for us and for all of our peer group. And there are certainly times when the markets can be crazier than you would have ever expected. And that typically happens in periods of deep, deep stress in liquidity and availability of and systematic risk effectively across the globe. So those definitely test us and test markets. Typically, thankfully, in the more recent past, we've always and we've had negative outcomes, but negative outcomes that were understood before the fact ex ante and then we're prepared for those.

Speaker 2:
[08:44] Let's go back to the markets and the opportunity set that's in front of us. As you think about all the different ways that Farallon can make money, is there one part of the portfolio you find most appealing right now?

Speaker 1:
[08:56] There's probably multiple parts that I still find attractive right now. So I mentioned our core strategies within our long short exposures. There's certainly two areas in particular that are particularly attractive right now. Japan is a place that we've been investing in for a very long time, over 15 years by now. And there's been a dramatic change in how corporations are supposed to behave now. So that transition in corporate governance has really opened a whole avenue for us to deploy capital. It's a place where you need legitimacy, that you need to play by the local code, I think, to be successful. But there are multiple areas where you can invest in corporations and help them generate value for shareholders. And it's a unique time in Japanese society where the government, the stock exchange, the ministries are all supportive of this constructive engagement. So that's a core area of focus, investing in equities, in constructive engagement with companies to help them generate value for shareholders and ultimately for society at large. We are very excited about our, in our long short book, in our event-driven investing in biotech stocks in particular. This is an area where there's just an incredible amount of innovation still taking place in this country. And it's an area which really fits well our mode of thinking in terms of probabilities of outcome. And our ability to combine both science and investing together. We're looking for really good investments, but with great in depth of scientific research. So that depth is working for us. And then thirdly, I think our initial strategies of merger arbitrage that I've mentioned has really seen a new light of day effectively in the recent years with a much easier regulatory path to approval of deals. And probably a very short window for corporations to do strategically transformative deal. I think your firm is at the forefront of supporting that effort. We encourage you to go all in as I know you are. And so, it's a very attractive period with the very good risk rewards on the large transactions that have been announced. And it's a business which is very good to do selectively. Larger deals tend to have wider spreads, and to do it as part of a multi-strategy effort where you're not running a diversified book of merger arbitrage deals, but you're really picking the best ones as part of a bigger book where you're diversifying risk elsewhere, very accretive to returns we expect.

Speaker 2:
[11:16] One of the defining features of the investing environment today, of course, is this rise in geopolitical risk. How does that play a role in how you operate the fund?

Speaker 1:
[11:28] I think we are really trying to add value, and our alpha in our DNA is to add value in idiosyncratic risk, is will that company decide to sell itself in Japan or not? Will this drug be successful or not? Will this restructuring go our way or not? That's where we're going to add value irrespective of geopolitical risk. We are geopolitically aware, of course, as we are now macroeconomically aware after 2008. And so, this is a key component of our portfolio construction and our portfolio hedges. But what our LPs expect of us is to preserve capital during the periods of volatilities, but really generate returns from idiosyncratic risk, not betting on those investments. And so, we're managing the volatility and trying to understand what is going on and how it can impact shorter movements. But really, our portfolio is fundamentally structured to look through those events.

Speaker 2:
[12:17] You mentioned earlier that credit is a part of the, it's one of the arrows in your quiver. What's your kind of view on this current narrative and handwringing around the private credit space?

Speaker 1:
[12:28] Well, actually, you know, we're talking about 2008, so private credit came out of that, yes. It was the solution to the systematic risk that affected all the banks. We're going to put credit risk in areas which are loss absorbing without creating systematic risk. And I think the regulator has been very successful by the growth of private credit, especially around direct lending and structured asset, seeking the risk off the banks. It's put them in the hands of investors who have the ability to absorb capital. Unfortunately, it is possible that we're entering a phase where there'll be more need for that loss absorbing portion of the capital. I think the growth will undeniably continue. I also think that the biggest problem perhaps with the asset class is just that there is always a credit cycle and we have not really had a credit cycle for a long while now and we've seen a rise in liability management exercises and restructurings. But it would certainly go up significantly in a recession and it's likely to go up much more when there's an incredible transformation that's going to affect all of our industries from the rollout of AI. And I do think that the concerns over the future losses on software related asset like businesses that have been heavily levered and favored by private equity and are perhaps disproportionately represented in private credit versus public high yield credit will create greater losses in the private credit world. But I think it's a question of quantum and I do not expect there to be a systematic risk associated with this, but there will be greater opportunities going forward for investors.

Speaker 2:
[13:55] So what are those opportunities?

Speaker 1:
[13:57] Really it's about being prepared right now. I think this is going to be a long cycle and one of the key factors around private credit is indeed that these structures were designed not to be traded. So there is some trading that's taking place right now, but I think the opportunities that are going to be around actual defaults that are going to be going, that are going to be ahead of us and then refinancing of those balance sheets when they mature. And so for me, the private credit opportunity with regards to direct lending and how we can lean into that is really going to be a 27 and beyond opportunity in terms of meaningful capital deployment. But those disruptions that come from AIs involvement in SaaS, but also in asset like businesses will have meaningful impact in those portfolios and there will be many winners and there will be many losers. And our interest is going to be in providing solutions to the ones that have done less well.

Speaker 2:
[14:46] You alluded to it earlier, but one thing that makes Farallon very unique is you've been through not one but two CIO transitions, which is very rare in the hedge fund space. If you were to explain how the organization has pulled that off, how would you tell the story?

Speaker 1:
[15:03] I think it goes back to the fundamentals of our extrusive mission is generating returns for LPs, yes, and we put our LPs first in everything that we do, and when we talk about our culture of integrity, that's also putting them first, and also our desire to do the right thing by our partners is because we also represent them in what we do, and we're very honored by the cast of LPs that have decided to invest with us. So when you do that, I think it means that anybody who's running the firm is really a steward on their behalf. And the best way to achieve returns over long periods of time is to move on at the right time, to let the new generation take the helm with new ideas, to nurture the next generation in order to generate returns for LPs. And so we have this mentality where the partners who run the firms are the ones who really earn the economics of the firm, and we pass it on to the next generation. And that allows us to have these rather seamless transitions of new talent coming in, running the firm on behalf of LPs.

Speaker 2:
[16:09] We'll finish with some shorter form questions. Nicolas, what's your greatest strength as an investor?

Speaker 1:
[16:14] Well, I think I'm a self-aware, paranoid optimist. So maybe that's three strengths which have got their own weaknesses. I think if you're going to invest well, you've got to know your own biases. I certainly like to lean into market dislocations, but I tend to do that too early, and I correct myself. I think you've got to be an optimist, ultimately. It's true, optimists win over the long term.

Speaker 2:
[16:36] That's right.

Speaker 1:
[16:38] But you've got to be paranoid because there's more ways to lose money than can be ascertained at first instance. So always putting yourself back, challenging yourself in the hypothesis. And I think that fits in well with, when I talk about our three pillars of our culture of humility, you're always constantly reassessing yourself.

Speaker 2:
[16:54] What's the best piece of advice you've ever received?

Speaker 1:
[16:57] Life is a marathon, it's not a sprint. And it's a powerful statement, because it means also that when things don't work out, well, this investment does not define your career as an investor, this particular event in life does not define the rest of your life, but at the same time, it's perpetual effort. Always pushing yourself, it's a marathon, you gotta train for it, you gotta work on it every day, you gotta persevere. And what's incredible about that statement as well is that you can achieve so much over long periods of time.

Speaker 2:
[17:25] How do you spend your time outside of the office?

Speaker 1:
[17:28] I'm a very boring family man. But now that we are actually empty nesters with my wife, there's a little bit more time. But I live in San Francisco, I think, Farallon, one of the differentiating characteristics is that it was built in San Francisco to be in a different place than New York so that we could be contrarian in our investment approach and we could make decisions without the wisdom of the crowds around us to some extent. And the greater benefit of the San Francisco in the Bay Area is you see outdoors are absolutely fantastic, so I enjoy mountain biking and hiking.

Speaker 2:
[17:59] And then finally, what are you most excited about in the world right now?

Speaker 1:
[18:02] Oh, I think the most exciting thing is this AI revolution that's coming upon us. It's going to change every single industry, the way we organize our firms. It's a unique and incredible time to be an investor. Our whole portfolio is designed so that we are not leaning into the fate of the moment, but we are absolutely recognizing that this will impact our credit business, certainly our long short business, and our firm, and staying close to those developments, implementing them internally, and how they impact every single one of our investment. It's probably the single most exciting areas in the world right now.

Speaker 2:
[18:36] We're going to leave it there. Nicolas, thank you for doing this. Thank you for visiting your alma mater, and best wishes for the path ahead.

Speaker 1:
[18:42] Thank you very much, Sonny. It was a pleasure to be here.

Speaker 2:
[18:44] Thank you all for listening to this episode of Goldman Sachs Exchanges, Great Investors, which was recorded on April 9th, 2026. I'm Tony Baskarello.

Speaker 3:
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