By:Phil Lawson Issue: Biennial of the Americas 2010 Section:The Americas Roundtables
Is the Highest Return on Investment Always the Best Formula?
Wandering the aisles of a new Do-it-Yourself (DIY) store during his last visit to Latin America, Thomas Steyer, Founder of Farallon Capital Management, was moved by the sight of entire families participating in the process of improving their homes. DIY stores, similar to Home Depot in America, are a new concept to Peruvians that allows them to take charge of home improvements “room by room.”
“For people who often have not had running water and electricity in their house, all of a sudden they come in as a whole family and buy what they need,” Steyer explained. “When I saw it, I thought it was one of the most impressive and exciting things I’d seen, because literally the whole family comes in: the grandmother comes in, the parents come in, the kids come in, and they fill up a huge shopping basket to build their next room.”
This model of “sustainable growth,” Steyer insists, is exactly what his company looks for when it comes to investment decisions.
“Our model of investing has to do with investing in a country and participating in that country’s growth,” Steyer further explained. “By definition, we are not people who are coming in to extract resources. We are coming in to make investments over a long period of time and be part of the community. We don’t believe in people coming from the United States, staying for a few years, and coming back. Basically, if you want to work for us in Latin America, you have to live in Latin America. You have to send your kids to school in Latin America. You can’t be an outsider—that doesn’t work. So, from our point of view, part and parcel of what we see as success is a successful society.”
What additional criteria represent success in Steyer’s view?"Gross domestic product" tops the list, he said, but many other factors play a role.
The first question is: Are standards of living rising for the average person? Steyer said, "That’s the first measure of success for a society. That’s something we’re going to look at before we ever invest because, if they are not fair, that’s probably not a place that is going to work very well for us. If it’s corrupt we can’t really participate in it." "If you have a kind of slash and burn mentality, it’s not going to work out. If you really believe you are going to do well at the expense of somebody else’s economy, I think you are fooling yourself." - Thomas Steyer
The question remains: Does GDP have as much relevance when there’s a sizable gap between the rich and poor? And the answer, according to Steyer is, “It still does.”
“Normally, when we look at societies where there is a huge gap between rich and poor, they’re normally extraction-based societies. And that’s been the traditional case in Latin America where basically you are extracting minerals or other resources from the society and those societies tend to be very desperate in terms of incomes. That’s still true. Those aren’t really the things we specialize in. What we specialize in are the kinds of businesses that have to do with growing the average income.”
What about socially responsible investing—theconcept that corporations favor practices that promote environmental stewardship, consumer protection and more?
“That is something I spend a ton of my personal time on,” Steyer said. “I’d say the way that we think about it from the point of view of our funds—where we are representing other people—is from the traditional American Medical Association, first of all, 'Do no harm.' We can’t be participating in things that cause harm. We have to be participating in things that are positive.”
Does Steyer play the numbers game? Promote a high return-on-investment formula? Or, do his solutions comprise different numbers for different locations and industries?
“It depends on the recipe,” Steyer explained. “There is no one number; it depends on what you are actually doing and how much risk you’re taking … To put it down to “one” number would be, you know, way too simplistic and inaccurate. That’s not the way to think about life.”
Steyer’s approach appeared to reflect a blend of Wall Street and the new Impact Investing model. “We take a long term view,” Steyer said. “If you have a kind of slash and burn mentality, it’s not going to work out. If you really believe you are going to do well at the expense of somebody else’s economy, I think you are fooling yourself. It’s not going to happen. We believe that it actually lines up—that the kinds of investments that help people are the kinds of investments you make money from… I’ve looked all around the world—in all seriousness; we’ve visited countries on every continent, probably in the last quarter (and) being part of a rip-off does not work; is not satisfying; will lead to a bad end in all ways and so we just won’t do it. But I also believe that businesses are what provide jobs; they are what create higher living standards; they are what raise people out of poverty and let them educate their kids, having a decent standard of living and dignity, so I in no way despise private enterprise. I believe it is the thing that actually helps people.”
Prior to founding Farallon in 1986, Mr. Steyer’s background included working for Goldman Sachs & Co. and Morgan Stanley & Co. He currently oversees Farallon’s investment activities. The firm employs approximately 165 people in eight offices globally, and manages equity capital for institutions and high net worth individuals.