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December 15, 2009

AlphaOne Male

By Spear's

Ex-Goldmanites rarely speak about the company, but Nicolas Sarkis tells William Cash about its culture, its clashes — and why he left to found his own firm

WHEN NICOLAS SARKIS, the founding partner of AlphaOne, walked up to the Christie’s podium to be presented with the Spear’s Award for Ultra High Net Worth Asset Management Firm of the Year, the host couldn’t resist asking Sarkis a cheeky question as he posed for the camera with the award in his hand.

‘So what does it feel like to beat Goldman Sachs?’ said the host, CNBC Europe anchor Ross Westgate, to the 38-year old Franco-Lebanese former Goldman Sachs banker.

Sarkis was competing in the same category as his old firm. Goldman Sachs was created in the last century while AlphaOne is only five years old, and already it is one of the leading independent investment advisory firms. It works with a small but global group of institutional investors, high net worth families and sovereign wealth funds.

Such success does not come without hard work, an acute understanding of what investors want, a long-term vision, strict discipline and high ethics. Because he is modest, Sarkis also likes to say that his business is ‘easy’: ‘A lot of what we do is common sense. I think that large institutions lose this feeling and with it the importance of having some basic perspective. Let me give you a simple example: would you ever invest with an asset manager whose strategy you do not understand or whom you have never spoken to or met?’

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This question relates to Sarkis’s claim to a colourful footnote in the financial history books chronicling the Armageddon of 2008: he was one of the very last people whom Bernard Madoff personally tried to persuade to invest in his fund before he was arrested last year on 11 December.

The moment that Sarkis left Madoff’s office after two hours with him, he knew that something felt wrong, most probably ‘front-running’, an illegal trading practice where a broker takes a proprietary position before putting through a client trade. At the end of the meeting, he told Madoff that he would send him the full due diligence questionnaire that AlphaOne had put together. Madoff’s face turned dark as he realized that his charisma had not been convincing enough.

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In 2007 and 2008, AlphaOne had already become a relatively visible investment firm and hence was frequently contacted by asset managers eager to place their investment funds. Among them, several linked to Madoff had tried to push their products. Sarkis had vaguely heard about Madoff back in his Goldman Sachs days and he knew that some of his former colleagues were keen on him but nobody had actually met with him and the investment strategy was fuzzy.

‘One of the many purveyors of Madoff who contacted us told me that it would be easier to meet with the Pope than with Bernard Madoff, that the fund was extremely exclusive, etc. How could it be? I could already list five funds of funds who were only working with him. As Reagan said: trust, then verify. That is what I did.’

 
THIS IS A prime example how a boutique firm with the right discipline can do a much better job than a bank with tens of thousands of people. ‘It is amazing that such giants as UBS, UBP or Santander were caught on such a massive scale.’ Importantly, one of AlphaOne’s key principles is its independence and the absence of conflicts of interest that comes with it.

‘This is no longer a theoretical problem. It is no coincidence that the people who lost the most in this scandal are based in Switzerland, the home of kickbacks and retrocessions of all sorts, which Madoff was distributing so generously.’

One of the most common mistakes within the investor community, Sarkis says, is that people tend to think that because the performance of a fund was historically good, then its investment strategy can only be good too. ‘I have heard so many times even relatively sophisticated investors say, “This investment is like cash”. It has always ended in tears – the only thing like cash is cash.’

When people are not afraid of risk, they will accept it without being compensated for it. This is what has led to the two most recent financial crises. Sarkis likes to quote Howard Marks, founder of Oaktree and one of the world’s best investors: ‘It is frightening to think that you might not know something but more frightening to think that, by and large, the world is run by people who have faith they know exactly what’s going on.’

I remember once being in Geneva at the same time at Sarkis and he invited me to lunch. He brought along as his guest a dollar billionaire under 40 who wore a leather jacket and jeans and has a house overlooking Lake Geneva, and has also managed to avoid being ranked or listed in any Forbes Rich List. Sarkis himself is equally discreet.

 
HIS SUCCESS HAS come not from throwing clients’ money at marketing or decorating London buses (remember those New Star ads?) but rather by applying a zealous and unflinching work ethic, partly drilled into him from an early age by his Lebanese-Christian parents who are his role models. Sarkis’s father is a well-known and highly respected consultant in the energy business.

A typical Mediterranean, Sarkis also adores his mother with whom he speaks every day. He also admits that he owes a lot to Goldman Sachs, having been trained in the nineties in the ruthlessly competitive and hard-working priesthood culture of the world’s pre-eminent financial services firm.

There is something rootless about the Goldman cult which appealed to Sarkis from an early age. Sarkis was born in Lebanon but the civil war caused his 41-year old father to pack up with his wife and young family of three to fly to France, where Sarkis was raised. ‘This has taught me that in life you cannot take anything for granted. The world is a lot more unstable than people think, a very useful lesson for people involved in the financial world.

‘To be honest, I was never really motivated by money. My motivation comes from what I owe to my parents because they made huge sacrifices in leaving and so my brothers and I always felt that we had to work very hard to make them proud. That is partly why I am such a workaholic.’

The Lebanese are a strange people; it is no coincidence that a disproportionate number of London’s top financial players are from Lebanon. Part of this is because, as a country, they have no natural resources and hence have to rely on their financial and trading skills to get on in the world. And there are fewer nations on earth who like a deal, or the chase or thrill of the deal, more than the Lebanese.

The Lebanese are very proud of their country, says Sarkis. ‘You can ski, you can go to the beach or the mountains all in a day. We don’t get flapped by anything. No market meltdown is going to cause us to panic. If anything we will just regard it as an opportunity. The Lebanese are a very hard-working people partly because we have no welfare state. So people have to basically get out of bed and go and work.’

Being multi-cultural, Sarkis never really fitted in at schools in France. Nor, to be honest, at Goldman. Although he punched above his weight in bringing in business, he knew, deep down in the saturnine depths of his Lebanese soul, that he could never play the Machiavellian politics required to make managing partner. He never wanted to be a Goldman lifer. He always wanted to use Goldman as a springboard for something bigger and better – his own investment advisory firm, to better serve his clients.

 
OF COURSE, SARKIS kept this very much to himself when doing the exhaustive interview rounds to the bank, which involved four sets of interviews in London and then being flown to New York for the final interviews. Sarkis says that getting into Goldman when it was still private was much harder than it is now: it was like a psychological and intellectual boot camp for the very best young minds in the world, the most ambitious and most driven. Many applicants simply couldn’t take the pace, or handle the line of questioning – which made the rigours of Top Gun suddenly seem like a municipal ballet school.

On the first day of his fifth round of interviews for Goldman Sachs back in 1992 – he attended 52 in total before being offered a place – he walked into the cathedral-like trading floor of Goldman in New York and witnessed a trader sitting at the NASDAQ desk who had a heart attack right in front of the interviewees. ‘He was a young guy, 40 years old. They brought in the nurses and the ambulance and I saw the guy whizzed out and I really thought that I was in a movie.’

It was also Sarkis’s first real taste of the business high life, and he became aware that if he played the Goldman game, then the world was his. ‘I was 21 years old and I loved it. I was interviewing for an associate position and was by far the youngest in the class; other candidates came with a Harvard or Wharton MBA and were six to eight years older than I. I came from a school which the French consider one of the best but that no one in the USA had ever heard about; it was a terrifically humbling experience.’

Sarkis always admired the fervour of the Goldman mission which still affects the way he does business today, and the relentless way that he follows up with clients and looks after them and attends to their needs. ‘I was really impressed by the people at Goldman whom I met in my fifty-two interviews,’ he says. ‘Quite frankly I learnt a lot and after each interview I tried to record as much as possible so that by the time I was on my 20th or 30th interview I actually started to know what I was talking about. I asked them what the characteristics of the top Goldman Sachs professionals were. I kept hearing words such as “team player”, “dedication” and “client focus”.’

But the truth is that while brilliant as a young banker with Goldman, Sarkis was never really a typical Goldman banker. He was too independent and always more worried about his clients’ interests than the firm’s agenda. ‘It was in my own interest: I had worked very hard bringing clients to Goldman Sachs, sometimes a process involving years. Trust is very hard to acquire and very easy to lose. My franchise was all I had. If I did something which I thought was not in my clients’ interests, Goldman may lose a few clients. I would lose everything’.

In the Goldman Sachs 360 degree annual reviews, where peers anonymously comment on each other at year end, some of Sarkis’s colleagues made bitter comments about him. He was one of the most successful at this job but this attracts jealousy. ‘At GS, it is all about emulation and internal competition. They never want people to feel secure; this is why the firm as a whole is so good. How do you expect people with whom you compete internally to comment favourably about you? In general, the more successful you are, the less popular you will become.’

 
BUT THE LEBANESE are also fiercely independent and hate the idea of pushing product if it is not the very best. Compromise is not a word they understand and this zealous regard for searching down the very best fund managers — and flying half way across the world at short notice just to have a meeting — is part of what has made AlphaOne a unique force in the Mayfair investment landscape.

It was his tenacious determination that got Sarkis his job at Goldman Sachs in the first place. When his family suddenly moved to France, he was educated at a Jesuit school and, after spending time at Stanford, he was admitted to one of France’s most competitive universities. ‘But I knew very little about finance when I graduated. I had few financial qualifications. I sent out my CV to Goldman Sachs and was very persistent.

‘I knew that Goldman Sachs was out of reach for someone my age and with my qualification; this is precisely what made it so exciting. I love trying to achieve things that seem very difficult or quasi-impossible; this is what makes life fun. A lot of my friends tried to get interviews with bulge bracket firms and failed, so they immediately gave up. I sent a letter and I followed up with a call. I think that 80 per cent of success in life comes from showing up; it is amazing how quickly some people give up.’

The fact that Sarkis was not trained in finance did not seem to bother Goldman Sachs. ‘I think what they were looking for was personality and character. Basically, they bring you and then they put you on this nine month training programme where they teach you everything you need to know. They don’t need financial experts. I was expected to come in and basically keep my mouth shout and learn during the gruelling nine months. They were making a big investment in me and I was very appreciative.’

The Goldman training course was like a military training camp. ‘It was incredibly tough. A big part of our class actually resigned during the programme because they thought it was a madman’s house,’ recalls Sarkis. ‘The first week at Goldman the head of our training program threatened to fire me twice because I was one minute late for meetings; he would chase us in the toilets and ask us where gold had closed the day before. And then they would ask some really impossible questions like “Where is the ten-year bond trading at in Bangladesh?”’

Another part of his Goldman education was to learn not to be intimidated by anybody, however well qualified or rich they are. ‘The people on the Goldman program who had gone to Harvard and Yale had a huge ego and the goal of the Goldman program was to “break” these people. By breaking them, just like in the army, you can remodel them and create this esprit de corps. In the face of adversity they regrouped and did things the Goldman way. It is a shame this has been diluted a lot now, probably out of political correctness or reduced budgets.’

The other thing Sarkis learnt from Goldman was the importance of being part of the Goldman tribe. ‘I really had the feeling I was joining a family. You could say a secret family, but truly a family.’

 
GOLDMAN, OF COURSE, is also a family with very powerful political connections and Sarkis also learnt that it is not just how smart you are that but who you know.

On Sarkis’s very first day in his new job, Bob Steel, who would become many years later US Treasury undersecretary, came up to him and shook his hand saying: ‘Welcome to Goldman Sachs, I wish you the very best, I am here for you.’ ‘They were very good at making you feel like you are not just there for the money. I admired Bob and looked up to him as a role model.’

Sarkis began on the trading floor, in what was called institutional equity sales. He was a broker on the US stock market for large European institutions. It wasn’t long, however, before he decided to attempt to switch departments and enter the sacred halls of PCS – the ruthless Goldman private client business.

‘Within sales you basically sit behind a desk, working with research and trading, trying to source research ideas for smart institutional investors. It’s a very exciting job but it’s a lot more fun to work on multiple asset classes and with private clients because they are nobody’s employee. The great thing with a private client is what you see is what you get. If he doesn’t understand, he says, “I don’t understand,” and you’re actually talking about his own money.’

Goldman finally allowed Sarkis to move to PCS in the mid-nineties. But it wasn’t easy to switch from the role he had been expensively trained for. They told Sarkis that if that is what he really wanted to do, they would pay him only the basic salary he received when he joined four years before. ‘So I took a huge pay cut. I actually demanded it; I thought it was the only way for me to be motivated.’

Once inside the halls of PCS, Sarkis become a fearless, shameless master of the cold calls and plunged at the same time deep into academic research to truly understand modern portfolio management technology, spending days and weeks with the best and brightest asset managers to understand what sets them apart. ‘I love managing money. It is one of the most complex things in the world. There is a long list of things to avoid and investors, especially private ones, suffer unfortunately from a huge information deficit. This is where we step in.’

 
AUDACITY AND PERSEVERANCE were Sarkis’ modus operandi. ‘The first client I ever got in wealth management at Goldman was a person I had called on his cell phone whilst he was pumping gas into his car at a station. First he said, “I will never be a client of yours. I do not want to work with American banks.” I was convinced we could add value and do a better job managing his money, so I was persistent. It paid off, he became a client two years later.’

At Goldman, meanwhile, the company was changing as more people like Sarkis realized that far from being the slow lane of the bank, wealth management represented a great opportunity. ‘I was very client-focused. Some of my colleagues would spend as much time dealing with clients as telling their boss what they had done for clients. That was never my style. It is fun to be a small part of a big organization, but I think it is more fun to be a big part of a small organization.’

For Sarkis, leaving Goldman after some 14 years was a natural career move as he was positioned to use his Goldman knowledge for investors’ benefit. Realizing that institutional investors benefited from better access to investments and lower transaction fees than private clients, he founded AlphaOne to represent the interests of such investors from the vantage point of a professional institutional investor.

‘Many large private clients are way too big to advised by a bank, where the average account size is rarely above a few millions of dollars, yet they do not want to build their dedicated team of advisers,’ he explains. ‘It is expensive, an administrative headache and top financial talent usually does not want to work in a single-client environment.

‘Another issue with banks, of course, is conflicts of interest: how can you advise independently when you have your own products to sell, or are paid a commission by a third party to place its products, or are paid more when you trade more? What you really need a bank for is asset custody and borrowing money; investment advisory is a very tricky business for them.’

AlphaOne does not manufacture any products in house and has no capitalistic ties to any institution or any of its clients: ‘Not a single one of our investors is a shareholder in our business and we are not affiliated to any asset managers.’ This guarantees total independence in the choice of investments and fairness in the allocation of opportunities. Also, it is only paid by its clients and passes on any rebates to them. In addition, it is the first-ever investment firm in Europe that to be paid only performance fees on certain mandates.

When he started AlphaOne in 2005, Sarkis knew that his model had to be to hunt down the very best investment opportunities globally and simply refuse to take no for an answer once he had done all the due diligence. ‘Ultra high net worth individuals or sophisticated institutional investors do not want to interface with a marketing person. They want somebody to take care of their investments and be accountable.’

AlphaOne operates from offices on Grosvenor Street but it has a presence in Geneva. It is also looking to open an office soon in Southern Europe and another one in South East Asia.

AT ALPHAONE, SARKIS has created a bespoke business that combines the very best of Goldman, his Lebanese streak of independence and his focus when it comes to selecting investment opportunities.

‘We are not in the market share game,’ he says. ‘AlphaOne wants to remain a small and dedicated firm. Our only concern is to continue providing good investment advice to our clients. We are only as good as our clients say we are.’

You cannot understand Sarkis and his vision unless you understand his stubborn streak of independence, which is in the DNA of anyone who grew up during the Lebanese civil war as the country struggled for its own independence. It has given him the drive to make AlphaOne the success it is today.

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