Hillhouse Capital’s Zhang Lei runs a $35 billion dollar fund and is considered one of China’s shrewdest venture capitalists, but he didn’t start out wanting to be in finance.
After an internship search proved futile as a student at the Yale School of Management, Zhang landed an on-campus job with the Yale University Investment Office. “At least they paid better than a Chinese restaurant in New Haven,” he recalled to laughter during an interview at Fortune’s Brainstorm Tech International conference in Guangzhou, China on Wednesday.
There, he translated Yale chief investment officer David Swensen’s book, Pioneering Portfolio Management, which Zhang credits for cementing his interest in private equity investment management, particularly for emerging markets.
“But I wanted to do something different,” Zhang said. “I wanted to form a model to invest in great companies and incredible entrepreneurs, irrespective of which stage they were in. They could be raising an early or Series A round, a public company, or in a buyout.”
“I thought it was good idea, but when I spoke with a lot of prospective LPs, nobody believed me,” he recalled, using finance jargon for “limited partner,” the investors who put money in venture capital funds. “What a crazy idea, they all said.” After year of fundraising, he managed to convince only one LP, the Yale endowment fund, to get on board.
With that $20 million investment, Zhang put his money in companies across different stages and sectors, from biotechnology to computer science and traditional appliance companies. Zhang was also the first to back several Chinese Internet entrepreneurs, including e-commerce giant JD.com’s Richard Liu and Tencent’s founder and chief executive, Pony Ma.
“It was 2005, and you could feel something brewing in the air in China. It wasn’t only the Internet, but the sense of entrepreneurship. Everyone aspired to be the best versions of themselves. It was the best time,” Zhang said. “A lot of people underestimated the franchise value those companies built, which at the time far exceeded their monetary value, or cash flow.”
Tencent, for instance, had the largest social network in China even though its business model at the time was merely selling virtual emoji stickers and doing distribution for telecommunications companies such as China Mobile, Zhang said. “Either they had not figured out how to get money or the market was not ready to give them money, but they kept on creating value.”
Quoting his favorite Chinese poem, ‘plum and pear trees don’t talk and people still leave their paths to find them’, Zhang explained: “Once you do good things, even if you are a small company, over time you can grow to be big and successful.”
Hillhouse is one such example. From the initial $20 million seed capital, Hillhouse now manages over $35 billion. In July 2017, it acquired Hong Kong-listed Chinese footwear retailer Belle International for $6.8 billion and subsequently delisted the company. The move, Zhang said, was a chance for his team to do what he often advises the entrepreneurs he invests in—to keep innovating.
“We are in essence entrepreneurs who happen to be investors. [Belle] gives us another chance to say, how do we leverage our expertise to help companies reinvent themselves,” said Zhang, who is now Belle’s chairman.
Never mind that Belle is a traditional brick-and-mortar retailer with 120,000 employees and 20,000 owned and managed stores, Zhang views the business through a tech lens.
“In my first townhall meeting, we talked about how to improve the UX [tech lingo for user experience] and UI [user interface] of our retail experience. We view the 6 million to 8 million daily visitors to our stores as DAU, or daily active users,” he laughed, throwing in even more tech talk. His team is also looking at using technology to make employees more productive and proud of their jobs, as well as introducing new retail experiences such as the mass customization of shoes by arch height, toe size, and more.
Zhang considers it his “great mission” to make technology “go beyond being a creative destructor but also an equalizer”. While technology can propel society to the next level, it can also accelerate the digital gap, he believes. The top 1% will get better and smarter while the majority will lag behind and will not enjoy the benefits—or will even be marginalized by technology.
Yet, if managed well, “companies marginalized by technology can be re-energized by jumping on the tech train to be more useful,” he said. “I feel good about that, but I also feel great about the returns and results,” said Zhang. Under Hillhouse’s management, for instance, Belle has moved from declining growth to double digit growth in the last two months.
“What we do is very different from traditional private equity in the West, which focuses on high leverage and cost cutting. We are not that, we are low leverage, and our goal is to grow a bigger pie,” he said. “To us, that’s innovation.”
