Chinese Billionaire Zhang Lei Spins Research Into Investment Gold

Hong Kong: With an $18 billion war chest, he is one of China's richest investors. Yet on a recent trip to San Francisco, Zhang Lei and his entourage crammed into a three-bedroom house in the Mission District, rented through Airbnb. He also ordered water from Instacart, the on-demand grocery delivery service. A few days later in New York, he bought food through Google Express. Of course, it is not as if he could not afford luxury hotels and restaurants. Instead, it was research. Zhang just wanted to get to know some of the businesses he might one day invest in. Starting 10 years ago with $20 million from Yale University's endowment, Zhang was an early backer of companies like Tencent and JD.com, businesses that have shaken up traditional industries across China. Now he thinks these companies could stir things up globally. "China could be one of the engines to this whole global innovation revolution," Zhang said in an interview at the Hong Kong office of his firm, Hillhouse Capital Group, in one of the city's tallest skyscrapers, with sweeping views of Victoria Harbor. Across the ocean in Silicon Valley, Zhang represents China's new entrepreneurial class. He has consulted with the likes of Mark Zuckerberg and Jeff Bezos, and visited with startups like Airbnb. To outsiders, Hillhouse is a mysterious firm led by a secretive man who happened to strike gold early on. To his investors - which include the endowments for prestigious universities like MIT and Yale, sovereign wealth funds, and wealthy entrepreneurs - he seems incapable of making a bad bet. But as China's economy hits a series of economic road bumps, his next set of investments could define his legacy. The firm says little about its investors or its investing record, emphasizing only that it holds on to investments for long stretches. One investor said Hillhouse had returned a yearly average of 39 percent since it was founded in 2005. With bulging coffers, Zhang and Hillhouse are looking to the United States in search of more opportunities. In his most recent deal, Hillhouse teamed up with the Mayo Clinic to bring one of America's best-known health care institutions to China. Zhang hopes to upend the rickety state health care system, which is in severe need of a turnaround, using modern technology to create new services and products like a digital records management system. But challenges await Zhang. Corruption in China's health care sector abounds; bribery investigations have ensnared Western companies like GlaxoSmithKline. State hospitals are weighed down by bureaucracy. And demand for geriatric services has soared. Zhang says he is up to the task. A bespectacled and energetic man with a casual demeanor that belies his great wealth, Zhang has an unusual background. He was born in 1972 in Zhumadian, Henan province, at the height of the Cultural Revolution, when China was purging itself of all things even remotely capitalistic. He came of age just as his country was embracing capitalist reforms. At 7, Zhang had his first business idea. He rented his comic books to passengers waiting for their trains. Today, that shared-economy concept is the basis for Silicon Valley companies like Uber and Airbnb. His other forward-thinking ideas were not always met with enthusiasm. Not long after securing a scholarship to the Yale School of Management in 1999, Zhang started applying for Wall Street jobs. No one asked him back. One interviewer went so far as to question his intellectual capacity when Zhang asked whether there was any point to gas stations. His break came when Yale's endowment took him on as an intern. It was an unconventional arrangement. The office did not typically take MBA students as interns, but Zhang had impressed David F. Swensen, the chief investment officer. "Almost immediately, Lei was exceptional in that he had really great insights," said Dean Takahashi, senior director at the Yale endowment, adding that Zhang was able to identify what was going to be a great business. He was also an inveterate networker, introducing successful Chinese entrepreneurs through the Hillhouse Club, which he founded on Yale's campus and named after Hillhouse Avenue, where some of his classes were held. "It was like, why in the world does this kid from China have these insights?" Takahashi said. At the endowment, Zhang was sent to research industries like timber and would return weeks later with inch-thick reports. This tradition has carried on at his firm. Analysts spent years researching before Hillhouse struck the deal with the Mayo Clinic. After his first year at Yale, Zhang took time off to research China's expanding private sector, knocking on the doors of entrepreneurs like Jack Ma of Alibaba, Robin Li of Baidu and Pony Ma of Tencent, and cultivating friendships. He returned to the United States after the Internet bubble burst, in 2001. Four years later, with an MBA in hand, he persuaded Yale to give him $20 million to invest in new companies in China. His initial pitch was met with hesitation. He was green, former Yale endowment colleagues recall, so green that he did not know whom to hire. Zhang called up old friends. One friend declined the offer but suggested his wife. "I said, 'Are you serious? You're just going to dump me and send your wife?'" Zhang recalled. The wife, Tracy Ma, is now the chief operating officer of Hillhouse and No. 2 at the firm. Zhang still jokes about the early days. "When I started Hillhouse, I had this weird strategy and it sounded distracted," he recalled. "That's why no one else invested in me other than Yale." For Yale, which had $15 billion under management in 2005, it was a relatively small wager on China and on a young man who the endowment thought showed a lot of potential. One of Zhang's first bets was on Tencent; he bought the stock in 2005. Back then the company was best known for its QQ messaging service and was worth less than $2 billion. Today, Tencent is an Internet giant worth more than $180 billion. "Looking back now I think, wow, Tencent was so cheap," Zhang said. Hillhouse still owns the stock. Other investments yielded knockout returns. In 2010, Hillhouse invested $255 million in JD.com. Four years later, that stake was worth $3.9 billion at JD.com's initial public offering. When Tencent paid $215 million for a 15 percent stake in JD.com in 2014, Zhang was involved behind the scenes, according to two people involved in the deal who were not authorized to speak publicly. Hillhouse's buy-and-hold strategy makes it more of a private equity firm than a hedge fund. Its investors are willing to lock up their money for extended periods. This gives Zhang leeway to invest in private companies like Blue Moon, a Chinese consumer goods producer. In 2006, when Zhang first met the husband-and-wife team who founded Blue Moon, they were selling liquid hand soap. He stayed in touch. Several years later, they called him up to say they had created a new kind of liquid detergent. A light bulb went on. At that time, in 2010, most multinational companies were selling powdered detergent in China because they thought consumers would not pay more for liquid detergent. But Zhang believed they would, and he persuaded Blue Moon to expand heavily in liquid detergent, bankrolling its expansion in exchange for a stake in the company. Now, Zhang wagers it can be a multibillion-dollar brand that will compete with the likes of Tide. Hillhouse has made similar bets on companies like Gree, now a leading maker of air-conditioners globally, and Midea, an electric-appliance manufacturer. "I'm seeing an uprising of Chinese entrepreneurs who are able to upgrade themselves versus the relatively slow-moving multinational companies," Zhang said, adding that American companies can learn a thing or two from their Chinese counterparts, who have learned to leapfrog traditional industries. It is a skill he knows something about - not just in his jump from humble beginnings to billionaire status in a few short years but also in his passion for daredevil sports. During a skiing trip to Telluride, Colorado, in February, he was the one going down the steepest slopes in a straight line. Investing in China, he said, is "not for the faint of heart" But, he added, the opportunities are vast, "if you are open-minded and you focus on the future of China." @ 2015 New York Times News Service

Chinese Billionaire Zhang Lei Spins Research Into Investment Gold

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