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. Mr. 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, Mr.
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,” Mr. 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, Mr. Zhang represents China’s new
entrepreneurial class. He has consulted with the likes of Mark
Zuckerberg and Jeff Bezos, and visited with start-ups 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 M.I.T. 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 that Hillhouse had returned a yearly average of 39
percent since it was founded in 2005.
With bulging coffers, Mr. 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. Mr.
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 Mr. 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.
Mr. Zhang says he is up to the task.
A
bespectacled and energetic man with a casual demeanor that belies his
great wealth, Mr. 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, Mr. 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, Mr. Zhang started applying for Wall Street jobs. No one asked him
back. One interviewer went so far as to question his intellectual
capacity when Mr. 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 M.B.A.
students as interns, but Mr. 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
Mr. 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?” Mr. Takahashi said.
At
the endowment, Mr. 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, Mr. 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 M.B.A. 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. Mr. 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?’ ” Mr. Zhang recalled. The wife, Tracy Ma, is now the chief
operating officer of Hillhouse and No. 2 at the firm.
Mr.
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 Mr. 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 nearly $180 billion.
“Looking back now I think, wow, Tencent was so cheap,” Mr. 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, Mr. 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 Mr. Zhang leeway to invest in private companies like Blue Moon, a
Chinese consumer goods producer. In 2006, when Mr. 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 Mr. 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,
Mr. 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, a manufacturer of electric appliances.
“I’m
seeing an uprising of Chinese entrepreneurs who are able to upgrade
themselves versus the relatively slow-moving multinational companies,”
Mr. 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, Colo.,
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.”
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