Hillhouse Capital Management Group was founded in 2005 with US $20 million in seed capital from the Yale University endowment. Since then, the investment manager has grown its assets under management (AUM) to over $30 billion.
What explains this explosive growth?
Hillhouse founder, chair, and CEO Lei Zhang revealed some of the secrets to the firm’s success in his presentation at the 71st CFA Institute Annual Conference in Hong Kong.
Zhang says it comes down to the importance of people: The people whom the fund has hired and the people in whom the fund has invested.
Hillhouse favors investment managers who embrace an entrepreneurial ethos. The investment managers they recruit are really entrepreneurs themselves who just happen to be investment managers, Zhang said. During the recruitment process, Hillhouse places less emphasis on experience and background and more on intelligence, independent thinking, and honesty. Other attributes they look for are humility, the ability to connect with people, level-headedness, and a focus on fundamentals.
Zhang said Hillhouse has a broad investment philosophy. It not only invests in such high-technology companies as Tencent and Baidu, but also more traditional sectors. It took a lead role in the consortium that privatized the largest women’s footwear retailer in China, the Hong Kong-listed Belle International Holdings, in a $6.8-billion deal last July.
It is also driven by its founder’s mandate: Big or small, public or private, do what makes sense. Though the exit strategy is the first thing many PE firms think about and then use financial leverage and cost cutting to get there, Hillhouse takes a longer-term approach. Their rationale is simple: If you invest in good people and firms with good cash flow and have the ability to leverage technology, Zhang said, the exit strategy will look after itself.
Indeed, even firms with excellent management and high existing rates of return can be enhanced through the strategic use of technology, Zhang said. In the case of Belle, he explained, tech can help develop new e-commerce opportunities, improve inventory control, and transform shop assistants into fashion advisers.
But tech alone is not enough. Success ultimately comes down to asking the basic questions, Zhang said. That simple approach strips investments down to their most critical components and yields the greatest understanding of their potential.
Has Hillhouse made mistakes? Of course, Zhang said, but the company has learned from them. The management of one business Hillhouse invested in got distracted by Wall Street bankers, who started proposing unsuitable acquisition targets for them, Zhang recalled. That upset the company’s focus and set them back for a time.
Is Zhang a fully-fledged capitalist? Not really, he said. He believes technology should be inclusive and not marginalize people. He doesn’t believe investing is a zero-sum game or a winner-take-all scenario. Capitalism with a conscience, that works hard to support all, is what Zhang sees as the long-term sustainable approach.
A question on the importance of due diligence re-emphasized the importance of people. Before investing in a company, Zhang said it’s critical to determine whether the owners, directors. and managers are long-term, intelligent, and aligned with their customers’ needs.
In a way, Zhang made success on Hillhouse’s scale sound simple. Simple it probably isn’t. But the key factor is adopting a people-centered philosophy.
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