Imagine: John D Rockefeller, John Pierpont Morgan, Andrew Carnegie, Elon Musk and Mark Zuckerberg all walking down the street at the same time. That’s how Lei Zhang, founder of Hillhouse Capital Management, described what’s happening in China today. “Innovation is across all verticals and industries. It is becoming the catalyst across all value creation.”
Speaking at the Asian Financial Forum in Hong Kong, Zhang believes the opportunity set in China now is very unique. He calls it the triple combination: urbanization, industrialization and the information age happening at the same time.
“We are blessed to be in this era; to invest, discover value, and adding value,” says the Hillhouse CEO who, together with his team, manages in excess of US$35 billion in hedge and private equity funds with a focus on China. Among the limited partners investing with him are the endowment fund of his alma mater, Yale University, the Canada Pension Plan Investment Board, Princeton University Foundation, and Massachusetts Institute of Technology.
Zhang, who keeps a low profile, shared three megatrends defining the China transformation starting with healthcare. “We are at the start of this whole healthcare-life science innovation particularly when life science is combined with AI (artificial intelligence), and super-computing. There are so many things that could be out there.”
The healthcare industry underwent a stress test during this pandemic, he adds. “From the vaccination to the cure system and after-care, a lot of things need to be revamped to get it better. We are very excited about healthcare. We are probably the largest healthcare investor in China.”
He sees a big gap between the clinical research organization and clinical research-based hospital to help the innovation companies. “[There is a need] to build the clinical research infrastructure to help our portfolio companies to trial their products and apply their technology much faster.”
Lei Zhang speaking at the Asian Financial Forum 2021 Online
Another segment where Zhang expects a lot of growth is the technology driving cloud-based business services. “We are all experiencing working from home. Even after the pandemic, meetings will be done online, group activity, and collaboration,” he notes, even though admitting he misses travelling and in-person meetings. “We are at the beginning of this particular innovation in business services, productivity, even cloud-based infrastructure for consumers as well.”
One of the early investors in video-conferencing app Zoom was Zhang’s Hillhouse in 2015. Founded in 2011 by a former engineer at Webex, Eric Yuan, Zoom went public in April 2019 and priced its share at US$36. It is now trading at US$393.87 as at January 19 2020.
A third area where Zhang sees considerable potential is leveraging technology to help traditional businesses to do better. “There is a lot of return that can be made by doing that. When you do good, you can actually do very well.”
He cited the case in 2017 when Hillhouse led an investor consortium in the US$6.8 billion take-private of Hong Kong-listed Belle International, the largest ladies footwear retailer and one of the largest sportswear retailers in China. “We were able to apply technology, helping them to use the tools to serve customers better. Inventory days were shortened, less wastage, [adopting] lean manufacturing leading to better operating earnings and financial returns that we can reinvest some of that to employee training and technology as well.”
That example can be applied to many of our portfolio companies, he continues. “The best that could happen is combining technology with very good management who can actually learn from those technology and apply into their industry. Belle has an incredible young management team – they are so driven, so open to change, always ready to learn – I am amazed at their insatiable demand for new ways of doing things. They are building the internet mentality for the traditional industry.”