Hillhouse’s Zhang: ‘Less conflict’ when private equity thinks long-term

Taking a longer-term approach to investing can make private equity players better stakeholders in society, the founder of Asia’s biggest PE firm Hillhouse Capital has said.

Speaking on a digital panel hosted by investment non-profit FCLT Global on Tuesday, Lei Zhang said investments have a more positive outcome when thought of in five-year, 10-year or 20-year horizons.

“We want to be a good stakeholder but people sometimes say: ‘You know what, but I also report to my LPs, my annual P&L, cashflow, I have so much financial leverage I need to deal with’,” Zhang said.

“Really the only thing that matters is the duration […] You do a much better job of aligning yourself, so there’s much less conflict, when you’re able to think for the long-term […] Short-term people might be aligned for financial performance, but for the long-term people may get much healthier, sustainable results for everybody.”

Zhang said private equity firms could use technology as a leveller in society, citing an “exciting” opportunity to invest in traditional businesses during coronavirus that have been left behind by the digital revolution.

“[These are] businesses that could embrace technology that actually have been a victim in some way of the creative disruption of technology and been left behind [that] now could actually leverage technology to catch up […] Making technology more than a creative disruptor, but also a kind of equaliser helping people to live better, that also could be equally exciting.”

Hong Kong-headquartered Hillhouse placed 24th on this year’s PEI 300 ranking, higher than any other Asia-based manager. The firm is seeking up to $13 billion for its fifth fundraising programme, which would target buyouts, growth equity and venture capital, sister publication Buyouts reported in March.

Its previous vehicle, Hillhouse Capital Fund IV, beat its $8 billion target to raise $10.6 billion in 2018 and received backing from LPs including Canada Pension Plan Investment Board, San Francisco Employees’ Retirement System and The Heinz Endowments, according to PEI data.

Zhang – who did not discuss fundraising during the panel – cited Belle International, a Chinese footwear retailer Hillhouse and CDH took private in 2017, as an example of a traditional company that has used technology to its advantage during the pandemic.

“[Belle] actually has been suffering a lot during covid, as you can imagine, with everyone doing Zoom and virtual conferences wearing pyjamas, [who] won’t need dress shoes,” he said. “In February and March, sales have been down more than 90 percent during China’s shutdown in the pandemic, but today let me report to you our sales are growing double-digits.”

Under Hillhouse and CDH’s ownership, Belle transformed its design model to shorten inventory times, enabling the business to move on from the winter collection and order the new spring collection earlier than some competitors.

“Belle has 120,000 employees – that’s impacting almost 300,000 to 500,000 people in terms of families,” he added. “A lot of people thought business could go under because of the threat of e-commerce and other retailers, but we ended up going out of this crisis much stronger both financially and employee morale and confidence.”