He almost failed to pass the junior high school entrance exam, but now manages more than 500 billion yuan of funds

He almost failed to get into junior high school, but now he manages more than 500 billion yuan in funds.

In 1972, a couple in Zhumadian City, Henan Province gave birth to a boy and gave him a name that was absolutely common at the time - Zhang Lei.

After going to school, everyone found out that this boy was a typical poor student. He had no interest in the regular classes at school and his mind was full of fantasies of "traveling around the world with a sword in hand".

The hit movie "Shaolin Temple" at that time gave him the idea of ​​learning the unparalleled martial arts, and he left home for Mount Songshan.

However, Zhang Lei showed some talent in running a business: during the summer vacation, he often went to the nearby railway station to set up a stall and rent out comic books.

It was completely expected that he would fail to pass the entrance exam to junior high school after graduating from elementary school. But luck was on his side—the junior high school score line was 140, and he scored 141. This is how he later dominated the investment circle.

01 The Awakening of a Bad Student

Although Zhang Lei doesn’t like going to school, he likes reading extracurricular books very much.

Since his parents had to go to work, they often entrusted him to a relative who worked in a library, which allowed him to indulge his addiction to reading.

At first, he mostly read literary books such as essays and biographies, but soon he was no longer satisfied with this taste and began to read academic books with more rigorous logic and more in-depth research. However, this kind of book is too difficult for a middle school student, especially one with such poor grades, to read, which directly stimulated his enthusiasm to study hard in school.

In his second year of high school, Zhang Lei began to catch up, and in the college entrance examination a year later, he was admitted to the International Finance major of Renmin University of China with the top score in the liberal arts in Henan Province.

Zhang Lei’s high school graduation photo. The 4th from the right in the 5th row is Zhang Lei.

The year was 1990.

That year, senior management was making final preparations for the opening of the A-share market.

That year, Zhang Lei, who received the admission letter, also expanded his business that summer. He found that books that taught people how to get rich quickly and described how the Shenzhen Special Economic Zone developed rapidly sold much better than comic books. He also sold water, instant noodles and Hunan sausages. He earned 800 yuan that summer, while a grassroots civil servant at that time only earned 80 yuan a month.

In the blink of an eye, it was 1992. In the summer when Zhang Lei was a sophomore, the flames of the stock market had spread across the country. People flocked to Shenzhen Futian with borrowed ID cards to snap up new stock subscription lottery tickets.

This year, Zhang Lei, who served as the president of the Student Union, organized a stock market simulation competition on campus and was invited to CCTV to talk about securities analysis. This was his first contact with the capital market.

But until he graduated at the age of 22, he never thought that he would make this his career ten years later.

After graduating from Renmin University, Zhang Lei did not join a financial institution like other students, but went to a mineral mining and trading company - China Minmetals Group. He often took green trains to acquire mines all over the country. There were many remote places that others were unwilling to go to, but Zhang Lei was eager to go because it would allow him to see a wider and more vibrant world.

When Zhang Lei traveled by train and minibus to Yunnan, Sichuan and Qinghai to look for minerals, China’s Internet was still in the “Stone Age”:

Jack Ma had just resigned from Hangzhou Institute of Electronic Industry and raised 20,000 yuan to start China Yellow Pages;

Zhang Chaoyang had just received venture capital from two professors from MIT and returned to China to create Sohu’s predecessor - Atnews;

Ma Huateng has just become the webmaster of the Huiduo.com branch;

Shen Nanpeng of Sequoia was still working at Deutsche Bank at the time. He drank and drank at the wine table during the day and returned to the hotel to write materials at night.​

02Work-study program at Yale

After traveling across most of China, Zhang Lei saw that more and more of his classmates were studying abroad. His childhood dream of “traveling the world with a sword” was rekindled: he wanted to go further and see a bigger world.

In 1998, Zhang Lei decided to study abroad.

He had admission opportunities from seven schools at the time, and he chose Yale mainly because Yale offered scholarships.

Who knew Yale also had its own tricks? It turned out that the scholarship was only for the first year. With no money for tuition and living expenses for the second year, Zhang Lei could only work part-time and look for a summer internship.

In the morning, Zhang Lei would walk 25 minutes from Yale University to New Haven Union Station, take the train to New York Grand Central Station, and then take the subway. This was the route he often took when looking for a job.

However, Zhang Lei’s weird train of thought made all the interviews go to waste.

Once, he went to a management consulting company in Boston for an interview, and the other party asked him a very typical question: How many gas stations should there be in a certain set area?

In the field of financial analysis, the standard solution to this problem is to infer the number of households from the population, then infer the number of cars, and finally calculate the corresponding number of gas stations.

But Zhang Lei was thinking:

What does a gas station really mean? In addition to refueling, does it also have the function of a convenience store? Will cars in the future need to be refueled? Will new modes of transportation emerge...

The interviewer looked confused and, as expected, rejected him.

Ultimately, Zhang Lei, who had no chance of working in a Wall Street investment bank, did not follow the typical career path of an MBA student. Instead, he thought about starting his own business.

In 1999, the Internet wave was already surging in Silicon Valley, and China had bid farewell to the "Stone Age." Zhang Lei, who was three months away from graduation, applied to his advisor for permission to retain his degree for one year. He then returned to Beijing with two classmates to establish a venture capital exchange platform - China Entrepreneurship Network. Simply put, it is a financing intermediary that helps companies find money and helps money find companies.

At first, the business went smoothly and attracted investments, but then the Internet bubble burst in the millennium and their business gradually died down. However, this entrepreneurial experience made him experience the cruelty of the business world firsthand and also saw the potential of the Internet industry.

After returning to Yale, Zhang Lei, who was still worried about his livelihood, would never have thought that when he accidentally passed by a Victorian-style building, the wheel of fate had begun to turn.

03Svensson's intern

That small building is where the Yale Investment Office is located. All the donated funds received by the school are handed over to this office to manage in order to maintain and increase their value.

The person in charge is David Swensen. Although he is not well-known among the Chinese people, his books are regarded as bibles by institutional investors in the United States. During the 30 years that he was in charge of the Yale Fund, he brought $34.1 billion in investment income to Yale.

Former Morgan Stanley chairman Barton Biggs once said: "There are only two truly great investors in the world, they are Swensen and Buffett."

China’s China Investment Corporation and Social Security Fund also use Svensson’s book as designated textbook.

When 28-year-old Zhang Lei met David Swensen in the interview room, he didn’t know that he was starting a world-class dream.

Svensson asked Zhang Lei many questions about investment, and Zhang Lei answered "I don't know" to most of them. However, this surprised Svensson at his honesty, and he eventually gave him the internship opportunity.

The Yale Investment Office has always been known for its rigor and professionalism. People here must have a sufficient sense of responsibility and mission, and especially have almost stringent requirements for moral character.​

Zhang Lei and Professor David Swensen took a photo in 2002

It was here that Zhang Lei mastered a rigorous analysis system, in-depth research methods and a complete thinking framework, and since then he has had an indissoluble bond with investment.

After graduating from Yale, Zhang Lei worked as a researcher for a global emerging market investment fund and as the chief representative of the New York Stock Exchange in China. These two jobs gave him unique opportunities and perspectives to observe emerging market countries.

He keenly felt that after going through the bubble period and the low tide period, China’s Internet industry has ushered in an extremely boiling era:

Just as Wang Shi, Zhang Ruimin, Liu Chuanzhi and Pan Ning all started their own businesses in 1984, Tencent acquired Zhang Xiaolong’s Foxmail, Liu Qiangdong focused on expanding the e-commerce business, Wang Xing founded Renren, Zhou Hongyi founded Qihoo 360, Zhuang Chenchao founded Qunar, and Li Xiang founded Autohome, all in 2005.

Quietly, the number of Internet users in China has exceeded 100 million.

Quietly, China has become an Internet power second only to the United States.

Many stories that later stirred up waves in the Internet world were foreshadowed in this year.

All of this made Zhang Lei feel that it would be a blasphemy to this era if he did not participate deeply in this historical process.

He resolutely resigned and returned to China to prepare for his second business venture.

04 Second entrepreneurial journey, mentor came to the rescue

On Children’s Day in 2005, 32-year-old Zhang Lei founded Hillhouse Capital.

Zhang Lei and several partners had no experience in directly managing investment funds. At the time, they had almost nothing except being fearless and happy like children. There was no initial capital, no decent office space, but they were just looking forward to practicing value investing in China and were full of genuine curiosity and determination about the future.

Going long on China is Hillhouse’s slogan. When raising funds, Zhang Lei’s slogan was:

"China is rising, the high-speed train is leaving the station, please get on board now!"

What he was selling was not the story of an industry, but the story of a country. However, the embarrassing thing was that almost no investors came on board, and Hillhouse Capital gained nothing.

In difficult times, my former mentor came to the rescue.

In July, David Swensen personally brought a team from the Yale Investment Office to Hillhouse for an on-site inspection.

In Hillhouse’s cramped office, Swensen asked the young team questions big and small, including investment plans, post-investment management, exit strategies, various expenses, etc., and then threw $20 million at them.

For Hillhouse, this long-desired funding is not only an affirmation of itself, but will also bring about a huge advertising effect.

Since then, Yale has continued to make additional investments.

Zhang Lei also brought huge profits to Yale: as of April 2020, Hillhouse’s total returns to Yale have reached US$2.4 billion.

In addition, in order to give back to Yale, Zhang Lei donated 8,888,888 US dollars to Yale in 2010. Zhang Lei also became the only Chinese trustee of Yale.

Where did they invest the initial “huge sum” of 20 million US dollars?

The answer is: All In Tencent in the secondary market.

At that time, Tencent had just been listed for more than a year. At that time, Li Ka-shing’s second son, Li Zekai, believed that Tencent’s heyday had passed and was no longer optimistic about it. But Zhang Lei saw that all the business cards of all kinds of people on the streets were printed with QQ numbers. He believed that as long as there was such terrifying traffic, making money would be a matter of minutes, and expanding new business would be a piece of cake. Based on this logic, he invested heavily in Tencent.

Tencent’s valuation has increased 250 times from less than US$2 billion in 2005 to US$500 billion in February 2020.

Zhang Lei won the bet.

05The ultimate appearance

Although he won the bet against Tencent, no one in the VC/PE world had heard of Zhang Lei’s name before 2011.

In the secondary market, he has achieved a return rate of more than 35% year after year (the IRR announced to the public in 2012 reached 52%), which has exceeded Buffett's level of 21%. But he is still not well-known in the investment circle.

It was the next "battle" that made his story spread throughout the world.

In 2010, a financing negotiation was underway in a conference room at the Ping An Guojin Building in Beijing.

On one side of the table was Zhang Lei, and on the other was Liu Qiangdong. Different from other negotiations in which “the entrepreneur makes the offer and the investor haggles,” in this negotiation, Liu Qiangdong said that only US$75 million would be enough, but Zhang Lei insisted on investing US$300 million, otherwise he would not invest.

Zhang Lei believes that Alibaba has already completed the light-asset e-commerce business, and only the heavy-asset model of integrating the supply chain still has a chance.

At that time, many e-commerce companies were leaning towards a light-asset model, but no logistics company could solve the user experience problem of the "last mile". Zhang Lei once asked Bezos, "What is the most regrettable thing?" Bezos said that the most regrettable thing was that when Amazon was founded, the United States already had logistics giants such as UPS, and he lost the opportunity to integrate the supply chain.

And isn’t the heavy asset model that Liu Qiangdong wants to create a combination of “Amazon + UPS”?

But if you want to adopt a heavy asset model, you can’t get results without spending money, so Zhang Lei insisted on investing $300 million, or not investing at all.

At that time, both the venture capital circle and the company were full of doubts. A colleague wrote a thick stack of materials to Zhang Lei, kindly advising him that JD.com had various problems, but Zhang Lei persisted.

Later Zhang Lei recalled:

"We are doing this kind of e-commerce business, and I feel there are a million ways for you to die miserably, so we lost $300 million, and the entire fund lost two or three points, which is insignificant to me, but we have to bet on the things we believe in most."

In the end, not only did the business not lose money, but it made a huge profit:

Hillhouse Capital holds 309 million shares of JD.com, with a cost price of approximately US$0.825 per share. Based on JD.com’s closing price of US$33.19 per share on April 17, 2015, Hillhouse Capital’s rate of return reached a staggering 40 times!

Zhang Lei became famous in one battle and made a "killer debut" in the venture capital circle.

In the past, when they met entrepreneurs, they had to spend 15 minutes introducing themselves. But after 2011, they only had to say: We are the ones who invested in JD.com...

06Strategic Loss

Zhang Lei’s vision is not limited to the emerging Internet sector. He has also invested in a traditional consumer goods company, Blue Moon. This industry is an area that venture capital companies rarely venture into.

The weird thing is that he insisted on turning the profitable Blue Moon into a loss-making company for three consecutive years.

As early as when Zhang Lei just returned to China, he found that he could not find the laundry detergent he was used to in the United States in the supermarket. At that time, laundry detergent was still a high-end product in China.

The laundry detergent market is basically occupied by foreign brands such as Procter & Gamble and Unilever, but they are “unambitious” and no longer develop new products, thus ignoring the trend of consumption upgrading in China.

According to Western experience, with the popularization of fully automatic washing machines, people will generally abandon laundry detergent and use laundry liquid instead - because laundry liquid is easier to rinse and more suitable for machine washing.

Zhang Lei first told Procter & Gamble and Unilever about this judgment, but the two responded:

Only when the GDP per capita exceeds US$8,000 will a country’s laundry behavior shift from washing powder to washing liquid. At that time, China’s GDP per capita was less than US$5,000, so they judged that the Chinese market was not ready yet.

But Zhang Lei believes that China cannot be viewed based on averages, because the consumption levels of first- and second-tier cities and fourth- and fifth-tier cities are too different. He felt this deeply when he went to acquire mines all over the country.

At that time, the country's population with a per capita GDP of more than US$8,000 had reached 200 million, which was completely suitable for making laundry detergent. So Zhang Lei found Blue Moon.

The founders of Blue Moon, Luo Qiuping and his wife, were both university chemistry teachers and idealists who had always wanted to make a truly “good product.” Zhang Lei successfully persuaded Luo Qiuping not to make short-term money, to boldly enter new product categories, and to become the number one laundry detergent in China.

With Zhang Lei’s financial support, Blue Moon began to transform from stable profits to three consecutive years of losses.

But after this squat, Blue Moon’s revenue increased tenfold in six years.

In 2014, Blue Moon’s sales in the laundry detergent industry were greater than the combined sales of Procter & Gamble and Unilever. In 2020, Blue Moon laundry detergent’s market share has reached 24.4%, ranking first.

In December 2020, Blue Moon was successfully listed in Hong Kong. Hillhouse Capital, which has been with Blue Moon for ten years, not only earned 8 billion in returns, but also made Blue Moon a classic case of a local brand defeating a multinational company.

07 “Four-in-one” investment method

Starting with Blue Moon, Hillhouse has far exceeded the level of "financial investment" and has become a kind of "incubator."

After that, Hillhouse Capital successively operated several large orders according to this model:

In April 2017, Hillhouse Capital acquired Belle International, which had been losing money for many years, for RMB 46.9 billion;

In January 2018, it acquired a logistics real estate company, GLP, for RMB 79 billion, becoming the largest private equity M&A case in Asia;

In February 2020, it acquired Gree Electric Appliances for 41.7 billion yuan;

In March 2021, it acquired Philips’ home appliance business for 3.7 billion euros.

The reason why Hillhouse’s model is weird is because: looking at all the domestic investment institutions, you will find it difficult to find a similar benchmark in any dimension.

For example, the equally famous Sequoia China and SoftBank Vision Fund have always been engaged in financial investment, focusing on efficiency, and have never thought about sinking into the industry.

Those who make large-scale mergers and acquisitions of companies mostly do so for price arbitrage, so they usually resort to massive layoffs, management changes and other measures to quickly improve performance without considering the long-term development of the company.

Funds that operate in the secondary market will just make a quick buck and run. Unless they are stuck with something, who will stay with a company for a long time?

The starting point of Hillhouse’s mergers and acquisitions is not simply to pursue returns, but to help them transform, expand markets, and find new growth models.

It is for this reason that Hillhouse Capital will win in the battle for Gree’s equity - Dong Mingzhu made it clear: What we need is capital that truly helps Gree develop, and we will never accept barbarians.

Hillhouse’s similar operations include:

In 2015, Hillhouse Capital and Mayo Clinic, the top-ranked comprehensive hospital in the United States, jointly established Huimei Medical Group to introduce Mayo Clinic’s advanced medical technology and training system to China;

In 2017, Hillhouse introduced Peet’s Coffee, the “ancestor of Starbucks”, to China, and opened its first flagship store on Donghu Road in Shanghai;

In 2018, Hillhouse introduced Stone Brewing, one of the top ten craft breweries in the United States, and opened its first flagship store in Asia on Yuyuan Road in Shanghai;

In 2019, Hillhouse also acquired Loch Lomond Group, a traditional British whisky brewing company with hundreds of years of history, and decided to help it expand into the Asian market using mobile Internet, new retail and other models.

For the elites in the venture capital circle who are good at calculation, this kind of hard work is either not cost-effective or not their forte. Hillhouse has created a unique "four-in-one" approach.

Could it be that this is a talent that only liberal arts students who dream of traveling the world with a sword and fail to answer the gas station question correctly have?

08Practice long-termism

Zhang Lei is a loyal supporter of Buffett’s “value investment” philosophy. In 2014, he visited Buffett’s home, and Buffett personally drove to pick him up.

You know, many people would spend millions of dollars to have lunch with Buffett.

But the term value investing, although it sounds nice, is often incomprehensible and has now almost become an object of public ridicule.

Zhang Lei gave his own interpretation:

think big, think long; 

Long-termism, be friends with time: find a firm practitioner of the great pattern and be his long-term partner;

There is only one criterion for real investment: whether it is creating real value and whether this value is beneficial to the overall prosperity of society;

There are some things that cannot be done, so don’t do them from the beginning;

There is only one moat in the world, and that is entrepreneurs constantly innovating and madly creating long-term value.

Wang Mingfu, chairman of Hejun Group, once had a private chat with Zhang Lei. When talking about how to invest in projects, Zhang Lei said:

Choose entrepreneurs who think big and think long-term and invest in their dreams.

This kind of idealistic statement usually only appears in high-sounding speeches. But it was surprising that Zhang Lei said this in a verbal conversation between the two.

He has mentioned on different occasions:

Many people are obsessed with the thrill of making quick money, because from the perspective of short-term returns, making quick money can quickly prove their abilities, but this is undoubtedly dangerous.

Because it can easily paralyze your nerves. Once investors lose the spirit of pursuing truth and the ability to understand things, they may lose a certain instinct for positive growth. Those who make quick money will find that the road is getting narrower and narrower. We also have some opportunities to make quick money, but we dare to say "no", we don't make money that does not belong to us.

In order to practice long-termism, Hillhouse only raises "long-term funds" - such as endowment funds of the world's top universities, sovereign wealth funds, pension funds, charitable funds, and overseas family funds - because these funds have enough patience and foresight and will not make it overly focused on short-term returns.

Hillhouse’s corporate culture is also consistent with his investment thinking:

Talking about money is not allowed within Hillhouse. Zhang Lei doesn’t want anyone to boast about how much money they make. One of his mantras is: making money is just a by-product of what we do.

Analysts will not face performance pressure due to failure to find good investment opportunities in the short term, and promotions and bonuses are not linked to rates of return.

Zhang Lei never requires that "a research report must derive a certain trading decision." Hillhouse is tolerant enough towards some seemingly invalid research.

These are unimaginable in other investment institutions.

09 Imperfect details

If you think Zhang Lei is amazing after reading this, you are wrong. In judging the trends of some individual stocks, he is not even as good as the "folk stock god".

Some time ago, the double reduction policy was introduced in education, and related education stocks were also "wiped out". Hillhouse Capital liquidated its holdings in TAL and New Oriental in advance and accurately, and was once considered to have "insider information". But in fact, while he continued to reduce his holdings in TAL and New Oriental after 2019, he invested US$1 billion in Yuanfudao in early 2020 - he could not escape the unpredictable policy risks.

In addition, he made a series of mistakes:

In the second quarter of 2018, Hillhouse Capital spent US$1.2 billion to buy a large stake in Alibaba, but sold off all its holdings in the third quarter. It was a small high point when it was bought, and a trough when it was reduced. Later, the stock price hit new highs.

In the first half of 2018, JD.com’s performance plummeted and Hillhouse Capital also significantly reduced its holdings. Later, JD.com’s stock price nearly tripled.

In February 2020, Hillhouse Capital chose to liquidate its holdings at NIO’s lowest point (which was when Hefei took over), but it was later proved that it sold at the bottom.

However, if you think he is mediocre because of these mistakes, you are wrong again.

In the capital market, you can't always operate perfectly.

The pursuit of perfection in everything is precisely the reason why many people do nothing. This is because it means that they can’t grasp the key points and are prone to frustration.

Success or failure often depends on a few key steps. You have already made 40 times the money on JD.com, would you still care about the last two times?

Think big, think long, and let go of those “perfect details”.

There are not many people who can truly understand this, and even fewer who can understand and put it into practice, so there is only one Hillhouse in China.

Hillhouse Capital has now become an investment institution covering the entire industry chain and the entire life cycle, managing more than 500 billion yuan in funds, firmly ranking first in the country. The average annualized rate of return has also reached an astonishing 40%. Looking back at China’s business history over the past fifteen years, Hillhouse Capital is almost always involved in any unicorn company.

We don’t know whether Zhang Lei will still remember his childhood experience of learning the unparalleled martial arts at Mount Songshan, or whether he still remembers all the companies he has invested in, many years later. But he will definitely not forget the day when he happened to pass by the Yale Investment Office.