8/18/2015

ZhangLeihasLunchwiththeFTFT.com

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June20,201411:59am

ZhangLeihasLunchwiththeFT
ByHennySender

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ThebillionaireChinesefinancierwasamongthefirsttoseethepotential
inhomegrowninternetcompanies.Hetalksaboutacareerthatbegan
whenherentedoutcomicsattheageofseven

tisagloriousspringSunday,thedaybefore
commencementatYaleUniversityinNew
Haven,Connecticut.Amongthemanyalumni
returningtothecampusisbillionaireChinese
financierZhangLei,41,whoisafamiliarfigure
here.In2010heannouncedagiftofthepropitious
amountof$8,888,888toYaleSchoolof
Management,thelargestdonationmadetothe
businessschoolfromoneofitsgraduates.
IntheworldbeyondYale,however,Zhangislittle
known.Yetherunsa$13bnfundinChina,
HillhouseCapital,whichhasafocusoninvesting
inChineseinternetentrepreneursandstartups.
ThefundisnamedafteranavenueinNewHaven
thatsablockfromwheretheYaleinvestment
officeusedtobelocated.Thisoffice,which
managestheuniversitys$20bnendowment,is
whereZhanggothisstartinfinanceasastudent
intern.
JamesFerguson

ItistemptingtocompareZhangwiththeUS
financialentrepreneursofthe1970sand1980swhostartedthenowpublicbuyoutfirms,such
asKKRorBlackstone,althoughherejectssuchparallels.Zhangbuilthisinvestmentfirmby
beingamongthefirsttobackChinesemainlandinternetentrepreneurs,amongthemTencents
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founderandchiefexecutive,PonyMa.Tencent,alongwithJackMasAlibaba,isoneofthe
mostvaluableinternetcompaniesinChina.Itismoreaccurate,perhaps,tolikenhimtoSilicon
Valleysventurecapitalists.
WevearrangedtomeetatatableinthesunoutsideNicasMarket,agroceryanddeliashort
walkfromthecampusandoneofthefewplacesopenforlunchonaSunday.Zhang,indark
jeansandadarkpoloshirtwithlongsleevesandblacktrim,blendsinamongthepassing
students.
AsIsitdownhetellsmehewillchangeintoatuxedolatertoattendareceptionhonouring
DavidSwensen,whohasbeenchiefinvestmentofficerfortheYaleendowmentsince1985.
SwensenhasbeensomethingofamentortoZhangsince1999,whenZhangtookSwensens
classattheYaleSchoolofManagementandwonacovetedinternshipattheinvestmentoffice.
IamamazedandpleasedthatZhanghasagreedtomeetmeIhavebeenaskingforalong
timeandthisishisfirstmajorinterviewinEnglish.Iaskwhyheavoidsthelimelight.He
repliesbyrecitingaTaoistsayinginChineseabouthowfragrantpeachandplumtreesdonot
speakyettheworldfindsapathtothembywayofexplanationandwritesthecharactersin
mynotebook.
IaskhowhecametobeastudentatYale.Bornin1972inZhumadian,avillageinHenan
province,centralChina,Zhangdoesntcomefromawealthybackground.Hescoredthehighest
marksintheprovinceonhiscollegeentranceexamsandsowonascholarshiptoRenmin
UniversityinBeijing,wherehestudiedfinance.
Hewantedtogoontograduateschoolabroadbutdidnthavethemoney.ThereasonIjust
appliedtograduateschoolsintheUSwassimpletheyweretheonlyonesIknewthatgave
scholarships,heexplainsinlightlyaccentedUSEnglish.IreceivedascholarshipfromYale.
Unfortunately,whenIfirstcametoYaleIdidnotevenrealisethatthescholarshipIgotwasfor
onlyoneyear[ofthethreeyearcourse].Iurgentlyneededtofindwork.SoIgotajobatthe
investmentoffice.
Swensensawthepotentialinhisearneststudentandtaughthimtheartofinvesting.Whileat
Yale,ZhangtranslatedSwensensbook,PioneeringPortfolioManagement,An
UnconventionalApproachtoInstitutionalInvestment(2000),intoChinese,intheprocess
makingupnewMandarinwordsforendowmentandfiduciary.
...
AtYale,Zhangreadeverythinghecould.WhenIlearntthatannualreportswerefree,Isent
awaytoeverycompanyintheS&P500,hesays.Icouldntbelievetheywerefree!Ilearntso
muchfromthemanagementdiscussionsectionaboutbusinessandthingslikereturnoncapital
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andreturnonequity.Itwasverygoodtraining.
Hetellsmethatatonepoint,desperateforaninternship,hehadaninterviewwithoneofthe
managementconsultanciesinBoston.Itwasanillfatedencounter.Shortoffunds,Zhanghad
askedthefirmtopayforhistrainticketinadvanceratherthanbeingreimbursedlater,asisthe
norm.Theyaskedmeaboutacasestudyabouthowmanygasstationsshouldacertain
companyideallyhavewithinacertainregion.Iasked,Whydopeopleneedgasstations?
Whenyouthinkaboutit,itisnotafoolishquestion.Whatisthefunctionandcanitchange?Is
it,forexample,agoodplacetodogroceryshopping?Canitbereplaced?Becomeobsolete,say,
becauseofelectriccars?Butthispersonlookedatmepityinglyandsaid,Perhapsyoudont
havetheintellecttobeaconsultant.IhadmanyfirstroundinterviewsbutIrarelywasinvited
forthesecondround.
ThatanecdoterevealsmuchabouttheinvestmentphilosophybehindHillhouse.Wealways
focusonwhatthebusinesswilllooklikeintheverylongterm,Zhangsays.Weaskthemost
basicquestionsandthatoftenleadsustodifferentinsights.
Ashetalkswegetuptojointhelonglineatthedelicounter,andselectourlunchfromthelist
ofsandwichesandsaladswrittenonthebackwall.Zhangasksforahotchickensandwichona
hardrollandapickledbeansaladwithpeppers,whichhesaysremindshimofoneofhis
favouritedishesinhishomevillage,steamednoodleswithlongbeans.IaskforaPortobello
mushroom,redpepperandcheesepaniniandaspicymushroomsalad.Hepicksupabigbottle
ofsparklingwaterandplacesitonourtraybeforeIpaythecashier.
Iknewtherewas
somethingbrewingin
China.Therewasso
muchenergy.You
couldmakelotsof
money.

Zhangfirstshowedentrepreneurialtalentwhenhewasseven.His
housewasclosetotherailwaystationconnectingBeijingto
Guangzhou,thebiggestcityinsouthernChina.Duringthesummer
theboysetoutchairsclosetotherailwaystationandrentedouthis
collectionofcomicstopeoplewaitingfortrainsorthosesimplyout
forastroll.

Asateenager,inthesummerbeforehewonascholarshipfor
universityinthecapital,Zhangexpandedhislibrarybusiness.This
was1990,DengXiaopinghadcometopowerandpeoplewereinarushtomakemoneynew
magazineswerededicatedtotopicssuchashowtogetrichquickandhowtogettothe
boomingspecialeconomiczoneslikeShenzhen,whichhadbarelyexistedevenhalfadecade
earlier.Zhangboughtthetitlesinbulktosellon.Chinawasonthevergeoftakingoff,hesays
aswereemergewithourfood.
Tweetthisquote

...
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Wehavetobreakoffforamoment:whilewewentinsideZhanglefthisblackjacketonhis
chairbutawomanwithachildinapramhasignoreditandclaimedthetable.Zhangsays
nothing,putsourtrayontheadjacenttable,whichlacksaparasoltokeepoffthesun,and
moveshisjacket.Weareluckytogeteventhisspottheadjacentcarparkisfull,andevery
tableoccupied.TherearenotmanychoicesinNewHavenonaSunday.
Oncesettled,hegoesonwithhisstory.Inthebeginning,IhadinventoryproblemsandI
foundIwasspendingalltheprofitsonbuyingwater[forpeople]todrink.ThenIfiguredoutto
orderonlyafewmagazinesandseewhichonessold.AndIbegantosellwaterandfastnoodles
andspicyHunansausages.Ifyouboughtthebundledpackage,Iwouldofferadiscount.When
hemovedtoBeijingtostartcollege,thenowexperiencedsalesmanhadRmb800(about$170
atthetime)inprofits.
Zhangtellsmehehadarelativelycarefreechildhood.Hisparentsgenerationwentthroughthe
culturalrevolutionbutwhenhewasbornin1972theupheavalwasfinallynearinganend.His
parentshadsufferedalotbuttheywerealwaysoptimisticandnevertalkedaboutit,hesays.
MyparentsgenerationneverhadtheopportunitysetIhad,hesays.Evennow,heisfrugal,
almostascetic.WhenIaskifIcangethimadessertfromtheicecreamorbakerycounteror
somethingotherthanwatertodrinkhepolitelydeclines.Ilooklonginglyattheotherpatrons
ofNicaswalkingpastus,icecreamconesdrippinginthehotsun.
Today,manyofthemostrecentChinesegraduatesfromtopUSuniversitiesprefertostayin
NorthAmericatowork.Theexceptionsaretheprincelings,thechildrenofChinasruling
elite,whohavenochoicebuttogohome.YoungexpatsbegintoseeChinathrougheyesthat
havebecomeAmerican.Theyseethepollution,thecorruptionandthelackoffreedomof
expressionbackhome,andworryaboutadjusting.
Zhang,however,sayshealwaysknewhewouldreturntoChina.Iwentbackin2005,headds.
AfterleavingYalehehadworkedforaWashingtonbasedemergingmarkethedgefund.At
thattime,IknewtherewassomethingbrewinginChina.Therewassomuchenergy.Youcould
makelotsofmoney.Thereweresomanyvibrantentrepreneursandtechstartups.Onhis
returntoChina,Swensengavehimaninitial$20mfromYaletokickstartHillhouse,with
another$10msoonafter.
In2005,itwasntobvioustoinvestorsthatthereweremanyvibrantentrepreneursandtech
startupsonthemainland.ItusedtobethatthewholeworldlearntfromtheUS,saysZhang.
Initially,manypeopledismissedChineseinternetcompaniesasmerecopycatsofcompanies
establishedintheUSandelsewhere,withnooriginalbusinessmodelsortechnology.But
ChinahasleapfroggedtheUSinmanyways,especiallymobileinternet,Zhangsays.Thescale
andpaceofgrowthoftheinternetcompaniesinChinaexceedsanywhereelse.Today,the
mainlandhasabout600minternetusersandwillsoonbetheworldsbiggestecommerce
market.
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ZhangputmuchofthemoneyheinitiallyraisedfromYaleintoTencent,thelargestChinese
internetserviceandsocialnetworkingportal.Itwashisearliestinvestmentandamonghis
mostprofitable.Atthetime,though,hesayshewasworriedaboutTencentsQQsocial
networkingplatform.ToresearchTencentsstayingpower,hevisitedlocalmarketplaces.I
thoughtaspeoplebecomemoresophisticatedperhapstheywouldupgradetootherservices
andabandonQQ,hesays.But,inthemarketplace,everyonehadaQQnumberevenifthey
didnothaveacellorafax.Evennow,heretainsastakeinTencent,whichislistedinHong
Kong.
WhenChineseentrepreneursdodealswitheachother,Zhangis
oftenthebehindthescenescatalyst.Asalongtimeshareholderof
TencentandoneofthefirsttoinvestinecommercegiantJD.com
andthethirdlargestshareholderbeforeitsrecentlistingonNasdaq
hewasresponsibleforthestrategicpartnershipbetweenthe
Tweetthisquote
companies.Itmadeperfectsense,hesays.Tencentowned
ecommerceplatformsbutJDdidonlinebetterandhadalreadybuilt
outasupplychaininfrastructure,whileJDgotTencentsmassiveuserbase.
Chinahas
leapfroggedtheUSin
manyways,especially
mobileinternet

JDisAmazonandUPS,headds,bywayofillustrationofhowexactlyChinaisleapfrogging
thebusinessmodelspioneeredinSiliconValleyexplainingthatChinadidntreallyhavean
equivalentofaUPS,whilephysicalretailinginChinaisverymuchlessefficientthanintheUS.
ThelistingattheendofMaygaveJDavalueof$26bnandHillhouseprofitedyetagain.Its
original$255minvestmentwasvaluedat$3.9bnattheendofMay.(JD.comsfounder,
RichardLiu,isnowamemberoftheChinesetechbillionairesclub,alongwiththefoundersof
Baidu,Tencent,AlibabaandZhang.)
ZhangholdsinformalHillhousegatheringswiththeleadersofprivatecompanies,manyof
themtheconsumerandtechenterprisesinwhichHillhouseinvests,andmanyofthemonthe
vergeofgoingpublic.Theentrepreneursinmyportfoliocompanieslearnfromeachother,
Zhangsays,notingthathehasfosteredstudysessionsbetweenJDandahypermarketchainhe
hasinvestedin.Etailerslearnhowofflinecompaniesthinkandretailerslearnhowecommerce
companiesthink.
Hecitesapracticalexampleofcompanieslearningfromeachother:ZhanginvestedinBlue
Moon,aliquiddetergentmaker,andhaditsexecutivesmeetJD.ThatsessionledBlueMoonto
redesignitsliquiddetergentrefillpackssotheycouldfitmoreeasilyintoJDsdeliverybins.
Bulkyisanadvantagetoattractconsumersinaphysicalworldbutitisadisadvantageina
virtualworld,hesays.
NowZhangistakingtheChinesetemplateoffshore.TheChinesemodel,whichismobile
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driven,ismoresuitedtoemergingmarketsthantheUSmodel,whichisdesktopdriven,he
says.Thesocioeconomicprofileismoresimilar.WecanhelpcompanieslikeTencentgo
abroadandacceleratethegrowthofthemobileinternetelsewhereandothersalsocanleapfrog.
Itisawinwinsituation.WearechangingintraAsiantrade.
InIndonesia,forexample,ZhangcreatedajointventurebetweenTencentsWeChatmobile
messagingplatformandGlobalMediacom,Indonesiaslargestmedia,televisionandpayTV
conglomerate.IndonesianowislikeChinasomeyearsago,hesays.
Zhangseeshimselfastheproductofbotheastandwest.Hisinvestmentphilosophycanbe
summedupasamixofSwensensteachingsalongwiththoseoftheBuddhaandtheTaoist
sagesofChina.Aswefinish,herecitessomeTaoistaphorisms.Hetellsmehowimportantitis
nottochasetoomanyopportunities.Thereisflowingwaterallaround,heintonesashe
reachesforsomesparklingwater.YetIonlyneedtotakeasingleladleful[toquenchmy
thirst].
Inaworldofspeculators,Zhangis,likeWarrenBuffett,abuyandholdinvestor.(Thetwomen
havehadlunchtogether.)Hetakesprideinthefactthatmostofhisinvestorsarethe
endowmentfundsforYaleandotheruniversities.HeischairmanoftheYaleAsiaDevelopment
Council,hasbecomeatrusteeoftheBrookingsInstitutionthinktankintheUSandisvice
chairmanandtrusteeofhisalmamater,RenminUniversityinBeijing.Hetalksaboutgiving
awaymuchofhisfortune.
Zhangislateforhisnextmeeting.Hedeclinescoffeeorteaandpausesbeforeimpartingafinal
insight.Youneedtohavetheabilitytodelaygratification,hesays.Youhavetofocusandyou
havetohaveaclearmind.
HennySenderistheFTschiefinternationalfinancecorrespondent
IllustrationbyJamesFerguson

NicasMarket
603OrangeStreet,NewHaven,Connecticut
Mushroomsaladinoil$4.05
Beanandpeppersalad$2.88
Chickensandwich$5.00
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