Hillhouse Capital: The alarming growth of Chinese private equity

Hillhouse is the figurehead of homegrown Chinese private equity, although as an institution it is somewhat unusual and owes at least as much to the patient techniques of the Yale Investments Office as it does to mainland entrepreneurial zest. 

Hillhouse, under CEO Lei Zhang, is the name everyone’s talking about in Hong Kong and Beijing: its $10.6 billion fundraising, which closed in September, was Asia’s largest-ever private equity capital raise and the deals it is involved in are some of the most interesting and transformational in the region.

The underlying trend is not just noteworthy but also a little alarming. According to the Asset Management Association of China (Amac), there were 66,400 private funds in China at the end of 2017, with Rmb11.1 trillion ($1.6 trillion) under management. 

Local governments have begun to create special zones for private funds; one, a town called Yuhuang Shannan in the tech-savvy city of Hangzhou, has signed a memorandum of understanding with Greenwich, Connecticut, where many US hedge funds reside. Yuhuang Shannan had 2,758 firms managing Rmb1.12 trillion as of July 2018, according to CNBC.

Why alarming? Expansion at a pace like that – about eightfold from 2014 to 2018 – is never entirely healthy. Amac also said it “lost contact” with 163 private fund institutions in the first six months of 2018, which suggests they have failed to renew their registration status, either winding down or just disappearing, sometimes with the money they raised. 

Crackdown

A national crackdown on debt, and on risk generally, is leading less sustainable private equity and hedge fund operations to dissolve, as has already happened in the peer-to-peer lending sector. The steady drop in Chinese stock markets this year, particularly among beloved tech names like Tencent, has not helped. 

Nevertheless, the strength of the top names, their growing professionalism, their influence and their willingness to work collectively, is an enormously powerful force in the markets. Most professionals consider it positive – new money coming in with a different investment thesis to what is already out there. The pattern of taking Chinese assets private and then going public again is sophisticated, interesting and potentially lucrative. 

It doesn’t necessarily mean a whole lot of advisory work for investment banks, however. Names like Hillhouse Capital have plentiful internal expertise, are more than capable of generating their own ideas and, in most cases, can execute them with only incidental external help. Banks wanting a seat at this table need not only a balance sheet but some visionary thinking too.

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