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[New Fortune Interview]


As an Investor Managing RMB 35 Billion, a True Private Equity Superstar Reveals His Core Investment Principles!


New Fortune Interview

ZhangWei, Chairman of Co-Stone Capital

Those who have access to capital must have a clear understanding of the intricate characteristics of capitalism. Constraining the ambitions of capital growth and recognizing the greatest value of capital to the society are both challenges that display the personal values behind them. Co-Stone Capital’s unique investment strategy, emphasis on entrepreneurial spirit and even its concept of promoting technological innovation and social progress through investments, are all driven by Zhang Wei’ unique value set and investment philosophy.

Author: Su Longfei

Source:(ID:New Fortune)

Original title: Zhang Wei: Uncommon Sense of Capital


  In a large and emerging market such as China, it seems that every industry is plagued with intense competition. To stand out from competitors, a company has to either win through scale or differentiation, and the PE industry is no exception. If JD Capital, one of thecountry’s most active players in the hot Pre-IPO space, is counted among the former, then Co-Stone Capital, which has achieved both a high success rate and a high rate of return through focused investment rather than following hot money, can certainly be counted as the latter.


Behind the helm of Co-Stone Capital, which is winning through differentiation, is Zhang Wei with his distinctive investment principles. According to Zhang Wei: "We do not invest on a macro-economic level, nor rely on macro-economic trends. Neither do we invest in projects based on which industries are hot. Just because an industry is promising does not guarantee success. What we invest in are living businesses and outstanding entrepreneurial teams. We do not expect to transform a team and its founder because a business has its own important DNA which can’t be casually grafted in or introduced out of nowhere, nor do we expect to transformation the business model. What we do is intensive analysis of the industries wherein we have expertise, identify key areas where we can provide value, examine the movements and behaviors of the companies who have demonstrated competence in running their business, and analyze their organizational system and entrepreneurial spirit before investing in it."

By closely examining Zhang Wei and his personal journey in the PE industry we have a window through which we can better understand Co-Stone Capital.


Understanding Human Nature with a Sense of Compassion


From investment banking to private equity, Zhang Wei has been engaged in the equity investment business for the better part of his 20 year career. Zhang Wei defines equity investment as "a luxury product that doesn’t compete solely on scale within the asset management industry." The PE industry in which he is currently engaged is also known as a luxury within the equity investment space. With minimum investments of RMB 10 million and a high 7 year lockup for LPs, it is not possible for everyone to play. Successful GPs who operate these top luxuries must be senior craftsmen well versed in human nature, not just understanding capital flows and business operations. After all, the ultimate determinant of investment success is human nature - the thought process of the GP himself and whether he can grasp the human nature of the team being invested.


With respect to human nature, Zhang Wei happens to be a keen observer.


Zhang Wei was born in a small county along the Yangtze River – He County, Anhui Province. Similar to most 1960s era children in rural China, he was able to roam about freely with little oversight from parents or teachers. When he was in fifth grade, his parents acquired were able to obtain, through help from a friend, a County Library card for him. Throughout the remainder of his schooling, Zhang Wei immersed himself in books from the library.


Those days spent in the library set the foundation for Zhang Wei’s investment philosophy for Co-Stone Capital which he established years later. During that time, he focused on reading humanities books, and what attracted him was the fate of people. "Whether you read true stories, historical records, philosophical works, fiction or poetry, all the Chinese and foreign famous works are ultimately about nothing more than human emotions, namely the concern about the fate of the characters." Zhang said, "The world's most fascinating thing is observing people’s fate.”



It is natural that Zhang Wei chose Chinese as his major at university. It was the eighties, during which the thawing political climate brought about an eruption of new philosophies. Society as a whole was caught up in the exploration of new ideas and intense debates, and the university campuses were by far the most active. Zhang Wei learned a lot through reading a sea of books, "when you have read a lot of books, you will have a lot of conflicting ideas generating internal cognitive dissonance, the thoughtful resolution of which allows you to gradually establish your own identity and determine your own values," he said.


Even today, reading is not just a personal pastime for Zhang Wei, but strongly influences how he approaches daily interactions with others. "He likes reading books," Zaiwu Han, a Co-Stone Capital Managing Partner, said, " and he also likes to present books to his work associates, and will personally write book reviews."


Zhang We recently released a recommended reading list, which includes works such as Retirement on Mars - Elon Musk (Adam Jefferson), Water Level of Concept (Liu Yu), Reading Classics - Humanities Education in American Universities (Xu Ben), The Empire's Defeat - Pictures of the Late Qing Dynasty from a Western Perspective (Zhang Ming). Zhang Wei wrote an introductory paragraph for his reading list: "with his eyes like burning torches the philosopher Alice Flom had clear insight into the tragedy of the modern people - the irrepressible pursuit of money, honor and status. People's secular achievements are nothing more than money, reputation and status, which probably can be replaced and converted by each other. ‘We count the mighty as no more than muck, because each of them will soon be swallowed in the river of history.’ Lack of a deep concern about the meaning of life and human destiny will cause a person to be lost in the maze of secular achievements. "

  Zhang Wei is no stranger to secular achievements, but this drive has been ultimately surpassed by his pursuit of the meaning of life. Although he obtained a promising job in a department of the Anhui provincial government after graduating from university, he still felt limited in his ability to reach his full potential through that platform. At one point, he requested to transfer to a city or county level position to enhance his skillset. "I later discovered through my observations that even if I were to become the local top executive, there would still be numerous roadblocks to achieving my goals. In order to reach my objectives, it would be better to learn economics, understand the economy and find some ways to apply that knowledge into society than to become a government official.” said Zhang Wei.


In 1992, Zhang Wei, as one of the many workers abandoning politics for commercial jobs in that period, finally found his calling – Shenzhen. "One of the most important factors in relocating to Shenzhen was the very high salaries, so I could not help but come here," said Zhang Wei half-seriously and half-jokingly, recalling the scene that year.


When Zhang Wei moved south, he carried with him two books in his bag: one was called Blocked Society, and the other Bureaucratic System Research. "At that time there was an idea in my mind that I should return to the government to serve the people after earning my fortune." For Zhang Wei, who’s ambitions at the time included self-cultivation, family harmony, country management and world peace, this idea was logical. What he did not realize then was how far he would go in business and that investment could also contribute to the community.


Now, when his wife quips "what value is your work? It is nothing more than helping the rich earn a little more money," Zhang Wei will answer in earnest: "We are cultivating enterprises. Many small businesses and their owners will gradually mature through our investments and become leaders in some industries. The work itself has a certain social value. Earning money for the rich is, in fact, merely an outcome of doing so.




Enlightenment from Drucker’s Books, Building the Logic of Business


  Zhang Wei began to build his business methodology after meeting with two mentors - Peng Jianfeng and Bao Zheng.


Peng Jianfeng and Bao Zheng are professors in the Business School at Renmin University in China, and are well-known in the business community for assisting Ren Zhengfei to draft the Basic Law of Huawei. The origin of the story can also be traced back to Zhang Wei. "Before and after 1993, I worked with Professor Bao Zheng in writing a series of books called Modern Management System: Procedures, Methods & Scopes, which sold for RMB 1000 per set. Zhang Wei brought one back and came to Beijing to meet me after reading it," recalled Peng Jianfeng. Afterwards, when Zhang Wei was engaged in human resources management at the Baoan Group in 1995, he invited Peng Jianfeng and Baozheng to provide advisory services in setting up the company’s personnel assessment system. "He was the first one to ask me to do a consulting job. We went to work in Huawei after that."


Both Peng Jianfeng and Bao Zheng are advocates of Drucker’s management school of thought, and under their influence, Zhang Wei began to read Drucker’s books. Zhang Wei read and re-read the 700 page Management: Mission, Responsibility and Practice. What is a business? What is the mission and purpose of an enterprise? What is the essence of management? How to seek the sustainable development of an enterprise? Why must the core leadership team of an enterprise be unified in morality and justice instead of merely money? Zhang Wei found answers to these questions about business values in Drucker’s books that almost rise to the level of philosophy.


"Drucker's core thesis is that the enterprise, as an organization, must have its mission and ambition. The enterprise has only one goal that is to satisfy customers, so profits are not the goal but merely a result of business operations. The enterprise should take seriously its social responsibility and should not work exclusively for profits. A business made solely as a tool for making money for individuals won’t run too far,” continued Zhang Wei.

New Fortune Interview

Such Drucker-style keywords as "mission & ambition" and "un-mercenary" have a natural harmony with the ideas of Confucian scholars in Zhang Wei’s mind. While his previous reading helped Zhang Wei establish a value system based on a social dimension, from Drucker's books Zhang Wei found a source of thought that carried those values into the business dimension. It can be said that Drucker's corporate management thought is a framework built around Zhang Wei’s foundational values. "He made me feel enlightened, as if I could see a light in a dark tunnel," added Zhang Wei.


After moving into the business side, Zhang Wei, who was already very fond of reading, began to look at more business related books, of which three business biographies have had a significant impact on him: Father and Son about the development of IBM, Sony Road by Akio Morita, and the HP Way by HP's two founders - Hewlett and Packard. "They tell about the growth processes of these companies, the way to deal with the relationships between all quarters of society, the mission of entrepreneurs and the challenges to a business. In the early 1990s, these three books along with Drucker's formed my basic ideology about business,” explained Zhang Wei.


 After 2000, IBM CEO Louis Gerstner spent 10 years leading the giant company as it grew by leaps and bounds, from the huge losses when he took the position in 1993 to the $160 billion market valuation when he left his post, which further solidified Zhang Wei’s thoughts about entrepreneurship. "Even if it is one of the most famous companies with a 100 year history, experience shows that if there is no entrepreneurial management view, any organizational system or technology cannot support the business to grow long term. Even an outstanding company like IBM certainly didn’t lack technology, talent or an organization system but was missing the entrepreneurial spirit. A strong entrepreneurial spirit brings an entrepreneur better business intuition, a more indomitable will and more powerful execution, all of which are necessary to transform his company. My understanding is that both the organizational system and the entrepreneurial spirit are necessary to support the continued growth of a business,” continued Zhang Wei.


It is based on this ideological system that Zhang Wei always thinks highly of entrepreneurs who have shown the traits of mission and ambition, such as Zhang Tangzhi, Zhang Xiaocheng and Huang Bingliang of Shandong Liuhe Group and He Qinghua of Sunward Intelligence. And the high returns of 30 - 100 times achieved through investing in Shandong Liuhe and Sunward Intelligence is not only a confirmation of Drucker Thoughts but also a demonstration that Zhang Wei is able to effectively apply Drucker’s philosophy into investments. Based on his experience, Zhang Wei gives the evaluation of entrepreneurial spirit an especially important position in subsequent investments.


"I break down entrepreneurial spirit to three primary characteristics: The first one is a diligent, persistent and indomitable spirit, which is common to the majority of entrepreneurs. The second one is what many people do not have, namely, the spirit of adventure with which you can break away from convention and overturn rules. The third one is clear vision and breadth of mind, which is even more rare. The vision refers to being long term career-oriented with strong business ideals rather than being purely money driven; breadth of mind means an understanding that sharing upside is necessary for a business to succeed long term.

These three criteria are not only used by Zhang Wei for the evaluation of invested enterprises, but also used as a standard for the partners and employees of Co-Stone Capital. His break from convention is vividly projected in the maverick investment style of Co-Stone Capital, and his persistence can be seen through his partnership with OPPLE Lighting over four years.


When Zhang Wei was an EMBA student at CEIBS in 2008, he was in the same class as Ma Xiuhui, the founder of OPPLE Lighting. "He was attracted to our business and wanted to invest us," said Ms. Ma, “but I believed that we had sufficient good cash flow at OPPLE, so we had no financing needs. On the contrary, we had some surplus cash.” However, Zhang Wei did not give it up. "Later on, an international lighting company wanted to acquire us, but I had little experience in this regard and was also worried about being taken advantage of, so I entrusted them to negotiate for us. Through the process of the negotiation, I found they had a very keen vision and strong insights,” continued Miss Ma.


Based on this trust, Ma Xiuhui eventually entrusted Co-Stone Capital to manage hers excess cash by becoming an LP. "The rate of return exceeded my imagination," exclaimed Miss Ma, so the cooperation between the two sides continued to deepen. After OPPLE Lighting’s IPO plan was put on the agenda, Co-Stone Capital continued to help design its restructuring program, management incentives program and so on, and made an investment into OPPLE Lighting in 2012. Ms. Ma said, “We did not take the investment because we needed the money, we accepted the investment from Co-Stone Capital because of Zhang Wei's sincerity and their spirit of providing continuous services”. In the PE industry, it is not uncommon to see portfolio companies turn around and become LPs. However, it is truly rare for LPs to become portfolio companies. In October 2015, just before OPPLE Lighting applied for listing, Co-Stone Capital helped OPPLE Lighting establish an M&A Fund, further broadening the range of cooperation.


Even subconsciously, Zhang Wei seems to consider himself more of an entrepreneur than an investor, as he values and seeks to embody the industrial ambitions and the mindset of sharing upside that define his entrepreneurial spirit.


When Co-Stone Capital was formally established in 2007, Zhang Wei established a system for sharing ownership among the partners. Tao Tao, Managing Partner of Co-Stone Capital explained: "there were a total of five founding partners in the company at that time, with Zhang Wei holding 50% of the shares and the other four partners sharing the remaining 50%. The equity ratio of the four partners is assessed once every two years and adjusted according to the results. The shares given to new partners when joining come from the shares held by Zhang Wei, the largest shareholder. When Zhang Wei’s holdings are diluted to 2 times that of the second-largest shareholder, the holdings of all partners will be diluted proportionally.”


By the end of 2015, the equity ratio of Zhang Wei had dropped to just over 30% and the equity holding of the remaining six partners was slightly higher than 50%, with 15% of the equity reserved for equity incentives which are available to all senior executives except Zhang Wei.  


The rationale for this arrangement lies in the concept that because the firm combined is stronger than each of the partners individually, the profits should be shared. Co-Stone Capital’s core partner team has been able to maintain long-term unity and stability, which is directly attributable to Zhang Wei's sharing arrangement. Chen Yanli, another Co-Stone Capital’s Managing Partner joked: "It is never possible to perfectly split the spoils, but the desire to divide it equally solves many problems." Indeed, without a clear mechanism for sharing profits, there is no way to address the issue of corporate governance.


Zhang Wei's sharing is reflected in not only the level of equity and performance dividends but also in the sharing of power. Although Co-Stone Capital has a focused investment strategy, it is implemented through a democratic system of decentralized checks and balances. All of the partners, including Zhang Wei, observe the “one-person one-vote” system in the Investment Committee meetings, and even projects that Zhang Wei favors have been vetoed. Lin Ling, a Co-Stone Capital Managing Partner & Vice Chairman said: "If Zhang Wei is particularly optimistic about a project, he is bound to keep lobbying everyone in the meeting, but the project will ultimately be vetoed if others do not agree with his view.”


Vanke, one of leaders in China's real estate industry, has been advocating the concept of industrialization of buildings, and expects that the "factory prefabrication, on-site assembly" model will prevail for future buildings. A few years ago, one of Zhang Wei's classmates was seeking financing for such a venture project: "We introduced a technology from the United Kingdom, with which we can build modular houses", said his classmate who had bought and was developing a piece of land in Zhangjiagang. Zhang Wei himself was quite optimistic about this project, and even invited this entrepreneur to make a special presentation to the Investment Committee, but in the end almost everyone voted against it.When this project was vetoed, Zhang Wei probably felt embarrassed, but he accepted the vote results.” To this Chen Yanli commented: "When the company is small, participation in the decision-making process can motivate you to do more. When the company grows bigger, and if the boss still allows you openly speak and participate in decision-making, it approaches the ideal."


Zhang Wei, himself, is well aware of this point: "Organizations such as ours have a natural instinct to take on risk because the money ultimately belongs to the investors. We all understand that if our investment hits their objectives you can earn a bonus, but if it fails you can quietly leave the company. For Co-Stone Capital, a big part of the risk control comes from the fundamental corporate governance design " The decentralized design of Co-Stone equity and therefore its voting rights are effectively used to suppress impulse decisions and control risk.


"For Co-Stone Capital, I think, the most important thing is that we do not become a mercenary business but remain a beneficial one," said Zhang Wei, and now his ambition is to "create wealth to help transform society." It is often said that the greater the ability, the greater the responsibility. One striking example of this occurred in 2007.


Thinking about the Value of Wealth after Obtaining Financial Freedom


In 2007, Zhang Wei earned a hundred times return from his first investment project, SUNWARD Intelligent, and after the exit, achieved his personal financial freedom. With this, he successfully founded Co-Stone Capital. “SUNWARD Intelligent has helped us achieve an initial accumulation, and without it our company wouldn’t have been founded,” said Mr. Zhang. In fact, another major influence of this project on Zhang Wei’s team is reflected in the self-confidence brought by the verification of their ability. The focused investment strategy espoused by Co-Stone today is derived from the self-confidence of the team.”


With a hundredfold return under his belt, Zhang Wei felt for the first time that he was on equal footing with his LPs. "There were not as many wealth households in those days and they always hesitated to give money. However, when you had a demonstrated ability to create wealth, these rich people would invest willingly. If you had not accumulated your own wealth, they would consider you as a loser or show a bit disrespect to you. If you can accumulate faster than he can, he will accept and admire you, otherwise he will treat you as a mere financial adviser and would not believe your knowledge is particularly valuable.”


In the presence of other entrepreneurs, Zhang Wei is now much more at ease. He continued: "Once you have gained a great fortune through an excellent transaction, you will find that unexpectedly, those other successful businessmen will treat you equally and you will have an equal opportunity to communicate with many leading enterprises." This is undoubtedly conducive to identifying high-quality investment projects.


Now, with the exit of Co-Stone Capital from of a number of high-return projects, coupled with the value of his share in the company, Zhang Wei’s net worth is already a long string of numbers on accounts. The current focus for his personal development is now to find ways to give back to the community.


Regarding the disposal of his own wealth, Zhang Wei had a serious conversation with his child: "You have been given the best possible education, so it will be certainly unfair to others if my assets are still bequeathed to you. I might leave you a little bit appropriately, or help fund your projects if you are able to demonstrate talent.


For the use of his wealth, Zhang Wei has a clear plan - the vast majority of it will be put into a new public welfare fund to contribute to the community, but it is definitely not just a simple charitable donation. "For example, I want to seed some non-profit organizations with my property as a start-up capital, and then to operate them in accordance with entrepreneurial characteristics. They may not be profitable but must at least be able to achieve self-sufficiency." This idea comes from his respected Silicon Valley heroes - Bill Gates, Steve Jobs, Larry Page, Elon Musk, Mark Zuckerberg, etc. "These Silicon Valley heroes have demonstrated through their way of life a set of clear values. They have been investing their wealth in places where they can effect meaningful change on society, from technological innovation to areas with great significance on social progress, " explained Zhang Wei, who recalls the words of Google founder Larry Page:" My money should not be a legacy, but should be given to Elon Musk as he is researching the colonization of Mars.”


When considering the various aspects of investment, making money is not the only criterion. Social progress is also a major factor, and Zhang Wei has invested in a project with a strong social benefit proposition. In 2012, he became interested in the Lanke Lithium project in which the lithium carbonate is extracted from the waste water of salt-lake potash and used in the production of lithium batteries. At that time the technology was still in the developmental stage, so it was vetoed by the Investment Committee due to the high risk. However, Zhang Wei believed that this was a ground-breaking technology, and that if it proved successful it would greatly minimize the problem of resource constraints in lithium battery production and could significantly improve the development of next generation battery production. Zhang Wei invested in this project individually (in accordance with the rules of Co-Stone Capital, an individual partner can invest personally in any project rejected by the company).


In addition to striving to achieve the "transformation of society" through his own efforts, Zhang Wei is also making efforts to spread his values to the people around him to try to generate a positive influence. Co-Stone’s "Recommended Reading List" and its forums held from time to time, such as "Great Master’s Lectures" and "Forum of Experts", bear the mark of this philosophy.

New Fortune Interview

So far, Co-Stone Capital has held a dozen lectures and forums of various sizes. Just as Zhang Wei’s recommended books cover a wide range, guest speakers at these forums are also leaders from all walks of life, such as: economists Mao Yushi, Zhang Weiying, Zhou Qiren and Xu Xiaonian; professors in management Peng Jianfeng and Bao Zheng; sociologists Yu Jianrong and Sun Liping; historians Qin Hui, Wu Si, Yang Kui-song, Ge Jianxiong and Zhang Ming; and even the judge He Weifang, philosopher Fu Peirong and the scholar of international relations Yan Xuetong. This diverse group clearly shows the broad spectrum of influences on Zhang Wei’s philosophies and ideas.

Even with this intense desire to influence society, Zhang Wei maintains a low profile, and avoids the pursuit of fame and fortune. "If you search the name - Zhang Wei online, you will be much more likely to come across similar names such as Zhang Weiying, which I think is quite good. What purpose does it serve to be well known? What good does fame bring you? Even if you become a leader in China's venture capital industry, it means nothing, as you will only be able to maintain this status for a year or two at most.”


He does not even seem concerned with political and business networking that is a focus of other investors. Just five days before accepting this interview with New Fortune, he met with Jin Haitao, the former chairman of SCGC for the first time. "I met him at a dinner table by chance, and before I had not been in contact with these market leaders, and have not been in their circles." Co-Stone Capital rarely has dealings with government officials, and the highest-ranking official received since its establishment was the Party Secretary of Futian District, Shenzhen City, "and that was because we paid a tax of RMB 80 million that year," explained Zhang Wei.


Zhang Wei maintains a casual appearance and can often be seen with a backpack over his shoulder. He does not drive an exotic car, and maintains the view that "we need to keep a distance from a life of conspicuous consumption."


Only Going beyond Capital Allows You to Grasp the Direction of Capital


Over the past 30 years in China, industrial operations generated massive wealth which generated significant sources of capital. However, this was later eclipsed by the vast wealth generated through the capital markets leading many to believe that the new virtual economy was the better source of personal wealth. As the capital markets play a bigger and bigger role in accelerating economic growth some voices are advocating a new paradigm in which Capital, not industry, is king.


Zhang Wei, although technically a "capitalist", is not mesmerized by the power of capital. In the sensational power struggle for the ownership of Vanke, Zhang Wei points out that the behavior of capital can be a negative factor for entrepreneurs when many capitalists were accusing Wang Shi of not playing by the rules. "Vanke's particularity is that Wang Shi as the founder of the company, is not just a manager but has created an phenomenal success story for the company. Over the past 25 years since Vanke was listed, it has achieved a compound growth rate of 29% in operating income and 31% in net profit. Although Baoneng Group is the largest shareholder, it cannot simply replace the management; China Resources invested RMB 4.5 billion in Vanke, reaped dividends of RMB 5.3 billion, and now holds nearly RMB 30 billion worth of Vanke shares, but they cannot simply get rid of the management either. It is an outstanding management, and the company's value creation is inseparable from Wang's management team. An enterprise is its own life form, and the management is not an accessory that can just be swapped out” said Zhang Wei.


Such a statement, of course, is based on both his recognition of entrepreneurship, and also from his keen awareness of the complex relationship between enterprises and capital which he has observed through the changes in China's economic and capital environments throughout his career: Capital cannot operate independently of industry, and its gains are still reliant on the intrinsic growth of enterprises; the common goal of capitalists and entrepreneurs is to play a net positive game rather than a zero sum or even a net negative one.


As an active participant in the capital market, Zhang Wei is undoubtedly aware how constructive and destructive the capital can be, and he is more than willing to use his own abilities to build rather than destroy.


Regarding investments, Zhang Wei has many quotable lines, such as, "The best Chinese enterprises are a mixture of prudence and the audacity, in which “prudence” represents the modern system based approach and “audacity” represents opportunism, adventure and unconventional practices.” How a person defines the boundary between prudence and audacity is a true measure of a person’s values. Because his vision goes beyond just capitalism, Zhang Wei knows how to draw the lines properly.


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