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Zhang Wei: The Unexplainable Mode of Capital

【New Fortune Interview】Zhang Wei: The Unexplainable Mode of Capital

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 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: New Fortune

 

In a large and emerging market such as China, it seems that homogeneous competitions can be observed in almost every industry. To stand out from the mass, a company could either try to outfox its competitors or a search for a breakthrough that distinguishes itself from others. The PE industry is no exception. If JD Capital, one of the country’s most active players in the hot Pre-IPO domain, falls into the first category, then Co-Stone Capital, which has achieved both a high success rate and a high rate of return through concentrated investment and its alienation from hot money, would most likely be considered as one of the latter.

Behind the Co-Stone Capital, which is winning through differentiation, is the steersman of the company, Zhang Wei. “We don’t make assumptions about the development of macroeconomy. Essentially, we do not invest in the macroeconomy nor the industries themselves. In fact, the selection of industry does not guarantee success since each industry must have its carriers: corporates and individuals. Therefore, by making an investment, we need to focus on dynamic enterprises and brilliant entrepreneurs. Moreover, we do not expect to rectify the existing business models nor do we wait for the trend to appear. This is precisely why most of our work are done in areas that are more familiar to us, so that we would be more capable of supervising the actions and behaviors of our potential partners while analyzing their organization skills and entrepreneurs’ spirit. 

In this sense, by observing Mr. Zhang Wei, a competent contestant rising mid-way in the PE marathon, our knowledge about the Co-stone capital company is largely enhanced.


Understanding humanities with a sense of compassion

 

Most of Zhang Wei’s professional life, from investment banking to PE, have been about equity investment, which, by its very own definition, is a “luxurious product in the asset management business that does not outstand only on its scale”. The PE industry, where he is found at the moment, is otherwise known as the top luxurious product in the equity investment: more than 10 million yuan of investment for at least seven years, making it extremely selective in choosing its players. For a GP to be good at his/her job, the level of understanding human nature, asides from capital flows and business operations of course, plays a major role. After all, the ultimate determine factor of an investment is the human nature of the GP himself/herself as well as how he understands that of his partners.

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

Born in a small county along the Yangtze River – He County, Anhui Province, Zhang Wei pretty much “grow up on his own” with little oversight from his parents or teachers, which was often the case for children born in the 1960s. When he was in his fifth grade, through the help of a friend, his parents managed to offer him a county library card, which eventually accompanied him throughout his high school.

During this period of his life, Zhang Wei realized that he was more interested in books on social sciences and what intrigued him most was the destiny of mankind. The same pattern can be observed in the choices made by the company he founded: making concentrated investment. “Classical literatures, Chinese or foreign, history or philosophy, novel or poetry, have always been about the humanities and the concern toward the fate of the human race.” As he would put it: “The most touching thing in the world is actually the destiny of people.”

It was quite natural when he chose Chinese as his major at university. During the 1980s, refreshing ideas emerged in large numbers and the whole society was caught between profound explorations and fierce debates. College campuses, among all walks of life, were without a doubt, the birth place of the most interesting ideas. Zhang Wei especially appreciated reading: “After having read numerous books, having all kinds of theories clashing in our minds, we establish, in a gradual way, our very own system of concepts of value.”

Up till now, reading has gone far beyond a personal habit for him: it is now how he interacts with people. “He loves books and giving out books to our clients, always with a commentary.” says Han Zaiwu, a Co-Stone Capital Managing Partner. On the company’s public WeChat account, a large percentage of the recommendations on social affairs come from Zhang Wei.

On the official website of Co-stone Capital, there is a column dedicated to “book recommendations”. One of the latest booklists contains six books: 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 the recommendation remarks like “the philosopher Alice Flom shed amazing insights on the tragedy of modern societies – the unstoppable pursuit of wealth, fame and social status. The socially recognized achievements include nothing but these three aspects, which are more or less interchangeable. As the Chinese saying goes, ‘We count the mighty as no more than muck, because each of them will soon be swallowed in the river of history.’ Without profound concerns about the meaning of life and the fate of people, one tends to get lost in the maze of worldly achievements.”

For a time, Zhang Wei too found himself trapped in this maze, which was ultimately surpassed by his search for the meaning of life. After graduation from university, he started working for the Anhui provincial government which initially exhibited all sorts of promising possibilities. However, with time, he felt that his hands were too tied with all the restraints that came with the job. At one point, he even asked to be transferred to local governments so that he could get more on hand practices. “After observation, I realized that even if I get to the executive level in local governments, there are still so many things that cannot be done. Being a politician was not going to help me achieve my aspirations. I later discovered better ways to adapt myself to the society by learning and understanding economics.”

By 1992, Zhang Wei became one of the many government officials who plunged in to the business sea, with the destination: Shen Zhen. “What attracted me most at the time about this city was the high salary.”, recalled Zhang Wei, half serious and half teasing.

Two books were packed with him during his trip to the south, one called Blocked Society and the other one Bureaucratic System Research. My idea at the time was that maybe, after gaining some satisfaction on an economical level, it would make more sense to go back to the government for the service of the people.” For someone whose ideal being “cultivate oneself and then serve the country”, the idea was nothing but natural. Only then did he not realize that he could succeed in business to such an extent and that his success could also be rewarding to society.

Nowadays, his wife would always tease him by saying “where is value in our work, which is basically making even more money for those who already have it?” To this, Zhang Wei would always answer her seriously: “What we are doing actually is cultivating enterprises. We invest in them while they are still small and wait until they become the leaders of their field. Making them rich is only a payoff.”


Enlightenment from Drucker, construct the logic of business

Zhang Wei, after meeting with two important people, Peng Jianfeng and Bao Zheng, along with his focus on humanities, started turning to business methodologies.

Peng and Bao, both professors in College of Commerce, Renmin University, became famous for contributing to the draft of The Fundamental Law of Huawei, which links them back to Zhang Wei. “Around 1993, I worked with Professor Bao Zheng in writing a series of books called Modern Management System: Procedures, Methods & Scopes, which sold for 1000 yuan per set. Zhang Wei bought the set, read it and came to see me in Beijing.” As Peng recalls. Ever since then, these two bonded via books. In 1995, Zhang Wei, who worked in human resources in Bao An Group at the time, invited Peng and Bao to provide consultation for the company’s on-going personnel assessment system construction. “He was the first one ever to offer me a job in consultation and it was after then did we end up in Huawei.”

Influenced by Peng and Bao, both of whom advocates of Drucker’s management theories, Zhang Wei too started reading Drucker’s books. The one book alone, the Management: Mission, Responsibility and Practice, which was over 700 pages, was read over and over again. What is an enterprise? What should its mission and moto be? What is the nature of management? How should one pursue a sustainable development for such an enterprise? Why should the core powers of leadership be united around moralities and not wealth? In the books of Drucker, Zhang Wei finds all his answers for these metaphysical questions.

“The key to Drucker’s ideas is that an enterprise, as an organization, must recognize its own missions and aspirations. Its sole target should be creating clients. Therefore, making profits isn’t an objective but a result. In fact, a company should carry certain socials responsivities and should not put profit as a priority. By doing so, it won’t last.”

【New Fortune Interview】Zhang Wei: The Unexplainable Mode of Capital

The keys words in the Drucker’s theories, such as “mission and aspiration”, “profit at a secondary position”, possess a natural compatibility with the Confucius complex that is incarnated inside Zhang Wei. It is safe to say that his previous reading on social sciences has created a system of value on a social scale and the books of Drucker have provided Zhang Wei with that on a business scale. In other words, the Drucker’s management thoughts have enriched that of Zhang Wei’s mind. “Like a light in a dark tunnel, he really shed light in my mind.”

After devoting himself to the business world, Zhang Wei increased his reading list to books on commerce and business. Three biographies have impacted him the most: Father and Son about the development of IBM, The Road of Sony by Akio Morita, and The way of HP by HP's two founders ---Hewlett and Packard. “These books made me realize how these companies have grown, how they dealt with different walks of life in society, the mission and challenges that the entrepreneurs encounter. In the early 1990s, with their help and that of Drucker’s books, I was able to formulate a general idea about enterprises of my own.

After 2000, Louis Gerstner, former CEO of IBM, managed to turn the giant deficit from 1993, when he joined IBM, to a market value of 160 billion dollars. This has left us reflecting on the spirit of entrepreneurs. “The experience shows that even if you are one of the most famous company with a history of more than a century, without such spirits, no organization system nor technology could support you. A company such as IBM surely is never short of techniques, talents and organizations, but it lacks entrepreneur’s spirits. Only with valid entrepreneur’s spirits can we have perseverance and stronger enforcement powers to lead the company’s transformation. In my own understanding, only by combining the organization skills and the spirit of entrepreneurs can a company grow in a sustainable manner.”

Based on such a theory, Zhang Wei thinks highly of entrepreneurs who’s exhibited their attention on their mission and aspirations: Zhang Tangzhi, Zhang Xiaocheng and Huang Bingliang of Shandong Liuhe as well as He Qinghua of Sunward Intelligent. The investment returns as high as 30 to 100 times brought by these two companies, confirms not only the theory of Drucker but also Zhang Wei’s application of such a theory. This is why that he has always put the spirit of entrepreneur on the top of his list when making investment decisions.

“To me, the spirit of entrepreneurs can be put into three categories: diligence and perseverance, which most of them have; thinking outside the box, which is uncommon to most; and lastly, which is even less seen are aspirations and a broad mind, the former indicates that he is career-oriented and not money-oriented and the latter means that companies share.”

These three values are not only applied in his selection of investment objects but also in his own professional life. His unorthodox thinking is vividly projected in the investment style of Co-Stone Capital and his persistence can be observed in his partnership with OPPLE Lighting for over four years. 

In fact, Zhang Wei happened to be in the same class as Ma Xiuhui, the founder of OPPLE Lighting, when he was an EMBA student at CEIBS in 2008. According to Ma: “He wanted to invest in us right away but since our cash flow was very healthy and we already have idle funds, we didn’t consider ourselves in the need of extra funding.” Zhang Wei did not give up on his first try. “Sometime later, there was a foreign lighting company that wanted to buy us. Since I was no expert and was feeling a little anxious, I asked Zhang Wei to negotiate with them on our behalf. Throughout the talks, I realized that they were very perceptive and had great insights.”

Based on this instinct, Ma Xiaohui began to trust OPPLE lightening’s idle fund with Co-Stone Capital, by becoming an LP. “The rate of return exceeded my imagination.” The relationship deepened gradually. Co-Stone Capital began to invest in OPPLE after helping them with their IPO project and incentive programs for the management level. As Ma Xiaohui put it, it was not for a lack of money that they were willing to receive investment from Co-Stone Capital but for the sincerity of Zhang Wei and their willingness to provide continuous services. In the PE industry, it was not uncommon to see companies became LPs after receiving investment but it was quite rare the other way around. Right before OPPLE lighting became listed, the two company co-founded a M&A in October 2015, taking their cooperation on a comprehensive level.

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

When Co-Stone Capital was formally created in 2007, Zhang Wei began to work on a system so as to regulate company’s shares. Tao Tao, one of the cofounders of the company: “At that moment, there were in total five cofounders, Zhang Wei was in possession of 50% and the second half was to be divided among the rest, which should be revised every two years based on their performance evaluations. Whenever a new partner comes into the team, he takes his shares from that of 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 above 30% and the total equity holding of the remaining six partners was slightly higher than 50%, with 15% of the equity reserved for equity incentives which applied to all senior executives except Zhang Wei.  

There is actually a logic behind this arrangement: when you are handed over the honor by your teammates, you share it with them. If the core partner team has maintained such a long-term stability and solidarity, Zhang Wei’s willingness to share is definitely related. Chen Yanli, another Co-Stone Capital’s Managing Partner, said with amusement: “The divisions of profits can never be 100% fair but the simple attempt to do so says a lot already.” Indeed, there would be no management of a company if no consensus is reached when it comes to dividing the profits.

The sharing of Zhang Wei includes not only stock shares and dividends, he is also generous with his powers. While the company prefers concentrated investments, they are quite democratic when it comes to internal management. During the vetting session, one person get one vote and it is not uncommon for projects favored by Zhang Wei to get denied. As Lin Lin, a Co-Stone Capital Managing Partner & Vice Chairman said: “If Zhang Wei has his eyes on a certain project, he would go on and on during the session but it won’t make that much a difference if no one else agrees with him.”

Vanke, the leader of China’s real estate industry, has been advocating the concept of the “industrialization of construction” and claiming that future constructions would be “prefabricated in factories and assemble on site”. A few years ago, one of Zhang Wei's old classmates was seeking financial aid for such a project. “He got his technology from Britain, which made structured constructions possible.” He even obtained permission from the city of Zhang Jiagang to work on a piece of land. Zhang Wei himself was very optimistic about the project and he even brought in the expert himself to present his project in front of the juries. Ultimately, the project was objected by a large majority. Even if Zhang accepted the result without problem, Chen knew him very well: “Naturally, with that project being declined, Zhang Wei would definitely feel embarrassed.” For Chen Yanli, “In a small company, letting you in on the decision-making process could motive you to work harder. But when it comes to a big enterprise, it is a matter of the idealistic stature for the big boss.”

As Zhang Wei put it: “Organizations such as ours have a natural instinct to take on risks since the money ultimately belongs to our investors. It is very tempting to take advantage of asymmetric information but it’s risky. We all understand that if we succeed, we get bonuses and if not, we make ourselves scarce. This is why risk control should be the core of a company’s management system.” The decentralized division of Co-Stone’s equity is precisely designed to suppress such impulses and keep the risk under control.

“I think that the most important things for Co-Stone is to be, and keep being a company with compassion, aspiration and responsibilities instead of seeking solely financial profits.” For Zhang Wei today, his aspiration is to “help transform the society with the money he makes”. As the saying goes, greater responsibilities should come with greater capacities. As times goes by, Zhang Wei is more and more convinced by such ideas. One of the biggest transitions happened in 2007.


Reflection on the value of wealth after gaining financial freedom

In 2007, Zhang Wei earned a hundred times return from his first investment project, Sunward Intelligent. After he exited from the project, Zhang achieved his personal financial freedom. With this, he successfully founded the company Co-Stone Capital. “Sunward Intelligent contributed a lot in our primitive financial accumulation. Without them, there was no way could we have founded our company.” In fact, the success of this project also greatly enhanced the confidence of Zhang Wei’s team. The concentrated investment strategy today is precisely derived from the self-confidence of its GP. 

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 out money. But when they hear how you had created your own wealth, it’s a whole different story. It’s very difficult to get recognition and respect from other people if you have never made any money yourself. Once you prove to be more efficient than them, you become much more than a financial consultant to them and your knowledge would be considered much more valuable.”

The same thing goes for entrepreneurs. “Once you have made a great fortune from a brilliant project, you would realize that a lot of the entrepreneurs would treat you equally, creating thus a lot more meetings opportunities with excellent enterprises.” This is without a doubt very beneficial to promoting projects.

Today, with the exit of Co-Stone Capital from of a number of high-return projects, coupled with the value of his shares in the company, wealth to Zhang Wei is nothing more than numbers on his accounts. What matters more to him nowadays is enhancing his personal ability and person value.

Regarding the disposal of his own wealth, Zhang Wei conducted a serious conversation with his child: “You have been given the best possible education and it will certainly be unfair to others if you get all my wealth. I might leave you some or help build you a lab, that is if you are really talented.”

Zhang Wei has a very clear plan as to where his wealth would go – mostly to charities. His money would go back to society but it wouldn’t be a simple donation. “For example, I could create multiple charitable facilities that operates as a firm. They would use my asset as their start-up capital and then runs themselves like a company. It is ok for them not to make any profit but they must be self-sufficient.” This concept comes from the Silicon Valley heroes that Zhang so respect: Bill Gates, Steve Jobs, Larry Page, Elon Musk, Mark Zuckerberg, etc. “These people have it all figured out. Being very sure of themselves, they invest their wealth in projects that might make a difference in this world: from technical innovation to the progress of society.” One of Zhang’s favorite quote comes from the founder of Google Larry Page: “My money should not be a legacy. They should be given to Elon Musk as he is exploring the possibilities of moving of Mars.”

Money should not be the only factor when considering an investment. Whether or not the project brings social progress is also an important thing to consider. One of the projects that Zhang invested proves the same point. 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 under development and got vetoed by the investment committee due to its high risk. However, Zhang Wei believed that this was a ground-breaking technology and that if proved successful, it would greatly facilitate lithium battery production and could significantly enhance the battery production efficiency of the next generation. Zhang Wei invested in this project personally (in accordance with the rules of Co-Stone Capital, an individual partner can invest personally if the project is rejected by the company). The Rou Yu project reflected this very same mindset.

Aside from working towards the “transformation of society”, Zhang gladly tries to influence as many people in his surroundings as possible. 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 marks of this philosophy.

【New Fortune Interview】Zhang Wei: The Unexplainable Mode of Capital

So far, Co-Stone Capital has held a dozen lectures and forums of various scales. Like the Zhang’s booklists, guest speakers at these forums come from all walk of life: 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. All their presence reflects on the humanistic spirit of Zhang Wei.

Even if Zhang wished to influence the society, he does not seem to be concerned with fame nor money. “When you type in Zhang Wei, all results are found to be about Zhang Weiying. I think it’s quite nice. Why should everyone know about you? How much satisfaction can you really get? Cause even if you were the leading person in the investment industry, it wouldn’t last for more than two years.”

Zhang does not care too much either about his network with the government either. Just five days before accepting this interview with New Fortune, he met with Jin Haitao, the former chairman of SCGC for the first time. “We met at a dinner table by chance. I had never approached these important people before. Always kept a distance from their circle.” Co-Stone Capital rarely deals with government officials either. 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 80 million yuan that year.”, explained Zhang Wei. 

For so long, a backpack has been the “must-have” item in Zhang’s appearance. He has always driven a BMW and never bought a car exceeding 1.5 million yuan. To him, “We need to keep a distance from materialism.”

Zhang keeps his distance with the unruliness of capitals too.


On by surpassing capital can you grasp its direction

In the present China, great amount of capital has been accumulated from thirty years of industrial development and the power exhibited from capital have deprived people of their faith in industry. As capital is becoming increasingly important in the economic development, serving as a filter, an accelerator and is even taking over the industrial development. Some even consider capital to be essential and that willpower is everything,

Zhang Wei, however, is not so intimidated by the power of capital. In the continuous “Baoneng VS. Vanke Battle”, while many people in the industry accused Wang Shi disrespectful of the game rules, Zhang Wei, from the perspective of entrepreneurs’ contribution to society, pointed out some contrary arguments. “What’s particular about Vanke is that Wang Shi is both the founder of the company and the creator of many great achievements of the company. For 25 years since it got listed, it has achieved a compound growth rate of 29% in operating income and 31% in net profit. Bao Neng Group, even being the largest shareholder, couldn’t not simply replace the management crew. Hua Run, with an investment of 4.5 billion in Vanke and a payback of 5.3 billion, now possesses nearly 30 billion worth of Vanke shares. They can’t get rid of the management team either. In fact, the value created by the company is tightly linked to the managing personnel who are brilliant. An enterprise is its own life form, and the management is not an accessory that can just be swapped out.”

Such a statement, of course, is based on both his recognition of entrepreneurship and also the transformation of China’s economy and the capital’s environment. As to the internal relationship between an enterprise and capital, Zhang is both sober and perceptive: capital can never function on its own without industrial development. The objective shared by capitalists and entrepreneurs is playing a positive sum game, not a zero-sum one, let alone a negative sum game.

As an active participant in the capital market, Zhang Wei is, with a doubt, perfectly aware of how constructive and destructive the capital can be. To him, it is more interesting to use his abilities in the construction and not the destruction of something beautiful.

Zhang Wei have a lot of quotes regarding investment. For example, “The best Chinese enterprises are a mixture of rationality and animal instinct: the former represents the modern cooperate system and the latter signifies opportunism, adventure spirits, motivation and unorthodox thinking.” Where the boundaries lie between these two depends on how the individual values the world. In a sense, those who are in possession of capital need to learn how to better manage them. Vision goes beyond the capital and Zhang Wei know just where to draw the lines. 


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