In the past year or two, the primary market has been filled with a confusing atmosphere: uncertainty about fundraising, uncertainty about exits, uncertainty about regulation, and uncertainty about technological changes......
In the face of many uncertainties, every primary market investor is like an adventurer sailing on the treacherous sea, facing all kinds of unknown investment risks at any time. In order to better resist investment risks, how to find out what can be done and useful for the future in the midst of many uncertainties?
This topic may as well be thrown into the hands of Hu Zuliu of Primavera Capital, who has more than 30 years of "sailing" experience in the investment field. As the helmsman of a "veteran PE", he has managed more than 100 billion yuan of funds, invested in many classic cases in the PE industry such as Yum China and Alibaba, and almost never missed a hit on popular head projects that are difficult to reach by venture capital such as Vision and Junlebao.
Hu Zuliu's answer revealed a kind of cautious optimism, and he sorted out several very firm judgments in the midst of the changes: First, the market's pessimism about China's economy is actually excessive, and China's economy can maintain a fairly high GDP growth rate in the next five years, and it is of high quality. Second, the AI revolution and the development of new energy are the general trend, but they need to be invested very carefully.
Therefore, Hu Zuliu believes that there are huge investment opportunities in an environment full of huge variables, and cultivating the "rationality" of investment and reducing emotional interference are the necessary qualities to pass through the fog. As long as you can survive this winter, you have the potential to be a winner.
On the eve of the "18th China Investment Annual Conference and Annual Summit" hosted by ChinaVentures and ChinaVentures, ChinaVenture had a wonderful dialogue with Hu Zuliu, Founder, Chairman and CEO of Primavera Capital Group.
In an environment full of uncertainties, there are huge investment opportunities
ChinaVenture: In the past two years, the primary market has been full of variables, and many variables are unpredictable, resulting in many people's experience and judgment failing. Entering 2024, many changes have already taken place, do you have any relatively firm judgments on the investment prospects of the international and domestic primary markets?
Hu Zuliu: The past one or two years have been very serious challenges to the investment market. There are several very important factors:
The first is that the Federal Reserve raises interest rates, the European Central Bank raises interest rates, and the Bank of England raises interest rates to combat inflation. The financial market is very sensitive to interest rates, and generally during a rate hike cycle, the open market will perform very sluggishly, which leads to two direct impacts on the primary market.
The first is that the number of IPOs has decreased sharply, and we can see that in the NASDAQ, the New York Stock Exchange, Hong Kong, and even the A-share market, IPOs are not so active, resulting in a very challenging environment for many PE/VC investment companies to exit.
The second is that in an environment of high interest rates, it is relatively difficult to raise funds. So the past two years have not only been the lowest two years of exiting, but also the two years of fundraising.
In addition, there are two related factors: China's economy has been an important locomotive and engine of the global economy for many years. However, because of the epidemic, the market believes that China's economic recovery is lower than expected, so the rest of the world is also very pessimistic about China.
Finally, the complex international environment has also made many investors feel very worried.
The above is the background of the investment market.
ChinaVenture: In the face of the current market trough, what kind of mentality should practitioners have?
Hu Zuliu: For the equity investment industry where PE/VC is located, although it is currently in a very sluggish state, (investment institutions) still have to base themselves on the long-term, and the medium and long-term should look at the next 3 years, 5 years or even 10 years. Nor should we simply extrapolate the past two years in a straight line, thinking that this year will repeat last year, and next year will be a continuation of this year, so as to create a very negative, very pessimistic knot. Investment is a function of time: if you make a decision today, you have to decide what the outcome will be in 3 years, 5 years, or 10 years, so you must have a long-term vision.
I think that although at this point in time, there is a lot of uncertainty, there is a lot of resistance, and even risk. But if you look at the medium- and long-term cycle in the next three to five or ten years, there are huge new investment opportunities hidden [in the market]. I still feel cautiously optimistic.
ChinaVenture: The investment industry is full of uncertainties: uncertainty of fundraising, uncertainty of exit, uncertainty of regulation, uncertainty of the international environment, uncertainty of technological changes...... With so much uncertainty in the face of all this, what do you think is the more concrete and certain thing that can be predicted?
Hu Zuliu: Of course, there are many, but I would like to emphasize two points:
The first is that the current global capital market, including the media, is extremely pessimistic about China, and I think this may be excessive. Of course, China's economy is facing some challenges, such as the well-known real estate, local bonds, deflation, demographic trends, and the response to the international environment, which are some of the challenges and difficulties that China's economy may be facing and must face, but I also firmly believe that China's economy still has very good fundamentals, and if you look at the next 3, 5, 10 years, I believe that China's rise is unstoppable.
From an investment perspective, the rise of China's population of 1.4 billion is four or five times the size of the United States, which is unprecedented in the past 300 years of the industrial revolution. So I think there will be a lot of opportunities, and that's something I think is more certain.
Second, I think it is more certain that the new technological revolution with AI as the core and symbolized is more certain. Of course, how fast it develops, how far-reaching its impact is on various industries and industries in the economy, and how much its value is in the end are still changing. However, in the next three to five or ten years, I think AI will become more and more mature and be more and more widely used in various fields of economy and society, which will profoundly change the form of the economy, the mode and driving force of development, the source of value, and the life of human beings. This is also the emerging AI revolution that I think we as investors should be very keen to follow, pay attention to, and participate in.
So even though we're in a very confusing and turbulent environment, I think these two basic trends: the rise of China, and the AI revolution, are relatively certain. There are huge investment opportunities here.
Optimistic about AI and green development, we must be very rational and rigorous about investment targets
ChinaVentures: There is a point of view that "venture capital should allow some excellent companies to get financing, but in the past ten years, VC has been a bull market, and the supply of funds in the market is too sufficient, and all companies can get financing, and since the release of ChatGPT, VC has entered the AI track to invest for the sake of investment, which has further weakened the market mechanism, and some people believe that in 2024, the AI investment race will go out." What do you think of this wave of AI investment, and how should Primavera Capital respond?
Hu Zuliu: I am very optimistic about the prospects of AI, but we still need to be very cautious in investment, not just chasing the wind and concepts, as long as you hang an AI, you will grab and do everything possible to grab the project. I have experienced this situation firsthand, and I still remember the Internet bubble in the late 90s of the last century.
Internet technology is very vigorous, but many companies because the technology is not hard, their business model is not mature, and the execution is also lacking, but they have raised a lot of money, and the valuation is dazzling, but in the end it has been proved that they cannot last, so they will fall down in batches after the big waves. But in the end, the rest became giants. Whether from the perspective of consumers, industry, government and business, the Internet has a profound impact on the economy, society and human life.
So from the experience of that time, not every AI company invested by (investment institutions) will definitely succeed, or every AI investment will be successful, these are two different concepts.
So (although) we pay a lot of attention to AI, but when it comes to each project, each target is very calm and rigorous, not just blindly chasing the wind. All in all, AI represents a very huge investment opportunity, so I must pay attention to AI, learn every new breakthrough and every technology, and evaluate its possible application business prospects and value, which will determine the risk and return of our investment.
ChinaVentures: Primavera is also very concerned about green development, and it is also frequently involved in new energy, including Envision Technology, which Primavera invested in last year, has become a unicorn. However, in the past two years, the new energy track has generally been reflected in the congestion of the primary market and the cold of the secondary market. How does Primavera view the investment in the new energy track?
Hu Zuliu: We are focusing on green development and carbon neutrality because our time is facing a very urgent challenge, which is climate change. As a professional investment institution, we also shoulder the responsibility and mission to help our country contribute to humanity's fight against climate change through our investment.
Second, in terms of the value of my investment, I am particularly pleased that China is a global leader in the energy transition. Our investment in renewable energy and clean energy exceeds that of the next 10 major countries combined, including the United States, Germany, Japan, the United Kingdom, France, India, Brazil, etc., and we are the world's leading leaders in solar energy, wind power, and batteries, so this opportunity is very large.
Now everyone is rushing to grab this track, it seems to be very crowded, the secondary market is not performing very well, and the valuation of the primary market is also in a bubble, which is similar to the Internet example I mentioned earlier. The technology itself is imperative for the energy transition and will have a very positive impact on humanity. But that doesn't mean every investment will be successful.
Therefore, on the one hand, we must focus on investing in this industry, but the specific target must be very rigorous, very calm, and very rational, and we must do very in-depth due diligence, really grasp the big torrent, and capture more unique investment opportunities in this general trend.
ChinaVentures: You have repeatedly mentioned that investment must be very rational. However, last year, the saying of "grass platform" was very popular, and many people will also use this sentence to challenge the investment industry, does this mean that "science" and "rationality" have become ineffective in practice in the past year or two?
Hu Zuliu: The capital market is actually a field where rationality and emotion are constantly playing. I believe that in the medium and long term, in the vast majority of the time, excellent investors should maintain a high degree of rationality, a high degree of calmness, have a quantitative and rigorous analysis method, and start from the data, so as to be able to build a better portfolio and obtain more ideal returns. I'm convinced it must be so.
But in the short term, because after all, investors are also people, people will have emotions, there will be various psychological factors, and there will be some social psychology: for example, the psychological state of the whole public will also affect your mood, when everyone is optimistic, you may feel very optimistic; This is mass psychology.
As an individual, you may sometimes act according to the two most basic human emotions, or you may often go to extremes, which are called greed and fear. We have emotions, and emotions can sometimes cause us to be irrational. In the matter of investment, in the short term, sometimes you rely on emotion, and you may be able to do better, but in the medium and long term, you must rely on reason to overcome this emotion. Therefore, I think in this regard, especially for young investors, it is important to learn how to cultivate their own rational, calm and rigorous thinking habits. This kind of professional spirit will not be too easy to become emotionally extreme, which also requires cultivation and time, and it is a process of slowly cultivating and accumulating in experience.
ChinaVentures: How does Primavera Capital make decisions?
Hu Zuliu: We are a partnership, basically a team makes decisions, not one person has the final say. Some important strategies are discussed together, and more often than not, debates are held, and the wise have their own opinions.
Because the world is very complicated, and as I just said, the market environment is also very complex, so we should brainstorm so that everyone can give full play to their wisdom and express their best ideas. This is also the atmosphere in which our decisions are formed.
China's economy has medium- to long-term structural advantages, and it is likely to be a winner if it survives this winter
ChinaVentures: How do you think investment institutions should find their own characteristics and positioning at present?
Hu Zuliu: As mentioned earlier, VC/PE is currently at a low point, perhaps the lowest point in many years, based on the general environment, monetary policy, macroeconomy, and international environment, which are superimposed, resulting in a very sluggish VC/PE market at present.
But as I mentioned earlier, if you actually have a very good opportunity in the next three or five or ten years, so I want to say to these institutions that are still in the market at the moment, the first thing is to survive, to survive this trough, to survive this winter, you may be a winner. For example, if the company you invest in encounters various difficulties, we need to help the company solve some difficulties and empower and create value for the invested company.
Second, the invested company may need to exit, whether it is a listing or merger or acquisition in the A-share market or the Hong Kong market, you have to help it plan, design, guide and implement, which also requires a lot of effort and very in-depth and patient work to do.
It is inevitable that the market economy will have cycles, ups and downs, highs and lows. Professional institutional investors need to learn to conserve their strength when they are at a low point, and then be able to seize opportunities when they are at a high point. But don't be blindly impulsive, then lose your rationality, it's all a balance. I believe that some experienced and mature professional institutions in China will be able to get out of the current downturn and play a very important role in China's high-quality development model of entrepreneurship and innovation.
ChinaVentures: Young investors may be confused now, what advice do you have for them?
Hu Zuliu: I think the first thing is to learn and be curious. Because the world is complex, investing is indeed challenging, not easy, and it can be a very difficult job. If you choose to invest, you have to be curious, have a strong self-motivation to learn, and be willing to keep learning, which is the first thing.
The second is to learn to be patient, investment is an industry that requires a very high degree of patience and qualifications, not too impatient, not too eager for quick success, I think this effect is not good, you will feel very disappointed, so you must be very patient.
Finally, from the aspect of character cultivation, we should be calm and rational, and there should be no (too subjective) emotions. Emotions are inevitable, try to minimize this extreme emotion, don't let it interfere, and don't let it dominate and influence your decision-making. This kind of decision-making still needs to be rational and calm, which means that you have to have data to support this kind of decision. For young people, you can't do it at first because you haven't been through a lot of experience, but day after day, year after year, after a period of experience, you will grow up and you will definitely become a very good, very outstanding investor.
ChinaVenture: You once said that as the middle class has become the main force of China's economy and China has become a veritable all-round well-off society, these significant and profound changes at the macro level have provided huge opportunities for professional investment institutions, including Primavera Capital, and also provided Primavera Capital with a decade of golden development opportunities. As a well-known economist, what do you think will be the fundamentals of China's economy in the next five years?
Hu Zuliu: After 45 years of reform and opening up, China has become the world's second largest economy. In the next five years, China also has some very significant advantages that the market has not fully recognized at present, and the market has seen and paid more attention to some problems in China, such as real estate, such as local bonds, deflation, etc., but ignoring some of China's inherent medium- and long-term structural advantages. I would like to make just three points:
The first is China's urban middle class. In absolute numbers, this is the largest group of the world's middle class. We are much larger than the United States, and even the middle class in Europe as a whole is not as large as in China. The engine of GDP growth that can be driven by consumption by the Chinese middle class is like the consumption of middle-class American households that has driven the American economy since World War II. Now after 45 years of development, most of the Chinese have escaped poverty and entered the middle class to varying degrees. If the middle class can have confidence, confidence in the future, be able to consume, and really stimulate the strong domestic demand of China's economy, this will be the first advantage [of China's economic development], which I think is underestimated at the moment.
Second, China's entire private economy. Chinese as a nation are very entrepreneurial, and the reform and opening up in the past few decades has also witnessed a large number of private entrepreneurs leading the way in all walks of life, creating a lot of jobs and tax revenue for China's economy, accounting for more than 70% of China's economy. I think China's private economy is also very dynamic, and if we can mobilize the confidence of private entrepreneurs, China's economic vitality in the next five years should definitely not be underestimated.
Finally, China's AI revolution, China's potential for innovation. Because China has the largest talent pool in the world, namely Chinese scientists, engineers, and China's investment in R&D over the past 20 years. Now, of course, we are second, or lagging behind the United States, but we have accumulated R&D investment for so many years, coupled with our talent advantage and market advantage, it is actually the largest comprehensive market. Combined, these three will make China one of the world's leading innovation powers.
So, I think we've seen that China has some world-leading innovation capabilities, from renewable energy, from EVs, from battery technology, quantum, biomedicine, etc. I believe that in the next five years, this capability will be further unleashed to drive China's economic growth.
The consumption of the middle class, China's strong and dynamic private economy, and the potential for innovation all determine that China will be able to maintain a fairly high GDP growth rate in the next five years, and it will be a very high level of growth. [China's economic growth] does not rely on real estate and infrastructure investment, but really relies on innovation and efficiency improvement to promote productivity. I have strong confidence in this.