Overview Founded in June 2005, Hillhouse Capital Management, Ltd. (“HCM”) provides investment
advice to clients organized as privately-offered pooled investment vehicles or similar structures
(the “Funds”) and from time to time may also advise managed accounts or similar relationships.
The Funds and all such HCA-advised managed accounts are referred to herein as “clients.” HCM
is a wholly-owned subsidiary of Hillhouse Capital Group Limited, which itself is a wholly
owned subsidiary of Hillhouse Capital Group Holdings Limited. Mr. Lei Zhang directly owns
100% of Hillhouse Capital Group Holdings Limited. HCM is part of the “Hillhouse Capital
Group,” a multinational group of related advisory entities.
To comply with local operational requirements (including the issuance of local work visas),
HCM has engaged local affiliates based in Hong Kong, the People’s Republic of China (the
“PRC”), and Singapore (Hillhouse Capital Management Limited, Hillhouse (Beijing) Advisory
Limited, and Hillhouse Capital Management Pte. Ltd., respectively). While these local entities
are not registered as investment advisers with the United States Securities and Exchange
Commission (the “SEC”), because these entities are under common control with HCM and share
certain personnel and resources, HCM subjects these affiliates’ personnel to all of its compliance
policies and deems these affiliates’ books, records, and personnel to be within the scope of
HCM’s books and records retention and production obligations. Accordingly, certain
information on HCM contained in this Brochure, including information regarding personnel, is
presented on an aggregate basis for HCM and these affiliates.
Another HCM affiliate, Hillhouse Capital Advisors, Ltd. (“HCA”), which is discussed in Item
10, is registered as an investment adviser with the SEC. While HCA and HCM may, from time
to time, invest in similar strategies or companies, HCA-advised clients generally focus on
publicly-listed (or similarly liquid) investment opportunities, while HCM-advised clients largely
focus on private (or otherwise less liquid) investment opportunities, including venture capital,
private equity, private debt and buyout transactions.
Investment Philosophy HCM’s investment philosophy is to seek long-term, risk-adjusted returns through bottom-up
analysis and fundamental proprietary research. As part of HCM’s bottom-up analysis, it
performs both qualitative and quantitative assessments of potential investments with a particular
focus on opportunities upon which it can gain insights and discover value in an ever-changing
world. HCM believes that this fundamental research persistence allows it to be a patient, long-
term investor.
Markets and Investment Opportunities
HCM primarily invests in equity and debt securities of private companies, but may invest in a
wide range of securities and other financial instruments including, without limitation: share
capital; common and preferred stock (privately-placed and exchange-traded); shares of beneficial
interest; partnership interests and similar financial instruments; bonds, notes, debentures and
other debt instruments (whether subordinated, convertible, or otherwise); commodities;
currencies; interest rate, currency, commodity, equity, debt, and other derivative products
(including, without limitation, (i) futures contracts (and options on futures contracts) relating to
stock indices, currencies, other financial instruments, and all other commodities, (ii) swaps,
options, warrants, caps, collars, floors, and forward rate agreements, (iii) spot and forward
currency transactions, and (iv) agreements relating to or securing such transactions); equipment
lease certificates; equipment trust certificates; loans; accounts and notes receivable and payable
held by trade or other creditors; trade acceptances; contract and other claims; executory
contracts; participations; mutual funds; money market funds; structured securities; repurchase
agreements; obligations of governments and instrumentalities; commercial paper; certificates of
deposit; bankers’ acceptances; trust receipts; choses in action; real estate, including fee interests,
leaseholds, mortgages, or other real estate assets; and any other obligations and instruments or
evidences of indebtedness of whatever kind or nature; in each case, of any person, corporation,
government, or other entity whatsoever, whether or not publicly traded or readily marketable.
Some investments that HCM makes for client accounts may have no readily available market.
HCM invests client assets in a wide range of countries, markets and exchanges in Asia and
throughout the world, including, without limitation, markets in the PRC, Hong Kong, the United
States (“U.S.”), Singapore, Taiwan, Korea, Japan, Indonesia, India, Vietnam, Malaysia,
Thailand, Australia, the United Kingdom, and elsewhere. Clients may also face indirect
exposure to all of the instruments and investments listed above through investment in special
purpose vehicles and similar entities.
Advisory Services HCM manages the Funds and any client accounts on a discretionary basis, subject to any
investment policies and restrictions established by its clients. HCM may in the future provide
advisory services on a non-discretionary basis. HCM manages the Funds and any other managed
client accounts in accordance with the investment guidelines set forth in the offering documents
for each Fund and manages other client accounts in accordance with the authority delegated to it
(including any limits on that authority) under the applicable client’s investment management
agreement or governing documents. HCM consults with each client on its investment objectives
and tailors its services and advice to those objectives.
HCM had approximately $16.237 billion of assets under management as of January 1, 2019, all
of which is managed on a discretionary basis. The amount of assets under management reported
in this Brochure is lower than the amount of “regulatory assets under management” that HCM
reports in Part 1, Item 5 of its Form ADV because Item 5 requires an adviser to report assets
under management
inclusive of any uncalled commitments and
without deducting any
outstanding indebtedness or other accrued but unpaid liabilities. To prevent the appearance of an
overstatement of HCM’s assets under management, HCM has calculated assets under
management in this Brochure
exclusive of uncalled commitments and
taking into account certain
unpaid liabilities and outstanding indebtedness.
Fund Structures While HCM does not limit the kinds of Funds and other clients that it may advise or the
composition of its clients’ portfolios, HCM’s client portfolios generally focus on investing in
illiquid or less-liquid investments, although certain Funds may invest in exchange-traded or more
liquid instruments (either as their primary focus or as portions of their portfolios).
The Funds are often organized into master-feeder structures. A master-feeder structure is
commonly used to accumulate capital raised from U.S. taxable, U.S. tax-exempt, and non-U.S.
investors into one central vehicle – a master fund – in order to enhance the critical mass of
investable assets, improve economies of scale under which the fund arrangements operate and
enhance operational efficiencies, thereby reducing costs. HCM commonly serves as, or controls,
or is under common control, with an entity that serves as, the general partner of those Funds
organized as partnerships. The general partner of any Fund may also act as the general partner of
other Funds or investment vehicles.
Co-Investments HCM or its affiliates may also, from time to time, form, sponsor, manage, arrange, offer or
advise investment vehicles or accounts in connection with a particular strategy or theme, or may
establish, sponsor or advise, on a transaction-by-transaction basis, an investment vehicle or
account through which certain persons may invest alongside or independently of one or more
clients (each such vehicle or account, a “Co-Investment Arrangement”). Co-Investment
Arrangements may participate in individual investments or a series of related or unrelated
investments alongside one or more other clients of HCM and its affiliates. Co-Investment
Arrangements may also make investments independently of (and not alongside) other clients of
HCM and its affiliates. In addition, certain Funds (and other HCM clients) may from time to
time co-invest with each other. HCM’s fee and compensation practices for Co-Investment
Arrangements are subject to a case-by-case agreement with the applicable investor.
The allocation of co-investment opportunities can be both discretionary or non-discretionary, and
HCM takes into account various facts and circumstances deemed relevant for determining
allocations relating to co-investment opportunities and establishing co-investment structures.
Such factors are likely to include, among others, the strategic value that the potential co-investor
may bring to the investment or transaction, whether a potential co-investor has expressed interest
in co-investment opportunities, the market or opportunity size, the amount of capital needed for
the potential investment, the number of investors that can practically participate in the
transaction, HCM’s assessment of the potential co-investor’s ability to invest in an amount and
within the timeframe required by the investment, regulatory or tax considerations in the
investment, the portfolio company’s requirements or preferences, and such other factors that
HCM may deem relevant. Please see “Investment Allocations” below for additional information
relating to investment allocations.
Investment Allocations and Related Conflicts HCM faces a number of conflicts in allocating investment opportunities among its various
clients, including clients with similar or identical investment programs and clients that have
separate and distinct, but overlapping, investment programs. HCM may also face additional
allocation conflicts in connection with certain proprietary vehicles owned or controlled by HCM
and its affiliates. These conflicts are heightened by the fact that the various Funds and other
clients sponsored, advised, or managed by HCM and its various affiliates have different
management and incentive fee structures.
Not all of the opportunities that may be suitable for a given client will be presented to such
client. In some circumstances, HCM may allocate the same or similar trade or investment
opportunities among clients and proprietary vehicles. In other circumstances, HCM may allocate
investment opportunities to certain clients or to proprietary vehicles and not to other clients.
Where investment opportunities fall within the investment programs of more than one client,
HCM’s policy is to allocate investment opportunities among eligible clients fairly and equitably,
to the extent possible, over a period of time, taking into account certain considerations, including
(i) any applicable investment parameters, (ii) contractual obligations, (iii) legal, tax, regulatory
and other considerations, and (iv) internal allocation policies. In an effort to ensure fairness in
the allocation of investment opportunities among HCM’s clients. HCM has adopted allocation
policies and procedures that take into account various factors, including: the suitability of the
investment for each of HCM’s clients; HCM’s clients’ investment objectives and strategies;
lifespans and closing dates of HCM’s Funds or client mandates; existing portfolio composition
and existing holdings; net asset value; liquidity and reserve levels; risk profile; actual or
projected future capacity for investment and the timing thereof; eligibility; the portfolio
company’s requirements or preferences; targeted rate of return; the stage of development of the
prospective portfolio company or other investments; legal, tax, contractual, regulatory or other
considerations; cash levels and cash availability; anticipated holding period and remaining
investment periods; market exposure; market or opportunity size; currency exposure; and
industry sector exposure. To the extent that all or a portion of an investment opportunity is
deemed inappropriate for HCM’s clients, such as but not limited to investments in pooled
investment vehicles or similar structures managed by third parties that assess management fees
or performance fees/allocations, HCM, its employees and its affiliates may participate in such
opportunities as described in HCM’s policies and procedures.
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General Clients typically compensate HCM, in part, on the basis of asset management fees calculated as a
percentage of the funded and unfunded capital commitments of the client, or in certain instances,
a client’s assets under management. HCM generally deducts or charges asset management fees
from or to client accounts on a quarterly basis and such fee rates are individually negotiated with
HCM’s clients. Asset management fees are generally payable by clients in advance of the
beginning of each calendar quarter.
HCM also enters into arrangements to receive performance-based fees/allocations. In such
cases, HCM generally assesses performance-based fees/allocations primarily based on realized
investment profits, but may also assess performance-based fees/allocations based on unrealized
capital appreciation. In certain instances, such performance fees/allocations are subject to a
hurdle or preferred return. HCM generally receives a portion of its clients’ realized investment
profits as performance fees/allocations upon disposition of the relevant investment, but may
deduct or receive performance-based fees/allocations from client accounts annually, or collect
them directly from clients on an annual basis. HCM’s fee and compensation practices for Co-
Investment Arrangements are subject to a case-by-case agreement with the applicable client.
Performance-based fee/allocation rates are individually negotiated with HCM’s clients.
Neither HCM nor any of its “supervised persons” (as defined in the glossary of terms to the SEC
Form ADV) accepts compensation for the sale of securities or other investment products,
including asset-based sales charges or service fees from the sale of mutual funds.
Performance-Based Compensation HCM receives performance-based fees and allocations, as described above. HCM negotiates or
arranges such fees/allocations with clients before entering into advisory relationships. The
receipt of performance-based compensation may create an incentive for HCM to make
investments that are riskier or more speculative than those HCM would otherwise make in the
absence of such incentive compensation. HCM addresses this conflict by focusing on long-term
relationships with its clients and Fund investors, and by managing the Funds in accordance with
the applicable advisory agreement and/or governing documents.
HCM charges clients both asset-based fees and performance-based fees/allocations. However,
fees and other economic terms can be negotiated on a client-by-client basis and may vary.
Charging asset-based fees and performance-based fees/allocations may create a conflict of
interest because it creates an incentive to allocate the best-performing assets into client accounts
on which HCM charges performance-based fees/allocations. Additionally, the allocation of
performance fees and allocations at different rates, or subject to different hurdle rates or
preferred returns, may create an incentive for HCM or its affiliates to disproportionately allocate
time, services, or functions to accounts or vehicles with higher fees/allocations (or subject to a
lower hurdle rate or preferred return), or to allocate investment opportunities to such accounts or
vehicles.
HCM and its advisory affiliates recognize the possibility of such a conflict and address it through
HCM’s allocation policies and procedures and other relevant measures. Please see Item 4,
“Investment Allocations” for additional information on HCM’s investment allocation policies
and procedures. HCM does not charge performance-based fees where such an arrangement
would violate Section 205 of the U.S. Investment Advisers Act of 1940 (the “Advisers Act”)
pursuant to Rule 205-3 thereunder.
Valuation of Assets
The asset management fees and the performance-based fees/allocations charged to or made by a
client may be calculated based on valuations ascribed to the client’s holdings by HCM, which
presents a potential conflict. Valuations are also used for determining the prices at which
interests in Funds are redeemed or purchased, which underscores the importance of the need to
address any such conflict. HCM addresses this conflict by adhering to its valuation practices,
which include:
Engaging third party administrators, auditors, pricing sources, and valuation agents, from
time to time, to assist in certain valuation processes and confirmations; and
A Valuation Committee that seeks to implement HCM's valuation policies and
procedures and to make determinations and recommendations regarding the valuations
ascribed to the client holdings.
HCM’s valuation policies and procedures (i) seek to ensure that HCM’s determination of fair
value of client assets is appropriate, (ii) require all such determinations to be made in good faith,
and (iii) address relevant accounting standards.
Specific valuation procedures may differ based on the type of security and/or instrument and the
observability of market inputs. Certain terms related to HCM’s valuation policies and
procedures are incorporated into written investment management agreements entered into with
its clients and/or the Funds’ governing documents. There can be no assurance that the value
assigned to an investment at a certain time will equal the value that the client is ultimately able to
realize.
Expenses and Other Fees
Each client bears its own expenses and HCM’s general policy is that it will only assess expenses
against client accounts to the extent that such expenses are permissible client expenses under the
applicable client agreements. Allocable client expenses generally include: management fees and
performance fees/allocations; organizational and administration fees and expenses; taxes; costs
incurred in connection with the researching, evaluation, acquisition, monitoring and disposition
of investments (whether or not consummated); transaction costs; financing costs; insurance costs;
certain regulatory and tax compliance costs; and fees relating to service providers engaged for
the client’s business and operations, including, without limitation, attorneys, auditors,
accountants, valuation services, consultants, and custodians; and such other fees and expenses as
are provided for under the arrangement with each client.
Certain expenses may be charged to more than one client, in which case HCM will determine the
appropriate allocation of expenses among each client depending on the nature of the expense.
Certain expenses may be allocated between clients on a pro rata basis (as appropriate) while
others may be allocated more specifically based on other factors, such as the relevant clients that
have incurred the cost or received the benefit arising from the expenses.
Clients will incur brokerage and other transaction costs. Please see Item 12, “Brokerage
Practices,” below for a discussion of certain brokerage expenses. HCM has no affiliated broker-
dealers.
HCM or its affiliates may receive or be eligible to receive other fees or service payments
(including directors’ fees, transaction fees, break fees, or similar fees) from client portfolio
investments, which may be in addition to management fees. As set forth in the investment
advisory agreement or governing documents of the applicable client, HCM may, in some
circumstances, be obligated to reduce the amount of management fees paid by the relevant client
based on such fees received. In addition, HCM may forgo such fees or ensure such fees are
received by the applicable client.
Refunds and Fee Waivers In the event of the termination of a client’s advisory contract during a quarterly period, the client,
without request, will receive a pro rata refund of the portion of the asset management fee paid in
advance for the remaining balance of the quarter. Additionally, HCM assesses a pro rata asset
management fee to any client account created on any date other than the first day of any calendar
quarter.
HCM may, in its sole discretion, waive all or part of any fees or expenses payable by or
attributable to the Funds, Fund investors, or other clients.
HCM, its affiliates and/or each of their personnel may invest in one or more of the Funds directly
or indirectly through vehicles established by HCM for personnel. HCM, its affiliates and/or its
affiliates’ personnel are not generally subject to asset management fees or performance-based
fees/allocations with respect to their investments in the Funds.
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HCM receives performance-based compensation as described in Item 5, “Fees and
Compensation” above. As described above, HCM does not engage in side-by-side management
practices.
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HCM serves as an investment adviser to pooled investment vehicles whose underlying investors
are exclusively “accredited investors” (as defined in Rule 501(a) of Regulation D under the U.S.
Securities Act of 1933) and “qualified purchasers” (as defined in Section 2(a)(51) of the U.S.
Investment Company Act of 1940). Underlying investors in the pooled investment vehicles
HCM advises are generally endowments, foundations, non-profit organizations, pensions,
corporates, government entities, family offices, trusts, and other businesses or institutions.
HCM may also provide investment advice to institutional clients such as endowments,
foundations, non-profit organizations, pensions, corporates, government entities, family offices,
trusts, and other businesses or institutions.
Minimum Account Size Certain of the Funds require an initial minimum capital contribution of $10,000,000, but the
general partners of such Funds may accept contributions in lesser amounts in their sole and
absolute discretion, with an absolute minimum initial capital contribution of $100,000 (except
with respect to certain Funds and/or affiliated investors). HCM generally does not require clients
or investors to maintain a minimum investment to continue an advisory relationship or to remain
invested in the Funds.
Advisory Agreements All clients must enter into a written investment management, advisory, or similar agreement
before establishing an advisory relationship with HCM. HCM may not assign such agreements
without client consent.
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Methods of Analysis HCM’s research process employs fundamental, quantitative, and qualitative analysis, including
cyclical analysis. HCM focuses on developing a deep, fundamental understanding of investment
opportunities through rigorous due diligence and analysis. HCM’s bottom-up approach to
analysis and research is generally conducted on a company-by-company basis, but may extend to
competitors and industries. HCM evaluates the upside and downside of the companies and
opportunities identified and monitor them closely. HCM also conducts on-site visits, cross-
checks, and detailed financial analysis of investment opportunities. HCM’s analysis includes
vigilant monitoring that continues the due diligence process after an investment is entered into
the client’s portfolio. HCM’s extensive due diligence process also assists it in discovering and
exploring previously unknown investment opportunities.
Sources of Information HCM incorporates local expertise stemming from grassroots research to generate powerful
independent and proprietary views that drive its investment strategy. HCM generally adheres to
an exhaustive research framework, including face-to-face communication with management,
analysis of publications and other media, site visits, and dialogue with suppliers, customers, and
competitors.
Investment Strategies General Strategy. HCM’s investment decisions are based on bottom-up analysis and research.
HCM generally focuses on private (or otherwise less liquid) investment opportunities, including
venture capital, private equity, private debt and buyout transactions, across multiple industries,
but it may also participate in publicly-listed (or similarly liquid) investment opportunities. HCM
invests primarily in reasonably priced companies that provide substantial long-term growth
prospects. Although HCM monitors macro-economic factors and market trends, HCM generally
avoids market-timing strategies and focuses primarily on bottom-up opportunities.
HCM invests globally with a particular focus on companies or assets having substantial relations
with Asia. HCM focuses on understanding fundamental risks, uncovering long-term growth
potential, and targeting industries that it understands and can monitor.
Short Strategy and Hedging. HCM may, from time to time, utilize short sales and maintain
short positions in order to hedge risks that are present in or that could affect a client portfolio, to
generate returns for a client account, or to structure and manage risks in an investment strategy.
HCM is cognizant of the risks of trading short and monitors exposure carefully. HCM is
cognizant of the risks of trading short and monitors exposure carefully.
Risk Factors Clients should be aware that any investment with HCM involves a high degree of risk and is
suitable only for investors of substantial means who have no need for liquidity with respect to the
amount invested and can afford to lose all of their investment. There can be no assurances that
HCM’s clients will receive a return of, or on, their capital.
Investors are advised to review the applicable Fund offering materials for a more extensive description of the risks of investing in the Funds. Investment risks include, but are not limited to, the following:
Risk of Loss. HCM does not guarantee the future performance of any client portfolio, the success
of any investment decision, strategy, or advice that HCM may employ or provide, or the success
of HCM’s overall management of any client. Any investment made in connection with HCM’s
advice or management involves significant risk, including the risk of loss of all or substantially
all capital invested. Investors should be prepared to bear the loss of the entire amount of their
investment.
International Investments Risk. HCM’s investments include equity and debt securities in a
number of international jurisdictions including securities with a substantial relationship with
Asia. International investments involve a broad range of political, economic, legal, tax, and
financial risks. Many of these risks are not typically associated with investments in securities of
companies in economies that have developed and been regulated over a longer period. These
risks include: (i) less publicly available information; (ii) varying levels of governmental
regulation and supervision; and (iii) foreign exchange controls.
Moreover, non-U.S. companies may not be subject to uniform accounting, auditing, and financial
reporting standards, practices, and requirements comparable to those applicable to U.S.
companies. Further, investing in securities of non-U.S. entities that are generally denominated in
non-U.S. currencies and utilization of options on non-U.S. securities involves certain
considerations comprising both risks and opportunities not typically associated with investing in
securities of the U.S. government or entities organized or domiciled in the U.S. These
considerations include changes in exchange rates and exchange control regulations; political and
social instability; expropriation; imposition of foreign taxes; less liquid markets and less
available information than is generally the case in the U.S.; higher transaction costs; foreign
government restrictions; less government supervision of exchanges, brokers and issuers; greater
risks associated with counterparties and settlement; difficulty in enforcing contractual
obligations; and greater price volatility.
Further, income or proceeds received by a client from sources within some countries may be
reduced by withholding and other taxes imposed by such countries. Any such taxes paid by a
client will reduce its net income or return from such investments.
Emerging Markets Risk. Investing in an emerging market involves additional risks and special
considerations not typically associated with investing in other more established economies or
securities markets. Emerging economies differ from other large economies in many respects,
including the level of development, growth rate, and allocation of resources.
Such risks may include: (i) increased risk of nationalization, expropriation of assets, or
confiscatory taxation; (ii) greater social, economic, and political uncertainty, including war; (iii)
higher dependence on exports and the corresponding importance of international trade; (iv)
greater volatility, less liquidity, and smaller capitalization of securities markets; (v) greater
volatility in currency exchange rates; (vi) greater risk of inflation; (vii) greater controls on
foreign investment and limitations on repatriation of invested capital and on the ability to
exchange local currencies for U.S. dollars; (viii) increased likelihood of governmental decisions
to cease support of economic reform programs or to impose centrally planned economies; (ix)
differences in auditing and financial reporting standards, which may result in the unavailability
of material information about issuers; (x) less extensive regulation of the securities markets; (xi)
longer settlement periods for securities transactions and less reliable clearance and custody
arrangements; (xii) less protection through registration of assets; (xiii) less developed corporate
laws regarding fiduciary duties of officers and directors and protection of shareholders and other
interest holders; and (xiv) less developed laws regarding internal controls designed to ensure the
accuracy of financial reporting and third-party attestation of the effectiveness of those controls.
Moreover, the value of HCM’s investments may be adversely affected by uncertainties
associated with international political developments. Changes in political, economic, and social
conditions and government policies in the PRC and elsewhere in Asia may have a substantial
detrimental impact on HCM’s clients’ investments. These changes may include: (i)
promulgation of new laws, regulations, and economic policies; (ii) changes in the interpretation
or enforcement of laws or regulations; (iii) introduction of measures to control inflation or
stimulate growth; (iv) changes in the rate or method of taxation; and (v) the imposition of
additional restrictions on currency conversion and remittances abroad.
Availability of Suitable Investment Opportunities and Investment Risk. For HCM’s investment
strategies to be successful, it must be able to identify and select appropriate investment
opportunities. Additionally, HCM competes for investment opportunities with operating
companies, financial institutions, and other institutional investors, including private equity,
hedge, and other investment funds, which may negatively impact HCM’s ability to take
advantage of suitable investment opportunities. Successful implementation of the investment
strategy adopted by HCM requires accurate assessments of general economic conditions, the
detailed analysis of individual companies or industries, the relationship between a security and
its derivatives, the risk correlation between a wide variety of investments, and the future
behavior of other financial market participants. Even with the most careful analysis, the
direction of the financial markets is often driven by unforeseeable economic, political, and other
events and the reaction of market participants to these events. HCM’s clients should be aware
that the value of their investments and the return derived from them may fluctuate. There can be
no assurance that HCM’s strategy will be successful and an unsuccessful strategy may result in
significant losses to HCM’s clients’ investments. Further, there can be no assurance that the
investments HCM chooses will achieve HCM’s clients’ investment objectives. Additionally,
though investments are monitored in accordance with HCM’s policies, as well as risk
management policies and restrictions in prospectuses, investment advisory agreements or
governing documents, there can be no guarantee that losses will be avoided at all times. There is
a risk that HCM’s clients’ investments will be lost entirely or in part. Past performance should
not be construed as an indication of the future results of an investment that HCM monitors,
recommends, or trades for its clients.
Strategy Risk. Fundamental analysis, by itself, does not attempt to anticipate market movements.
This presents a potential risk and, although HCM considers overall market conditions in its
investment strategies, the price of a security may move up or down along with the overall market
regardless of the economic and financial factors considered in evaluating the investment.
Likewise, HCM’s long-term growth strategy may not take advantage of short-term gains that
could be profitable. If HCM’s predictions are incorrect, a security may decline sharply in value
before client investments are sold.
Hedging Policies/Risks. In connection with the consummation of investments, HCM’s client
may or may not employ hedging techniques designed to protect such clients against adverse
movements in currency or prices. In the event as client does employ hedging techniques, it will
do so in order to: (i) protect against possible changes in the market value of the client’s
investment portfolio resulting from fluctuations in the markets and changes in interest rates;
(ii) protect the client’s unrealized gains in the value of its investment portfolio; (iii) facilitate the
sale of any securities; (iv) enhance or preserve returns, spreads or gains on any security in the
client’s portfolio; (v) hedge against a directional trade; (vi) hedge the interest rate, credit or
currency exchange rate on any of the client’s securities; (vii) protect against any increase in the
price of any securities the client anticipates purchasing at a later date; or (viii) act for any other
reason that HCM deems appropriate. HCM’s clients will not be required to hedge any particular
risk in connection with a particular transaction or its portfolio generally. HCM may be unable to
anticipate the occurrence of a particular risk and, therefore, may be unable to attempt to hedge
against it. While HCM’s clients may enter into hedging transactions to seek to reduce risk, such
transactions may result in a poorer overall performance for HCM’s clients than if they had not
engaged in any such hedging transaction. Moreover, the portfolio will always be exposed to
certain risks that cannot be hedged.
Leverage and Borrowing.
Leverage for Investment Purposes. HCM’s clients may employ leverage in their investment
activities. The use of leverage will allow HCM’s clients to make additional investments, thereby
increasing their exposure to assets, such that their total assets may be greater than their capital.
However, leverage will also magnify the volatility of changes in the value of the clients’
portfolio. The effect of the use of leverage by HCM’s clients in a market that moves adversely
to their investments could result in losses to such clients, which would be greater than if such
clients were not leveraged.
Collateral. HCM’s clients may pledge their securities to counterparties in order to borrow or
otherwise obtain leverage for investment or other purposes. Should the securities pledged to
counterparties to secure HCM’s clients’ margin accounts decline in value, the clients could be
subject to a “margin call,” pursuant to which the clients must either deposit additional funds or
securities with the broker or suffer mandatory liquidation of the pledged securities to compensate
for the decline in value. The banks and dealers that provide financing to HCM’s clients can
apply essentially discretionary margin, “haircut,” financing and collateral valuation policies.
Changes by counterparties in any of the foregoing may result in large margin calls, loss of
financing and forced liquidations of positions at disadvantageous prices.
HCM’s clients also may borrow money from and/or enter into guarantees, pledges or financing
arrangements with third-parties or investors to make investments or satisfy other obligations
outside of a brokerage arrangement. The terms of any such borrowings, guarantees, pledges or
financing arrangements may require HCM's Funds and other clients to pledge or encumber their
assets to provide security to any such counterparty. Borrowing arrangements involve costs and
expenses, which are generally for the account of the relevant client. Such counterparties that
provide other types of asset-based or secured financing to HCM’s clients may have rights similar
to those of brokers providing leverage. There can be no assurance that the clients will be able to
secure or maintain adequate financing.
Costs. Borrowings will be subject to interest, transaction and other costs, and other types of
leverage also involve transaction and other costs. Any such costs may or may not be recovered
by the return on the clients’ portfolios.
Equity Risk. Because of the nature of HCM’s investment strategies, clients are subject to the
risk that prices will fall over short or extended periods of time, and clients could lose all, or a
substantial portion, of the value of their investments.
Business Risk. Investments made by HCM’s clients may report poor results and industry and/or
economic trends and developments could have a greater impact on certain companies in
comparison to the market as a whole. The prices of these companies’ securities may decline in
response.
Market Risk and Disruptions. The price of a security may decline in response to certain
tangible and intangible events and conditions, including, but not limited to: conditions directly
involving the issuers of the securities; general economic conditions; overall market changes;
local, regional, or global political, social, or economic instability; governmental responses to
economic conditions; and currency, interest rate, and commodity price fluctuations. Such events
are beyond HCM’s control and may be independent of a security’s particular underlying
circumstances. Further, the global financial markets have undergone and may further undergo
pervasive and fundamental disruptions that have led to extensive and unprecedented
governmental intervention. Such intervention has, in certain cases, been implemented on a
sudden and “emergency” basis. This has substantially limited the ability of market participants
to continue to implement certain strategies or manage the risk of their outstanding positions. In
addition, as one would expect given the complexities of the financial markets and the limited
time frame within which governments have felt compelled to take action, these interventions
may be perceived as unclear in scope and application and such perceptions can contribute to
general uncertainty in the markets. Clients may incur major losses in the event of disrupted
markets and other extraordinary events in which historical pricing relationships (on which HCM
may base its advice) become materially distorted. The risk of loss from pricing distortions is
compounded by the fact that in disrupted markets many positions become illiquid, making it
difficult or impossible to close out positions against which the markets are moving. Market
disruptions may from time to time cause dramatic losses for HCM’s clients, and such events can
result in otherwise historically low-risk strategies performing with unprecedented volatility and
risk. It is impossible to predict what additional interim or permanent governmental restrictions
may be imposed on the markets and/or the effect of such restrictions on HCM’s strategies.
Interest Rate Fluctuations Risk. The prices of some of the financial derivative instruments in
which HCM may invest client assets may be sensitive to interest rate fluctuations. Unexpected
fluctuations in interest rates could cause the corresponding prices of HCM’s clients’ long and
short positions to move in directions that were not initially anticipated. Additionally, interest
rate increases generally will increase the costs of borrowing. To the extent that interest rate
assumptions underlie the hedge ratios implemented in hedging a particular position, fluctuations
in interest rates could invalidate those underlying assumptions and expose HCM’s clients to
losses.
Investment Regulations Risk. The laws and regulations of various jurisdictions related to
securities markets, investment advisers, and pooled investment vehicles have undergone
substantial change in recent years, and such change may continue in the foreseeable future. The
effect of regulatory change on HCM and its clients, while impossible to predict, could be
substantial and adverse.
Securities Markets Risk. The PRC securities markets, including the Shanghai Stock Exchange
and Shenzhen Stock Exchange,
are undergoing a period of growth and change that may lead to
difficulties in the settlement and recording of transactions and in interpreting and applying the
relevant regulations. In addition, there is regulation and enforcement activity in the PRC
securities markets that may not be equivalent to markets in countries that are members of the
Organization for Economic Co-operation and Development (“OECD”), including the U.S. There
may not be regulation and monitoring of the PRC securities markets and activities of investors,
brokers, and other participants equivalent to that in certain OECD markets. Client investments
may be disrupted if changes are adopted in any applicable laws or regulations such that it
becomes illegal for the issuers to issue certain instruments. Such changes, if implemented, may
cause HCM’s clients to suffer substantial losses.
PRC Laws and Regulations Risk. Under HCM’s current investment program, clients will have
exposure to investments in the PRC. The PRC legal system is a civil law system based on
written statutes. Since 1979, the PRC government has been developing a comprehensive system
of commercial laws and considerable progress has been made in the promulgation of laws and
regulations dealing with economic matters, such as corporate organization and governance,
foreign investment, commerce, taxation, and trade. Therefore, some degree of uncertainty exists
in connection with whether existing laws and regulations will apply to certain events or
circumstances and, if so, the manner of such application. Precedents on the interpretation,
implementation, and enforcement of PRC laws and regulations are somewhat limited and the
binding nature of decisions of PRC courts may vary. The administration of PRC laws and
regulations may be subject to a certain degree of discretion by executive authorities. In
particular, as mentioned below, new investment regulations have a shorter operating history.
Because these laws, regulations, and legal requirements are relatively recent, their interpretation
and enforcement involve some uncertainty. In addition, PRC laws governing business
organizations, bankruptcy, and insolvency have less of an operating history, which may lead to
less certainty on protections for security holders than that provided by the laws of some other
countries.
PRC Enterprise Income Tax. According to the Enterprise Income Tax Law of the PRC, which
became effective on January 1, 2008 (the “Enterprise Income Tax Law”), dividends, interest,
rents, royalties, capital gains, and other income from PRC sources recognized by non-PRC tax
resident enterprises are generally subject to PRC Enterprise Income Tax (“EIT”) at a rate of
20%, provided that (i) the non-PRC tax resident enterprise does not have an establishment or
place of business or a permanent establishment (the establishment/place of business and
permanent establishment are collectively referred to as “PE”) within China or (ii) although the
non-PRC tax resident enterprise has a PE within China, the income received by such non-PRC
tax resident enterprise has no actual connection with such PE. The implementation regulations
of the Enterprise Income Tax Law reduced the rate of EIT imposed by the Enterprise Income
Tax Law from 20% to 10% for PRC-sourced income recognized by non-PRC tax resident
enterprises under “non-PE” situations. In addition, the EIT rate may be reduced or exempted if
there is any applicable tax treaty or arrangement.
PRC Stamp Duty. PRC stamp duty may be imposed on the making of certain investments in the
PRC. According to regulations effective September 19, 2008, the purchase of shares of PRC-
listed companies will not be subject to PRC stamp duty and only the selling party will be subject
to the PRC stamp duty for the transfer of shares. A person licensed as a Qualified Foreign
Institutional Investor (“QFII”) by the China Securities Regulatory Commission (the “CSRC”) is
subject to PRC stamp duty on each sale made in PRC-listed shares, which may adversely affect
investment returns.
PRC Value-added Tax (“VAT”) Risk. Pursuant to the
Circular on Full Implementation of
Transferring Business Tax to Value Added Tax Reform (Caishui [2016] No. 36) issued by the
MOF and the SAT on March 23, 2016 (the “VAT Circular”), VAT was introduced to replace
Business Tax for all business activities effective from May 1, 2016. VAT is applicable where
entities or individuals provide services within the PRC. The VAT Circular specifically provides
that QFIIs are exempt from VAT with respect to gains derived from their securities trading
activities in China via PRC trading agents. Furthermore, the
Supplementary Notice of the MOF
and the SAT on VAT Policies for Interbank Dealings of Financial Institutions (Caishui [2016]
No. 70), which came into effect retroactively on May 1, 2016 (the “Interbank VAT Circular”),
further clarifies that income derived from the investment in interbank local currency market (i.e.,
the interbank bond market) by a foreign institution which is duly recognized by the People’s
Bank of China shall be exempted from VAT. Therefore, once the conditions set forth by the
Interbank VAT Circular are satisfied, a QFII will also be exempted from VAT for its income
from certain interbank transactions. According to Circular 108, during the time period between
November 7, 2018 and November 6, 2021, interests derived from a foreign institution’s
(including a QFII’s) investments in PRC debt securities market are also exempted from PRC
VAT. If certain gains are exempted from VAT, they shall also be exempted from local
surcharges calculated based on VAT. According to the VAT Circular, interests received from
government bonds and local government bonds are exempt from VAT.
Liquidity Risk. Some companies or investments in which HCM’s clients invest may not be well
known, may have few shares outstanding, may have contractual or regulatory restrictions on
disposal, or may be particularly susceptible to political and economic events. Securities issued
by such companies may be difficult to buy or sell and the value of such securities may rise and/or
fall substantially before such securities may be bought or sold.
Currency Risk; Liquidity and Exchange Controls. Changes in currency prices may adversely
affect the base currency value of a client’s portfolio investments and gains and losses on the sale
of portfolio investments. Clients may also incur costs in converting investment proceeds from
one currency to another. At present, renminbi (“RMB”) and certain other relevant currencies are
restricted currencies and are not freely convertible. Remittances or conversion of RMB and
certain other relevant currencies may be subject to approval from competent authorities. HCM’s
clients may be exposed to exchange control risk in connection with their investments. Relevant
authorities may change the current exchange control such that it may adversely impact the
liquidity of HCM’s clients’ investments and an active secondary market may not be developed or
maintained.
Uncertain Exit Strategies. Due to the illiquid nature of many investments that clients are
expected to make, HCM is unable to predict with confidence what the exit strategy will
ultimately be for any investment, or that one will definitely be available. Exit strategies which
appear to be viable when an investment is initiated may be precluded by the time the investment
is ready to be realized due to economic, legal, political or other factors.
Although investments by clients occasionally generate some current income, private equity and
similar investment transaction structures typically will not provide for liquidity of such clients’
investments prior to that time. It is unlikely there will be a public market for such investments at
the time of their acquisition. In the case of privately negotiated transactions that involve equity
or equity-linked investments in private companies, clients generally will not be able to sell their
securities or instruments publicly unless the issuer has gone public and such sale is registered
under applicable securities laws or unless an exemption from such registration requirements is
available. In addition, in some cases a client will be prohibited by contract or other limitation
from selling certain securities or instruments for a period of time (e.g., due to limitations on sale
arising from contractual lockups, obligations to receive consent to transfer or assign interests, or
rights of first offer), and as a result may not be permitted to sell an investment at a time it might
otherwise desire to do so. Further, disposition of such investments may require a lengthy time
period or result in distributions in kind to investors. Thus, the range of disposal strategies
available to clients would be further limited.
A client may invest in investments which cannot be advantageously disposed of prior to the date
that such client will be dissolved, either by expiration of such client’s term or otherwise.
Although HCM expects that investments will be disposed of prior to dissolution or be suitable
for in-kind distribution at dissolution, it may be necessary or advisable for such client to sell,
distribute or otherwise dispose of investments at a disadvantageous time as a result of
dissolution.
Valuation of Investments. Clients’ investments may include securities or other financial
instruments or obligations that are very thinly traded or for which no market exists and which
may be difficult to value accurately. Although HCM will determine the fair value of such
investments based on various factors and may engage an independent third party to review such
valuations, the valuation of such investments is inherently subjective and subject to increased
risk that the information utilized to value the investment or to create price models may be
inaccurate or subject to other errors. In addition, securities which HCM believes are
fundamentally undervalued or overvalued may not ultimately be valued in the capital markets at
prices and / or within the time frame HCM anticipates. Because of this significant uncertainty as
to the valuation of illiquid investments, the values of such investments may not necessarily
reflect the values that could actually be realized by clients. Under certain conditions a client may
be forced to sell its investments at lower prices than it had expected to realize or defer –
potentially for a considerable period of time – sales that it had planned to make. In addition,
under limited circumstances, HCM may not have access to all material information relevant to a
valuation analysis with respect to an investment. As a result, the valuation of an investment,
may be based on imperfect information and is subject to inherent uncertainties.
Risk of Early Stage Companies. Investments in the equity of private companies at an early
stage of development involves a high degree of business and financial risk. Early-stage
companies with little or no operating history may require substantial additional capital to support
expansion or to achieve or maintain a competitive position, may produce substantial variations in
operating results from period to period or may operate at a loss. Such companies may face
intense competition, including competition from companies with greater financial resources,
more extensive development, better marketing and service capabilities and a larger number of
qualified management and technical personnel. Such risks may adversely affect the performance
of such investments and result in substantial losses.
Additional Capital Requirements of Portfolio Companies. Certain of the clients’ portfolio
companies or pooled investment vehicle holdings, especially those in a development, acquisition,
or “platform” phase, may require additional financing to satisfy working capital requirements or
acquisition strategies. Following its initial investment in a company, a client may be called upon
to provide additional capital to, or have the opportunity to increase its investment in, an
investment opportunity. Although clients may make a follow-on investment, there is no
assurance that those clients and their co-investors (if any) will provide all necessary follow-on
capital. The amount of such additional financing will depend upon the maturity and objectives
of the particular portfolio company. Each such round of financing (whether from a Fund or other
investors) is typically intended to provide enough capital to reach the next major corporate
milestone. If the funds provided are not sufficient, a portfolio company may have to raise
additional capital at a price unfavorable to the existing investors, including the relevant client, or
there may be severe penalties for a failure to fund required contributions. In addition, a client or
such other investor may make additional debt and equity investments or exercise warrants,
options or convertible securities that were acquired in the initial investment in a portfolio
company in order to preserve the Fund’s proportionate ownership when a subsequent financing
is planned, or to protect the investor’s investment when such portfolio company’s performance
does not meet expectations. The availability of capital is generally a function of capital market
conditions that are beyond the control of an investor or any portfolio company. There can be no
assurance that a portfolio company will be able to predict accurately the future capital
requirements necessary for success or that additional funds will be available from any source.
Bridge Financings. From time to time, a client may lend with respect to an investment or a
potential investment on a short-term, unsecured basis in anticipation of a future issuance of
equity or long-term debt securities. Such bridge loans would typically be convertible into a more
permanent, long-term security. However, for reasons not always in such client’s control, such
long-term securities may not be issued and such bridge loans may remain outstanding. In such
event, the interest rate on such loans may not adequately reflect the risk associated with the
unsecured position taken by that client.
Nature of Investment. Certain clients may invest in companies that are experiencing or are
expected to experience severe financial difficulties, which difficulties may never be overcome.
Clients may also make investments in companies in a conceptual or early stage of development
that may not have a proven operating history on which to judge future performance. Such
investments are considered highly speculative and may result in the loss of the relevant clients’
entire investment. Since certain clients may only make a limited number of investments and
since many of HCA’s investments may involve a high degree of risk, poor performance by a few
of its investments could significantly reduce the total returns to such clients.
Third Party Involvement. HCM’s clients may co-invest in portfolio companies with one or
more third parties. Such investments may involve risks in connection with such third-party
involvement, including the possibility that a third-party co-investor may have financial, legal, or
regulatory difficulties, resulting in a negative impact on such investment, may have economic or
business interests or goals which are inconsistent with the relevant clients, or may be in a
position to take or block action in a manner contrary to such clients’ investment objectives. In
addition, the clients may, in certain circumstances, be liable for the actions of such third-party
co-investors. In circumstances where a management group is included as a third-party co-
investor, such third party may receive compensation arrangements relating to such investments,
including incentive compensation arrangements.
Reliance on the Management of Portfolio Companies. Although it is HCM’s intention to
ensure that portfolio companies have strong management teams, there can be no assurance that
any portfolio company’s management team will be able to operate successfully. With respect to
early-stage or recently developed investment opportunities, HCM may have limited ability to
evaluate the management of such companies based on past performance, and such companies
may rely more on individual members of the management team than would be the case for more
established companies. Instances of fraud and other deceptive practices committed by the
management teams of portfolio companies in which a client has an investment may undermine
HCM’s due diligence efforts with respect to such companies. If such fraud is discovered, it
could materially adversely affect the valuation of a client’s investments and may contribute to
overall market volatility that could negatively impact a client’s investments.
Uncertainty of Financial Projections. Projected operating results provided by companies or
generated internally will normally be based primarily on management or internal judgments. In
all cases, projections are only estimates of future results that are based upon assumptions made at
the time that the projections are developed. There can be no assurance that the projected results
will be obtained, and actual results may vary significantly from the projections. General
economic conditions, which are not predictable, can have a material adverse impact on the
reliability of projections.
Due Diligence Risk. Before making an investment in a private company, due diligence that is
deemed reasonable and appropriate based on the facts and circumstances applicable to each asset
or company will be conducted. Due diligence generally entails evaluation of important and
complex business, financial, tax, accounting, environmental and legal issues. Outside
consultants, legal advisors, accountants, investment banks and other third parties are involved
from time to time in the due diligence process to varying degrees depending on the type of
investment. Such involvement of third-party advisors or consultants may present a number of
risks primarily relating to reduced control of the functions that are outsourced. In addition, if
third-party providers are unable to be engaged in a timely manner, its ability to evaluate and
acquire more complex targets could be adversely affected. When conducting due diligence and
making an assessment regarding an investment, HCM will rely on the resources available to it,
including information provided by the target of the investment and, in some circumstances, third-
party investigations. The due diligence investigation that HCM carries out with respect to any
investment opportunity may not reveal or highlight all relevant facts that are necessary or helpful
in evaluating such investment opportunity. Moreover, such an investigation will not necessarily
result in an investment in a company being successful.
Control Issues. Although HCM may seek protective provisions, including possible board
representation in connection with certain of its private equity or similar investments, to the extent
a client takes minority positions in companies in which it invests, HCM may not be in a position
to exercise control over the management of such companies, and, accordingly, may have a
limited ability to protect its position in such companies.
Controlling Interests. Because of its equity ownership, representation on the board of directors
and/or contractual rights, a client may often be considered to control, participate in the
management of, or influence the conduct of portfolio companies. The designation of HCM’s
professionals as directors and exercise of control over a portfolio company may impose
additional risks of liability for environmental damage, product defects, pension and other fringe
benefits, failure to supervise management, violation of fiduciary duties, violation of laws and
governmental regulations (including securities laws), and other types of liability, for which the
limited liability generally afforded to investors may be ignored. If these liabilities were to arise,
a client may suffer a significant loss, exposing the assets of such client to claims by a portfolio
company, its other security holders, its creditors, or governmental agencies, which may exceed
the value of such client’s initial investment in that portfolio company.
Difficulty of Bringing Suit. The ability of a client to bring suit against a portfolio company or
its directors, executive officers, or other shareholders may be limited. Portfolio companies are
likely to be organized under the laws of countries other than the U.S., their directors and officers
are likely to reside outside of the U.S., and substantially all of their assets may be located outside
of the U.S. As a result, it is likely that a client will be unable to effect service of process within
the U.S. upon such entities or their directors and officers. Even where an entity is successfully
sued in the U.S., enforcement of the judgment in certain jurisdictions is impossible and in other
jurisdictions may be difficult.
Local Intermediary Risk. Client transactions may be undertaken through local brokers, banks, or
other organizations, and the clients will be subject to the risk of default, insolvency, or fraud of
such organizations. Such local brokers, banks, and other organizations are subject to various
laws and regulations in various jurisdictions that are designed to protect their customers in the
event of insolvency. However, the practical effect of these laws and their application to clients’
assets are subject to substantial limitations and uncertainties. There can be no assurance that any
money advanced to such organizations will be repaid or that the clients would have any recourse
in the event of default. The collection, transfer, and deposit of bearer securities and cash expose
clients to a variety of risks including theft, loss, and destruction.
Derivative Instruments Risk. HCM may invest client assets in derivative instruments. The
prices of derivative instruments, including futures and options, are highly volatile. Payments
made pursuant to swap agreements may also be highly volatile. Price movements of futures and
options contracts and payments pursuant to swap agreements are influenced by, among other
things: interest rates; changing supply and demand relationships; trade, fiscal, monetary and
exchange control programs and policies of governments; and national and international political
and economic events and policies. The value of futures, options, and swap agreements also
depends upon the price of the assets underlying them. In addition, such instruments are subject
to counterparty risk. Certain options and other custom instruments are subject to the risk of non-
performance by the counterparty, including risks of creditworthiness of the counterparty, market
risk, liquidity risk, and operations risk. If a counterparty’s creditworthiness declines, the value of
any agreements with such counterparty can be expected to decline, potentially resulting in loss.
In connection with exchange-listed or centrally-cleared instruments, clients are subject to the risk
of failure of any of the clearing houses or clearing members through which their positions are
cleared.
Short-Selling Risk. HCM may engage in short-selling securities on behalf of its clients, which
involves: (i) selling securities which may or may not be owned by the short seller; and (ii)
borrowing them for delivery to the purchaser, with an obligation to replace the borrowed
securities at a later date. Short-selling allows a client to profit from a decline in market price to
the extent such decline exceeds the transactions costs and the costs of borrowing the securities.
A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying
security could theoretically increase without limit. This would in turn increase the cost to the
client of buying those securities to cover the short position. There can be no assurance that a
client will be able to maintain the ability to borrow securities sold short. In such cases, the client
can be “bought in” (i.e., forced to repurchase securities in the open market to return to the
lender). There also can be no assurance that the securities necessary to cover a short position
will be available for purchase at or near prices quoted in the market. Purchasing securities to
close out a short position can itself cause the price of the securities to rise further, thereby
exacerbating the loss. In addition, short-selling activities are subject to restrictions imposed by
other foreign governmental and regulatory authorities and various securities exchanges. Such
restrictions may inhibit or prevent HCM from entering into a short position on behalf of a client.
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To HCM’s knowledge, after due inquiry, none of HCM, its affiliates, or any of their respective
management personnel has been involved in, or subject to, any disciplinary events or legal
actions that would be material to a client’s or prospective client’s evaluation of HCM’s advisory
business or the integrity of HCM’s management.
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Neither HCM nor any member of its management is registered, or has an application pending to
register, as a broker-dealer, a registered representative of a broker-dealer, a futures commission
merchant (an “FCM”), a commodity pool operator (a “CPO”), a commodity trading advisor
(“CTA”), or an associated person of a registered FCM, CPO, or CTA. HCM and certain of its
affiliates act as CPOs for their clients, but they are exempt from registration with the Commodity
Futures Trading Commission (the “CFTC”) pursuant to CFTC Rule 4.13(a)(3) under the U.S.
Commodity Exchange Act. This exemption is based primarily upon the clients’ limited
commodity interest trading. Unlike registered CPOs, HCM and its relevant affiliates are not
required to deliver to investors disclosure documents or certified annual reports contemplated by
CFTC rules applicable to registered CPOs. Likewise, HCM and certain of its affiliates act as
CTAs for some of their clients, but are exempt from registration as CTAs and therefore are not
required to satisfy certain requirements contemplated by CFTC rules applicable to registered
CTAs.
Certain members of HCM’s management constitute and/or serve as the directors of general
partners of certain of the Funds. Such relationships create a potential conflict of interest, which
HCM seeks to address in a number of ways, including by disclosing the terms of the relevant
partnership agreement to the Funds’ investors.
All qualifying HCM personnel (and qualifying personnel of the non-U.S. affiliates discussed in
Item 4) are treated as “access persons” by HCM within the meaning of Rule 204A-1 under the
Advisers Act, and are subjected to HCM’s Code of Ethics. Please see Item 11, “Code of Ethics,
Participation or Interest in Client Transactions, and Personal Trading” below for additional
information about HCM’s Code of Ethics.
An HCM affiliate, Hillhouse Capital Advisors, Ltd., (“HCA”) is also an SEC-registered
investment adviser. While HCA and HCM may, from time to time, invest in similar strategies or
companies, HCA-advised clients generally focus on publicly-listed (or similarly liquid)
investment opportunities, while HCM-advised clients largely focus on private (or otherwise less
liquid) investment opportunities, including venture capital, private equity, private debt and
buyout transactions. Therefore, investment results may differ as between HCM’s clients and
HCA’s clients. To address these potential conflicts of interests, HCM has adopted policies and
procedures, including a Code of Ethics. Please see Item 11, “Code of Ethics, Participation or
Interest in Client Transactions, and Personal Trading,” below for additional information about
HCM’s Code of Ethics.
HCM and HCA use shared personnel for certain services, including personnel of certain non-
U.S. affiliates, as discussed in Item 4 above. Shared personnel may include back office
personnel as well as professionals who provide portfolio advice. Such shared personnel may
have conflicts of interest in allocating their time and resources between HCM and HCA.
Different performance or management compensation structures or incentives may apply to
shared personnel, which may also create a conflict of interest. HCM has adopted policies and
procedures, including a Code of Ethics, to address these potential conflicts of interest.
Different performance and management fees may be charged for substantially similar products
HCM manages or advises, which may also create a conflict of interest. Please see Item 5, “Fees
and Compensation” above for information regarding how HCM is compensated by its clients, the
potential conflict of interest created by allocating investment opportunities among clients, and
how HCM addresses the potential conflict of interest.
HCM does not recommend or select third-party investment advisers for its clients. None of
HCM, HCA, or any other affiliate receives compensation, directly or indirectly, from any of the
others for any recommendation of the other. In addition, none of HCM, HCA, or any other
affiliate, directly or indirectly, pays or receives compensation to or from third parties in
connection with recommending advisory services.
Other conflicts not discussed above may arise in connection with HCM’s advisory business.
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PERSONAL TRADING General Code of Ethics HCM expects its employees to be responsible for maintaining the highest ethical standards when
conducting business. In keeping with these standards, HCM’s employees must always place its
clients’ interests ahead of their own. Moreover, HCM’s employees should adhere to the spirit as
well as the letter of the law and be vigilant in guarding against anything that could
inappropriately skew their judgment.
Pursuant to Rule 204A-1 under the Advisers Act, HCM has adopted a Code of Ethics (the
“Code”) which sets forth standards of business and personal conduct for all HCM employees,
and addresses conflicts of interest that may arise from personal trading by employees or gifts and
entertainment received or provided by employees. The Code sets forth, among other things,
standards for the purpose of deterring wrongdoing and promoting: (i) honest and ethical
reporting; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents;
(iii) compliance with applicable laws, rules, and regulations; (iv) prompt internal reporting of
violations of the Code; and (v) accountability for adherence to the Code. Clients or potential
clients may obtain a copy of the Code free of charge by writing to HCM’s Chief Compliance
Officer at the address on the cover page of this Brochure.
As discussed in Item 10, qualifying personnel of the non-U.S. affiliates discussed in Item 4 are
treated as “access persons” by HCM within the meaning of Rule 204A-1 under the Advisers Act,
and are subjected to HCM’s Code of Ethics.
Interest in Client Transactions Clients of HCM and its affiliates (such persons, the “Other Hillhouse Investors”) may hold
investments similar to or the same as those made or proposed to be made by other of HCM’s
clients. Investments held by Other Hillhouse Investors may be in the same or similar securities
as those held by HCM’s other clients, but acquired at different times, at lower or higher prices or
valuations, and on different terms than those upon which HCM’s clients acquire an investment.
The different prices paid for, or terms of, securities held by the Other Hillhouse Investors may
create conflicts of interest. HCM has adopted an aggregation and allocation policy to help assure
investment opportunities are recommended or allocated in a fair and equitable manner. As
described more fully in Item 5 under “Fees and Compensation,” HCM takes various factors into
account in making recommendation and allocation decisions.
Please see Item 5, “Fees and Compensation,” and Item 10, “Other Financial Industry Activities
and Affiliations,” above for a discussion of the potential conflict of interest created by allocating
investment opportunities among client accounts and how HCM addresses the potential conflict of
interest.
Personal Trading The Code is designed to assure that the personal securities transactions, activities, and interests
of HCM’s employees do not interfere with their judgment in advising HCM’s clients. HCM
discourages its employees from personal trading due to the conflicts of interest (real and
apparent) that such trading may present. Employees must seek pre-clearance for all reportable
personal securities transactions and provide post-trading details of all approved personal trades.
Employees also must provide HCM with detailed information regarding their reportable personal
securities holdings, which they must update on a quarterly basis. Although employees are not
prohibited from personal trading, employees are prohibited from short-term trading or
speculation, and employees must present any investment opportunities suitable for any
investment strategy of HCM’s clients to such clients prior to engaging in any transaction related
thereto for personal benefit. To minimize the risk of potential conflicts of interests, employees
and their immediate family members may not, directly or indirectly, make personal trades in any
security, company, asset, or investment product (i) located in or having a substantial business
relation to Asia, or (ii) under research, traded in, or contemplated to be traded in by HCM, in
each case without the consent of the Chief Compliance Officer.
Service on Boards of Directors Representatives of HCM, HCA, or their other affiliates may, from time to time, serve on the
boards of directors of portfolio and other companies. A HCM representative serving as a
director for a company has fiduciary duties to the company, as well as to HCM’s clients. These
separate fiduciary obligations may create conflicts of interest that must be mitigated to ensure the
HCM representative serving as director does not breach his or her fiduciary obligations. In
addition, if HCM obtains material, non-public information by virtue of a representative serving
as a director of a company, HCM may be precluded from trading or making a recommendation
with respect to the securities of such company. HCM has adopted internal policies and
procedures to address conflicts of interest that may arise in connection with service on the board
of directors of a company.
Other Business Ventures HCM, its affiliates, and its clients may engage in other business ventures to the extent not
prohibited by agreements with its clients, independently or with others, including ventures
involving investing in securities or managing or participating in other investment funds, or
pursuing co-investments with HCM’s clients or otherwise investing in portfolio companies
independently of its clients. Other ventures undertaken by HCM and its affiliates may be
competitive with its clients. Conflicts of interest may arise as a result of such activities,
including in allocating management time, services or functions and allocating investment
opportunities.
In addition, as discussed above, HCM and its affiliates may provide investment advisory services
to Co-Investment Arrangements or portfolio companies, and may also invest directly or
indirectly in investment opportunities. HCM recognizes the potential for conflicts in these
situations and relies upon its allocation and other internal policies and procedures to ensure fair
and equitable allocation of investment opportunities, and to address other potential conflicts of
interest.
Other conflicts not discussed above may arise in connection with the management and operation
of HCM’s clients.
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HCM has discretionary authority to invest client assets under its management and thereby direct
trades. HCM chooses various brokers for more efficient and/or less expensive transactions, or
for non-financial relationship reasons. HCM endeavors to select brokers that provide the best
execution for securities transactions so that a client’s total costs or proceeds in each transaction
are the most favorable under the circumstances (“Best Execution”). In selecting brokers to effect
portfolio transactions, HCM considers various factors, including, without limitation: price;
quality of execution, including the reliability, promptness, level of accuracy and confidentiality
in executing orders; extensiveness of the broker’s distribution network; commission rates or
other transaction costs; HCM’s access to the broker’s trading desk; the broker’s familiarity with
HCM’s investment practices; and the value of certain brokerage or research services. HCM does
not consider whether it receives referrals from a broker-dealer or third party in selecting a broker.
Directed Brokerage Clients may sometimes request that HCM use a particular broker-dealer to effect transactions in
recognition of services the clients receive from the broker-dealer or from a third party.
Agreement to any such request by a client must be pre-approved by HCM’s Chief Compliance
Officer. A client’s direction of brokerage services may cost the client more money and may
prevent the client from receiving the most favorable execution of the client’s transactions.
Soft Dollar Arrangements HCM or its affiliates may enter into arrangements whereby HCM receives research or other
products or services (other than execution) from a broker or other third party in connection with
client securities transactions, known as “soft dollar benefits.” These soft dollar benefits would
be received in connection with commission fees paid to those brokers to execute client
transactions. These research products and services would be intended to provide HCM with
valuable research and services that HCM would otherwise have to produce or purchase from
third parties with its own funds.
Any transaction in which soft dollar benefits are being received will be carefully evaluated to
determine that the transaction complies with HCM’s duty to seek Best Execution. However, as a
result of any soft dollar benefits HCM receives, HCM may have an incentive to select or
recommend a broker based on receipt of soft dollar benefits.
Section 28(e) of the Securities Exchange Act of 1934 establishes a safe harbor allowing
investment managers to use client funds, by way of commission dollars, to purchase certain
“brokerage and research” services. Pursuant to this safe harbor, the brokerage and research
services must provide HCM with lawful and appropriate assistance in the performance of its
investment decision-making responsibilities. Further, HCM will make a good faith
determination that the amount of commissions paid by clients is reasonable in light of the value
of the brokerage or research services received. This means that clients may pay commissions to
a broker in an amount greater than the amount another broker might charge.
HCM believes that the products or services it may obtain through soft dollar arrangements would
benefit all of its relevant client accounts, rather than benefitting just one account. HCM
currently does not require soft dollar benefits to be allocated proportionately to the amount of
soft dollar benefits generated by each client account. Therefore, it is possible that such soft
dollar benefits may provide a benefit to some clients who have not generated a proportionate
share of commissions used to pay for these benefits. However, it is also possible that clients may
benefit from these arrangements to a greater extent than the commissions they generated.
HCM has instituted certain procedures governing soft dollar benefits. Soft dollar benefits may
be received from a broker in consideration of directing transaction business on behalf of a client
to the broker only if:
The soft dollar products or services fall within the Section 28(e) safe harbor;
The soft dollar products or services are of demonstrable benefit to HCM’s clients;
HCM seeks to affirm that the soft dollar product or service assists in the investment
decision-making process and the commissions paid are reasonable in relation to the
products or services received;
Transaction execution is consistent with Best Execution standards and brokerage rates are
not in excess of customary full-service brokerage rates;
Disclosure is made to clients of HCM’s practices for receiving the soft dollar products or
services; and
The client(s) has consented in writing to the receipt of soft dollar products or services.
Trade Aggregation On occasions where a security is being traded for more than one client,, HCM may aggregate its
client orders when doing so will result in a better overall price for its clients’ trades and as
otherwise consistent with the terms of its allocation policies. Aggregation or “bunching”
describes a procedure whereby an investment manager combines the orders of two or more
clients into a single order for the purpose of obtaining better prices and lower execution costs.
Aggregation opportunities generally arise when more than one client is capable of purchasing or
selling a particular security based on investment objectives, net asset value, available cash,
lifespan of HCM’s clients and other factors. HCM will not aggregate orders among clients of
HCM and/or its affiliates where such activity is inconsistent with or is prohibited by local law,
regulations or exchange rules.
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HCM reviews and evaluates its clients’ investment objectives and performance on a quarterly
basis. HCM also reviews strategies to ensure compliance with investment objectives and
restrictions. Reviews are primarily conducted by the relevant portfolio manager and may
periodically be conducted by an Investment Committee that is comprised of HCM’s Chief
Investment Officer and other senior members of HCM’s research team.
Client Reports Fund investors receive an annual report containing audited financial statements following the end
of the Fund’s fiscal year. Fund investors also receive relevant tax information for the Fund in
which they are invested. In addition, HCM’s third-party administrator delivers to investors an
unaudited statement of an estimate of the account and account balance(s) and any capital
contributions or withdrawals since the preceding month-end generally within 60 days after the
end of each calendar quarter, or as soon thereafter as is reasonably possible. These written
financial statements and reports typically do not include a listing of portfolio investments.
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Neither HCM nor a related person of HCM, directly or indirectly, compensates any person for
client referrals. Should HCM determine to enter into a solicitation arrangement for client
referrals, HCM will disclose the arrangement in writing as required by Rule 206(4)-3 under the
Advisers Act and will comply with all other applicable requirements of the Rule.
No person, other than HCM’s clients, provides HCM with an economic benefit for providing
advisory services to its clients. Please see Item 12, “Brokerage Practices,” above for a discussion
of certain soft dollar benefits that HCM may receive in connection with certain brokerage
relationships.
A related person of HCM may, from time to time, serve as a director on the board of a public or
private company in which one or more of HCM’s clients invest. HCM may receive director’s
fees in connection with such service. Item 11, “Code of Ethics, Participation or Interest in Client
Transactions, and Personal Trading,” further describes HCM’s process for addressing conflicts
of interest created by its related persons serving as directors.
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HCM may be deemed to have custody over certain of its clients’ assets under Rule 206(4)-2 of
the Advisers Act (the “Custody Rule”) because of its authority to access client assets and its role
as a general partner of a Fund. The term “custody” is defined under the Custody Rule as
holding, directly or indirectly, client funds or securities, or having any authority to obtain
possession of them. HCM does not physically hold client assets. Instead, HCM maintains client
securities and funds with a “qualified custodian” in accordance with the Custody Rule. Client
funds and securities are held with a bank, broker-dealer, or other independent, qualified
custodian. HCM’s Chief Compliance Officer is responsible for ensuring that any qualified
custodian with custody of client assets is properly qualified. Further, HCM may satisfy the audit
provision of Rule 206(4)-2 under the Advisers Act - the Custody Rule - through an annual audit
of the relevant clients. Where required, audited financial statements are prepared and delivered
to underlying investors in accordance with the Custody Rule. Item 13, “Review of Accounts”
above describes the content and frequency of other reports delivered to underlying investors.
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HCM serves as an investment adviser to the Funds pursuant to written investment management
agreements. As noted above under Item 7, “Types of Clients,” all clients must enter into written
investment advisory agreements with HCM before establishing an advisory relationship with
HCM. Any limitation on HCM’s authority is described in the written investment management
agreements and/or the Funds’ governing documents.
Pursuant to HCM’s existing Fund agreements, HCM has discretionary authority to manage assets
on behalf of the Funds, including authority to determine which investments are bought and sold
and the amounts appropriate for each client. HCM also may enter into written investment
management or advisory agreements with managed account clients on a discretionary or non-
discretionary basis.
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HCM has and will accept proxy voting authority to vote client securities. This creates a potential
conflict of interest because of the possibility of HCM voting client securities to further its own
interests at the expense of its clients’ interests. HCM takes seriously its responsibility to exercise
proxies on behalf of clients and have adopted written policies and procedures to do so in a
manner consistent with Rule 206(4)-6 promulgated under the Advisers Act. These policies and
procedures are reasonably designed to ensure that proxies are voted in the best interest of HCM’s
clients, which generally means voting proxies with a view to enhancing the value of client
securities.
The financial interest of HCM’s clients is the primary consideration in determining how proxies
should be voted. Further, as the decision to invest in a company normally represents confidence
in the company’s management, HCM will typically give serious consideration to management
recommendations. HCM will generally support management recommendations regarding
internal operations and those without significant economic effects. Conversely, management
proposals that are likely to have significant economic effects, involve management interests or
where HCM lacks confidence in the management team will be subject to greater scrutiny on a
case-by-case basis. The following is a brief summary of principles, rather than rules, that reflect
the long-term approach that guides (but does not obligate) HCM’s investment and proxy voting
decisions regarding common proxy proposals.
1. Board of Directors: HCM will generally support resolutions that promote the
effectiveness of boards in acting in the best interest of shareholders. HCM generally
supports the election of a majority of independent directors.
2. Auditors and Auditor Compensation: Where all members of a company audit committee
are independent, HCM will generally support the election of directors, the appointment of
auditors, and the approval of the auditor compensation recommended by the board of
directors.
3. Changes in Capitalization: HCM recognizes the need for the management of a company
to have flexibility to issue or repurchase shares to meet changing financial conditions.
HCM will generally support changes in capitalization when a reasonable need for change
is demonstrated. HCM is, however, aware that new shares may dilute the ownership
interest of shareholders, and HCM will not generally support changes resulting in
excessive dilution of existing shareholder value.
4. Corporate Restructuring, Mergers, and Acquisitions: HCM believes proxy votes dealing
with corporate reorganizations are an extension of the investment decision. Accordingly,
HCM will analyze such proposals on a case-by-case basis, weighing heavily the views of
its research analysts that cover the company and its investment professionals managing
the portfolios in which the stock is held.
5. Management Compensation: HCM’s goal is to support compensation arrangements that
are tied to long-term corporate performance and shareholder value. These arrangements
should better align management’s interests with those of shareholders and should induce
management to purchase and hold equity in the company. Stock option plans that are
overly generous or excessively dilutive to other shareholders generally will not be
supported.
6. Other Issues: HCM will address business issues specific to a company or those raised by
shareholders of a company on a case-by-case basis with a focus on the potential impact of
the vote on value for its clients.
Procedurally, HCM will take reasonable measures under the circumstances to obtain knowledge
of meetings and other events giving rise to solicitation of proxies, assure that proxies are
received in sufficient time for HCM to take action, vote proxies, and return the proxies to the
parties soliciting them in time to be counted. Clients may direct (in certain cases) the vote of
HCM in a particular solicitation, obtain information from HCM about how it voted clients’
securities, and obtain a copy of HCM’s proxy voting policies and procedures by writing to
Hillhouse Capital Management, Ltd., Attn: Chief Compliance Officer, at the address on the
cover page of this Brochure.
If a HCM representative serves on the board of directors for a portfolio company in which a
client invests, unique conflicts of interest in relation to proxies may exist. In such circumstances,
HCM’s Chief Compliance Officer or its designee will undertake a review prior to any vote by the
proxy recipient to determine whether a material conflict of interest exists between the applicable
HCM representative and the interests of the client, or between the HCM representative and the
client and company shareholders. In the event a material conflict of interest is identified, the
Chief Compliance Officer or his or her designee will take such steps as he or she deems
necessary to determine how to vote the proxy in the best interests of the relevant client. In each
instance, when exercising their voting discretion, HCM’s representatives will seek to avoid any
direct or indirect conflict of interest between the client(s) and their voting decisions.
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There is no financial condition that is reasonably likely to impair HCM’s ability to meet its
contractual commitments to clients.
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