Hillhouse Capital Raises 3 Billion Yuan "Anti-Risk" Fund, a New Way to Win Back LPs

By Zhiyan Chen

Hillhouse Capital has raised a new fund. An Yong Waves has learned that Hillhouse's latest "protective strategy" fund recently held its first close, reaching roughly 50% of its target size, with a final cap of no more than 3 billion RMB. Its LPs include local state-owned capital, large insurance companies, and several industry-leading enterprises. The fund will deploy capital into Hillhouse's long-standing focus areas: technology, industrial upgrading, energy transition, and biotech.

This fund employs a "protective strategy."

According to Hillhouse, its underlying assets will primarily be companies with "high maturity, strong defensiveness, and stable cash flow." The fund aims to achieve "more robust risk control" and "more predictable returns" through active size management, "strict screening of targets, risk-based pricing, flexible and secure deal structures, and tight control over investment duration."

In plain terms, Hillhouse's new fund is a mezzanine fund blending equity and debt.

"Mezzanine" originated on Wall Street, initially referring to a bond rating between junk bonds and investment-grade bonds. It gradually evolved into an investment approach combining both debt and equity characteristics — an extension of traditional venture capital. For companies raising capital, a typical mezzanine structure has three layers: senior debt from banks and other low-cost capital; junior equity from the company's shareholders; and mezzanine capital in between.

Through this design, mezzanine funds can offer investors two distinct types of returns: fixed income (debt) and variable upside (equity). This relatively controllable risk profile and flexible return structure make mezzanine funds particularly suitable for insurance companies, commercial banks, investment banks, pension funds, and hedge funds as LPs.

In China, mezzanine investing remains a relatively new product. The country's first true mezzanine fund was the HuiFa China Fund I, established in 2005. Since then, international investment banks and asset managers including Goldman Sachs have launched mezzanine operations in China. Domestic institutions such as CITIC Capital, CDH Investments, China Development Bank Capital, and Hony Capital have also established RMB mezzanine funds.

Public information shows that domestic mezzanine fund investment has been concentrated most heavily in real estate, followed by infrastructure and energy/mining. But unlike the typical practice of investing primarily in real assets, Hillhouse's protective strategy fund will focus on high-quality growth companies.

In June this year, the General Office of the State Council's "17 Measures for Venture Capital" explicitly called for diversifying venture capital fund products, "encouraging more equity-debt hybrid venture capital products that better match the allocation preferences and risk appetites of long-term capital, investing in technology innovation through preferred shares, convertible bonds, warrants, and other instruments." An industry source told An Yong Waves that Hillhouse's new fund represents a proactive move in this direction.

Notably, this isn't Hillhouse's first "protective strategy fund." In 2020, the firm launched the first vintage of this strategy, with a size of 2 to 2.5 billion RMB. According to market intelligence gathered by An Yong Waves, this first fund has already distributed returns to LPs multiple times in just a few years, primarily through dividends. For LPs, such performance has been "steady" and "better than expected" in terms of efficiency.

However, simply analogizing this to "mezzanine funds" in the Western sense is only one lens for understanding Hillhouse's move. The broader context is this: as the era of easy growth slows, limited partners on the funding side are seeking more diversified allocation strategies.

Take one of this fund's LPs — the Hangzhou Fuyang District Performance-Oriented Industry Guidance Fund. Among the funds in its same batch of commitments, Hillhouse's fund accounted for the largest share. The Fuyang government told media that "the performance-oriented industry guidance fund is part of the district's government guidance fund system, with greater emphasis on investment returns than on investment attraction."

For any investment institution with a long-term horizon, its natural obligation is to cater first to its LPs — the fund's beneficiaries, so to speak. In this sense, Hillhouse's experiment is both a response to the current domestic market's challenges — difficulty raising blind pool funds, LP demand for greater return certainty, and the overall struggle to exit equity investments — and a demonstration of a new survival strategy for the存量 era: how to quickly match evolving capital-side demands.

An Yong Waves has observed that beyond this protective strategy fund, Hillhouse has brought several other moderately sized, tightly focused sector and industry funds to market in recent years. These include the previously disclosed Gaolu Phase I Industrial Logistics RMB fund at 3.5 billion RMB, a 4 billion RMB carbon neutrality fund, and a healthcare fund exceeding 5 billion RMB.

Moderate size reduces overall fundraising pressure; focused direction allows more precise alignment with state capital, insurance capital, and other sources' sector preferences. The defining feature of mezzanine funds is their balance between financial instrument flexibility and sustained return generation. Hillhouse's decision to raise another protective strategy fund now remains, at its core, a response to the difficulty of raising large blind pool funds, LP pursuit of investment certainty, and the broader struggle to exit equity positions.

Buffett once said that investing is an art. It's not merely a profession but a way of life. Yet today, when survival depends on certainty, practitioners can no longer persuade LPs to write checks based on ineffable "artistry." From embracing risk to returning to reality, today's investment industry players may need something more like the precision of fortress-building. After all, survival comes first.

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