Hillhouse fined for selling down Longi stake without disclosure

The private equity firm was told by China’s securities regulator to buy back shares in the solar company after selling them without the necessary disclosure

Key Takeaways:

  • Hillhouse Capital has raised its shareholding in Longi back to 5% after being investigated by the Chinese securities regulator for violating disclosure rules
  • Despite its bid to go global and shed its China affiliation, Hillhouse promised the Chinese regulator it would continue to invest and increase its asset allocation in China


By Teri Yu and Doug Young

In the complex tapestry that is China’s vast private equity sector, even the most skilled weaver can occasionally miss a thread. That’s what happened with Hillhouse Capital, a Chinese private equity firm now repositioning itself as a more global fund, which received a regulatory rap on the knuckles related to its investment in solar company Longi Green Energy.

Hillhouse recently bought back shares in Longi Green Energy Technology Co. Ltd. (601012.SH), raising its previous 4.85% holding to 5%, according to a Shanghai Stock Exchange filing by Longi last Friday. Hillhouse’s move was in response to accusations by the China Securities Regulatory Commission (CSRC) last November that it “indirectly reduced” its holdings in Longi without making proper disclosure.

Such an oversight by an experienced investor like Hillhouse is unusual and could explain why the regulator launched its investigation. Especially in the current weak stock market, any such questionable share maneuver could be seen as showing a lack of confidence in a company.

Building a global fund from Chinese roots

Founded by billionaire Zhang Lei in 2005, Hillhouse has made a name for itself for its investments in Chinese companies, mostly in the consumer, healthcare and technology sectors like Tencent Holdings (0700.HK), which has become China’s top gaming company, and Chinese e-commerce company Pinduoduo (PDD.US), which is jockeying with veteran Alibaba (BABA.US; 9988.HK). Belle Fashion, which has filed for a Hong Kong IPO, as well as cancer drug maker BeiGene (BGNE.US; 6160.HK; 688235.SH) are also among its portfolio investments.

Hillhouse’s misstep raised some eyebrows, especially as the company is pivoting from its Chinese roots to try to position itself as an Asia fund manager and expand to other global markets to hedge against uncertainties created by global geopolitical tensions. Such a transition is especially critical due to the company’s large American limited partnership base, mostly pension funds, endowments and other institutional investors, who have increasing concerns over Chinese investments.

Hillhouse’s website currently contains almost no mention of its successful Chinese deals but instead highlights its other presence in global markets like the U.S., Singapore, South Korea, Canada, Japan and Europe.

Apart from raising the Longi stake, Hillhouse also committed to investing in China’s A-share market by increasing the proportion of its allocation to that asset class, it told the Chinese regulator after the Longi probe. It remains to be seen how Hillhouse will juggle these two opposing demands.

Hillhouse is already facing headwinds across the hedge fund industry. According to a recent Reuters report, the value of the firm’s hedge fund assets dropped by a third last year to $27.5 billion as several of its U.S. investors withdrew their capital due to underperformance.

Caught in the act

So, what exactly happened that ultimately drew the CSRC’s attention?

Hillhouse is Longi’s third-largest shareholder and held 5.85% of the company’s stock through HHLR Management Pte. Ltd., its Singapore-based entity.

In March 2023, HHLR loaned 1% of Longi’s shares for a term of up to 182 days, which brought its stake below the 5% level — a significant threshold above which shareholders must disclose their positions, but below which there is no such requirement. In such a transaction, a shareholder typically lends its holdings in a publicly traded company to a borrower, which must return the borrowed stock by an agreed deadline together with a pre-agreed fee.

However, HHLR’s Longi stake only rebounded to 4.98% when the loan expired at the end of September, suggesting a divestment of 0.87%, or 54.61 million shares, which wasn’t disclosed, sparking the controversy.

Since being notified of the CSRC’s suspicions last November, HHLR has been actively cooperating with the probe and raised its Longi holding to 5% by buying 1.3 million shares, according to the latest Longi filing. Any profit HHLR makes through the share buyback will be given to Longi.

Hillhouse’s boosting of its Longi holdings back to 5% indicates it has complied with the regulator’s requirement, and may not intend to further raise its stake back to the earlier level. That’s not surprising given the volatile situation at Longi.

Once dubbed the world’s most valuable solar company and a top player in solar module production, Longi’s market capitalization slumped more than 70% from a 2021 peak as the entire photovoltaic industry was plagued by overcapacity. Sinking prices are squeezing margins and hurting profitability throughout the sector. Last month, Longi revealed it will reduce its global workforce by as much as 5% to cut costs, citing an “increasingly complex and competitive environment.”

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