In this edition of Search Fund Squared, we speak with Anurag Sinha, one of India’s pioneering search fund entrepreneurs. Based in Hyderabad, Anurag’s professional journey is marked by significant challenges and achievements, including launching his first venture as an undergraduate, witnessing explosive growth at Oyo Hotels, from a team of six to 3,500, with monthly GMV skyrocketing from zero to $20 million in just two and a half years, and managing crises in the hospitality industry during COVID-19. Then, at 27, he became CEO of a $100 million business unit in automotive retail.

Introduced to the search fund model during his INSEAD MBA, Anurag felt an immediate connection and is now set to embark on his search for an Indian SME to acquire. With India’s economy expanding at 8% year-on-year, a billion people having access to the internet and banking services, and an average age of just 29, the country offers tremendous growth potential for entrepreneurs like Anurag.

MC: Can you tell me which industries you’re focusing on in India?

Anurag: From an industry standpoint, a few sectors seem particularly exciting to me. Healthcare in India is expected to grow at over 20% CAGR, which is incredibly promising. The hospitality sector is another area of interest, as I’ve had some past experience there, particularly at the intersection of hospitality and real estate. Additionally, the automobile industry holds potential, especially in niches like used cars and vehicle servicing and maintenance, which I find more appealing than the new car market. While these are my primary areas of interest, I’m open to being opportunistic and exploring great opportunities as they arise, even if they fall outside these specific industries.

MC: India is huge and diverse. Are you focusing on a specific region in South India, or are you looking across the entire country?

Anurag: Yes, we’re focusing on a city in South India where I’m currently based – Hyderabad. According to data, it’s one of the fastest-growing cities in the country, and I personally love it. I believe it will thrive in the next few years due to its excellent governance and strong infrastructure, which is impressive by Indian standards. For these reasons, it seems like a great spot. However, our primary decision-making factor is the business potential. If we find an exciting opportunity elsewhere, even in a remote part of the country, we’ll go there. But for now, our interest is definitely in Hyderabad.

MC: What is your fundraising strategy? Are you looking to raise funds from traditional search funds or exploring options with Indian angels?

Anurag: We’re planning to allocate 70 to 80% of our capital internationally and 20 to 30% domestically. The main reason for the lower domestic allocation is that it’s harder to convince Indian investors, as they are unfamiliar with the model and there’s no current success story in India. Despite this, having local investors would be very beneficial, so we’re prepared to face that challenge. That’s our approach for now, and discussions are ongoing regarding the business culture in India.

MC: As you prepare to speak with SME owners, will the SME profile you’re targeting be similar to those in European and American search funds in terms of data points and growth levels, or will it differ due to the unique scale in India?

Anurag: There are a couple of key differences. First, the growth rate expected from a business in India has to be significantly higher than in a developed country. For example, if developed economies are growing at 2%, India is growing at 8%. This should be reflected in the business we acquire, aiming for at least 12% year-on-year growth.

Secondly, we prefer businesses that cater to the rich and upper middle class, as this is a rapidly growing segment in India.

Lastly, unlike the Western world, India’s median age is relatively younger. While we anticipate encountering business owners retiring without successors, we are open to different ownership profiles and will adapt as necessary.

MC: Although you haven’t started searching yet, how do you anticipate the negotiation process going? For example, we spoke to a searcher in Japan who faced challenges due to the lack of public data, making it difficult to contact CEOs. Is this an issue you expect to encounter in India, or is the situation different?

Anurag: One of the biggest challenges I foresee is the valuations. In India, due to the optimism about the economy, valuations are generally higher compared to the Western world. I need to get the buy-in from all investors that we’ll be spending 1x to 2x more compared to acquisitions in the US.

However, higher valuations are justified by the high growth rate. If an industry is growing at 20%, your investment could double every three and a half years. Using the rule of 72, dividing 72 by 20 gives you 3.5. So, if I pay 8x in India versus 4x in the US, within three and a half years, the investment in India would be equivalent to 4x due to the doubling growth.

While higher valuations make sense, sellers must avoid irrational numbers. Paying 1x to 2x extra is reasonable, but we must account for unforeseen circumstances like COVID-19. Both sides need to be realistic, and the solution lies somewhere in the middle. Bridging this gap between investors and sellers is a key challenge.

MC: That’s very exciting. Given that you don’t expect sellers to be just older individuals without heirs, will you be focusing primarily on family businesses or considering a broader range of businesses?

Anurag: Family businesses will definitely play a significant role. In India, 80% of businesses are family-owned, so by design, they dominate the landscape. Although India doesn’t have an ageing population, it’s very common for children not to want to continue their parents’ businesses. They simply don’t want to do it anymore, which means they won’t do justice to the business.

As a result, some businesses may not grow as much, or even if they are growing, the next generation might want to sell. We are looking forward to these opportunities. Additionally, I’m keen on exploring businesses owned by individuals with multiple ventures. If someone has three businesses but can’t focus on one as much, they might want to exit to concentrate on their other enterprises. These are the two primary profiles I’m looking at.

MC: How would you describe the availability of debt in India?

Anurag: While banks often don’t do direct debt for equity deals, there are several family offices, NBFCs & similar funders who are interested in such debt funding. We’re positive that we will be able to source the debt from such entities. Further we expect to use seller financing too. Also, post acquisition there are many debt options now for business scaling.

MC: What can you tell us about the availability of M&A players like PE with regards to potential exits for a search fund?

Anurag: PE investments in India are significant and were around of $40 Bn in 2023. Healthcare (a focus industry for our search) has seen remarkable interest of PE with about $5.5 Bn going into the sector in 2023 alone. This was when globally PE activity has been slower in 2023. I expect that annual PE activity in India will touch $100 Bn+ in the next 5 years.