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Investors: Beware the Beauty Bubble

Eager buyers are driving beauty and personal care valuations up, but industry insiders see risks.
Illustration by Jan-Nico Meyer for BoF
  • Lauren Sherman

NEW YORK, United States — When community-driven beauty brand Glossier raised another $52 million in 2017, chief executive Emily Weiss emailed her customers — the "extended Glossier team," as she calls them — saying the Series C round, which brought the venture's total funding raised to date to over $85 million, would help her and her team "keep building the beauty company of the future: the one that you shape."

To many, Weiss’ transparent communications strategy underscores why investors are interested in Glossier: her savvy approach to marketing has garnered a loyal fan base that keeps coming back for more. The hope, of course, is they’ll come back so many times that Glossier will become a billion-dollar business, far exceeding its current valuation of $390 million.

While Glossier’s rise may be notable, it’s not alone in attracting interest from investors who are taking chances on new concepts in the beauty and personal care space. For years, only strategics — think Estée Lauder Companies, L’Oréal, Procter & Gamble — and a handful of specialist private equity firms made serious bets on beauty brands. Today, the market has attracted private equity investors, family offices, venture capital firms and new strategic groups to the tune of more than 100 M&A transactions in 2017, after a similar number of deals last year, according to data compiled by Los Angeles-based investment banking firm Intrepid. There were 30 beauty transactions in the fourth quarter of 2017 alone, up 25 percent from a year earlier.

Major deals in 2017 include Kao Corporation’s acquisition of Oribe haircare, reportedly costing the Japanese chemical and cosmetics company close to $400 million, almost five times its current revenue ($80 million) and 13 times its EBITDA ($30 million). Private equity firm TSG Consumer’s minority investment in influencer-backed upstart Huda Beauty, which generated $200 million in sales last year, also made headlines, as did Castanea’s minority stake investment in Tatcha.


Beauty brands have a history of scaling relatively quickly and often come with high profit margins.

Less than three months into 2018, the category — which generated more than $455 billion in sales globally in 2017, according to Euromonitor International — shows no signs of slowing down. At the beginning of January, clean beauty leader Beautycounter announced that it had raised $21.3 million at a $400 million valuation, with backers including Mousse Partners Limited — the family office of the Wertheimers, who own Chanel — as well as private equity firm TPG Growth. In February, Procter & Gamble acquired skincare brand Snowberry. In March, Swander Pace Capital bought personal care line J.R. Watkins. Currently, Anastasia Beverly Hills is said to be in talks with multiple bidders. The transaction could value the brand, which has earned accolades for its masterful manipulation of social media, at $3 billion.

Beauty brands are attractive to investors because they have a history of scaling relatively quickly and often come with high profit margins. “One of the reasons investors like the beauty and personal care space is that it has a very, very good track record,” says Steve Davis, a managing director at Intrepid, which advised natural deodorant brand Native on its 2017 sale to P&G and Too Faced on its 2015 sale to General Atlantic. “There is a lot of wind at the back of these young brands that are stealing market share from some of the established players.”

“Twenty years ago, a $20 million brand in the beauty industry was considered tiny and barely ready for investment,” explains Lynda Berkowitz, a beauty industry veteran and chief executive of burgeoning colour makeup line ‎ILIA Beauty. From 2009 to 2014, Berkowitz was president of Too Faced, which received an investment from private equity Weston Presidio in 2012. “Even ten years ago, it took me three years to get private equity to take a look at Too Faced,” she says. Just two years later, General Atlantic acquired a majority stake in the company, valuing it at $500 million. In 2016, Estée Lauder Companies acquired it for $1.45 billion.

When something scales that quickly, how do you value it? If it's a namesake brand, what happens if that influencer leaves?

For investors looking to back ventures with large addressable markets, beauty is a no-brainer. “Part of the reason there has been as much activity as there has been is that it’s just a massive market,” says Susan Lyne, president and founding partner of BBG Ventures, which has invested in Glamsquad, Beautycon and Lola. “Even if you were defining beauty more narrowly to makeup and skincare, the vast majority of teen and adult women buy those products. Everybody sees the opportunity.”

But with great opportunity often comes over eager buyers who drive valuations up. Indeed, some industry insiders are concerned that a bubble is forming in the beauty and personal care space as acquisition targets continue to sell for more than four or five times their current revenue.

Most onlookers believe the bubble is relegated to certain subcategories such as social-media-born brands, which have yet to prove themselves over the long term. “It’s a bubble of influencer brands,” says Rich Gersten, a partner at Tengram Capital Partners, whose portfolio includes Cos Bar and Algenist. “From an investor perspective, it makes me nervous. When something scales that quickly, how do you value it? If it’s a namesake brand, what happens if that influencer leaves? What’s left? It’s a riskier proposition.”

“The only bubble in my mind is not in great brands coming to market or in new opportunity, it’s based on what these entrepreneurs expect to get out of it,” says John Demsey, executive vice president of the Estée Lauder Companies. “At some point in time, everything has to pay for itself. You have to be able to justify these investments.”

While Estée Lauder has paid high multiples for certain companies, including Too Faced, as well as Becca Cosmetics, which it bought in 2016 for an estimated $200 million, it also has more than 20 years of experience investing in the category. (Its first investment was MAC in 1994.)  “I do think there is some sort of rationalisation process that will come into the marketplace dynamics,” Demsey says. “You won’t know for 10 years. But regardless of what the market dynamics are, our strategic imperative will always be to look for great brands. We’re very a disciplined portfolio company that’s strategic.”


Opportunities remain, especially for investors willing to take longer-term bets on smaller brands.

And while the big-name acquisitions are fewer and farther between than they were a couple of years ago — primarily because most of the bigger brands, on the premium end in particular, have already been scooped up —  opportunities remain, especially for investors willing to take longer-term bets on smaller brands. Venture capital firms and private equity players are only one part of the current demand-side swell. There are also a growing number of new strategic groups taking shape, many formed by family offices or industry veterans. One of the most well-known is Manzanita Capital, which owns Space NK, Eve Lom, Byredo, Diptyque and others and was founded in 2001 by chief executive William S. Fisher, the son of Gap, Inc. founders Donald Fisher and Doris F. Fisher. Newer entrants include the UK-based Hut Group — which acquired seven companies in 2017, including cult makeup line Illamasqua, subscription service Glossybox and Australian beauty online retailer RY — and Glansaol, formed in 2015 by long-time Revlon executive Alan T. Ennis. (Its portfolio includes Laura Geller, Julep and Clark's Botanicals.)

For entrepreneurs and investors alike, there's also fertile and unexploited terrain in specific sub-categories within beauty and personal care. For instance, only 10 percent of US beauty sales occurred online in 2016, according to Nielsen, signalling that there is room for additional multi-brand e-commerce players offering a differentiated enough shopping experience. (See: UK-based curation-driven e-commerce site Cult Beauty, which is on track to generate £100 million in sales in 2018.) "It's a pretty old-fashioned market that has a lot of friction in it," Lyne says. "There is an opportunity to do something new and fresh."

There are also the “players behind the players,” as one industry insider put it. Formulators and suppliers like Intercos, Seed Beauty, Luxury Brand Partners and Bentley Labs — some of which have already disrupted the industry with new methods — are acquisition targets for investors who are interested swimming further upstream.

Intrepid’s Davis believes that, as long as there is both demand and supply, the emerging bubble won’t pop. That is, of course, if the economy remains strong. “One caveat I would have is that this is a cyclical business,” he says, alluding to forecasts that suggest the US market may experience a downturn before 2020. “If the economy as a whole goes into a recession, all M&A markets are going to suffer. But the underlying beauty and personal care business is fairly resistant.”

Related Articles:

Top M&A Targets in BeautyOpens in new window ]

How to Build a Beauty Brand in the Digital AgeOpens in new window ]

Inside Britain's Fastest-Growing Beauty BusinessOpens in new window ]

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