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The Top 15 M&A Targets in Beauty

In a market that is more competitive than ever, strategics and private equity firms alike are looking beyond makeup to acquisitions in skincare and haircare.
Source: @Glossier @BeautyCounter @Ipsy @AnastasiaBeverlyHills @CharlotteTilbury @Tatcha
By
  • Chantal Fernandez
BoF PROFESSIONAL

NEW YORK, United States — L'Oréal and Estée Lauder each spent over $1 billion acquiring cosmetics brands in 2016, marking a shift in an already active beauty market. Not only is the competition between strategic investors and private equity firms tougher than ever, but leading independent brands have raised their expectations on financial terms.

Yet there is no shortage of players willing to acquire high-potential start-ups in the prestige beauty sector, which grew by another $1 billion dollars last year for the third year in a row, according to NPD. “There’s a little bit of a classic private equity herd mentality,” says Rich Gersten, partner at Tengram Capital.

"So few independent brands of size are available today, intensifying this competitive environment," adds Janet Gurwitch, operating partner at Castanea Partners. And some of the bigger targets, particularly Anastasia and Charlotte Tilbury, don't want to sell or are waiting for much bigger payouts. So strategics like Unilever, Estée Lauder, L'Oréal, Glansaol and Coty — which have focused on major acquisitions in the past — are considering buying up smaller brands, according to industry sources.

Makeup, the fastest growing beauty category, which shows no sign of slowing down, remains the focus, but Gersten is seeing a shift toward skincare, where more brands are searching for growth partners. Brands like Tata Harper and Drunk Elephant that “play on the holistic, natural, wellness trend will fetch interest,” he says. Haircare is another category that could spark activity. Unlike skincare, haircare has the kind of visual impact needed for brands to attract engagement on Instagram.

So which beauty brands are ripe for investment or acquisition? BoF conducted its own internal research and analysis, and spoke with a number of industry experts, to identify 15 highly coveted colour, skincare and haircare brands. Some have only raised seed funding; others have attracted institutional investment; still others have already been acquired by private equity firms. But whether these brands have just finalised deals or are currently in play for a transaction, these are the targets everyone is talking about.

Anastasia Beverly Hills
Founded in 1997
Estimated Revenue: Undisclosed
Estimated Funding: Undisclosed

Anastasia Soare says she wants to retain ownership of her namesake line, but it is one of the most sought after on the market. The Los Angeles-based brow expert opened her first salon in 1997 and built a career tending to the brows of celebrities and supermodels. By the time the brand expanded the product line from brows to colour cosmetics in 2014, it was already big on Instagram thanks to an influencer strategy lead by Claudia Soare, Anastasia’s daughter and now president of the company. Anastasia has long topped Tribe Dynamics’s rankings of brands by the amount of earned media they generate. In March, that figure reached over $108 million, up 68 percent year-on-year.

Tatcha
Founded in 2009
Estimated Revenue: $12 million in 2014
Estimated Funding: $1.5 million in angel funding, additional funding undisclosed from investors including Beechwood Capital

Victoria Tsai self-funded the launch of Tatcha as a line of Japanese blotting papers, aburatorigami, after discovering the rare product on a work trip abroad. After Tsai met co-founder Brad Murray at a Harvard Business School event, they decided to raise the money they needed to launch a line of skincare products — based on the 200-year-old rituals of Japanese geishas — instead of selling to interested strategics. It debuted exclusively at Barneys and the line has since expanded to other sales channels including QVC and Sephora, where the Water Cream moisturiser is the top seller in the category.

Charlotte Tilbury
Founded in 2013
Estimated Revenue: Undisclosed
Estimated Funding: Undisclosed with investors including Venrex Investment Management, Samos Investments and Sequoia Capital

Strategics have been trying to pick up Charlotte Tilbury’s namesake brand since the celebrity makeup artist launched it in 2013. But in May, the company took on a minority investment from Sequoia Capital, signalling that there is much more growth to be had on her own. International expansion in the Middle East, where she plans to open standalone stores in the next year, is a current focus.

Drunk Elephant
Founded in 2013
Estimated Revenue: $30 million in 2016
Estimated Funding: Undisclosed from investors including VMG Partners and Leandra Medine

The buzzy all-natural skincare brand considered all sorts of offers last year before announcing an investment from private equity firm VMG Partners and Man Repeller founder Leandra Medine in March. Founder Tiffany Masterson of Houston launched the brand after struggling to find effective non-toxic, fragrance-free skincare products, and tapped into a growing consumer desire for natural skincare products. Though still quite small, Drunk Elephant is reportedly one of Sephora’s fast growing brands, and the Instagram-friendly packaging is also a plus. Its earned media value grew 196 percent in March year-on-year.

Beautycounter
Founded in 2013
Estimated Revenue: $150 million in 2016
Estimated Funding: $42 million from investors including TPG Growth

Serial entrepreneur Gregg Renfrew founded the skincare company with a long list of banned substances and a commitment to transparency, tapping consumer desire for clean and safe beauty products. The line has since expanded to colour cosmetics, haircare and baby products. It is available direct-to-consumer online, through retail partners such as J.Crew or Target and through a fleet of independent salespeople who earn about 25 percent of each sale. In Summer 2016, parent company Counter Brands acquired another natural line, Nude Skin Care and Brands, founded by Bono and wife Ali Hewson, which will operate independently but create opportunities for synergies.

Ouai
Founded in 2009
Estimated funding: Undisclosed
Estimated revenue: Undisclosed

Jen Atkin might be most known for her work with the Kardashians and Hadids, but the travelling celebrity hairstylist is well known in her own right — especially in the online beauty community. In 2014 she launched an editorial site called Mane Addicts that dispenses A-list hair tips, and in early 2016 she released her own line of haircare products (and vitamins supplements) called Ouai, pronounced “way”, with a focus on serving “the everyday girl who always looks great in a selfie,” as Atkin put it. Her community of it-girl friends and clients ensured the launch got lots of buzz and continued sales.

Milk Makeup
Founded in 2016
Estimated funding: Undisclosed from Main Post Partners
Estimated revenue: Undisclosed

Milk’s unconventional product offering has been a hit with consumers since it launched exclusively at Sephora in March 2016. Founded by the people behind photo studio and creative agency Milk Studios, including co-founder Mazdack Rassi, the brand tripled its doors in six months and expanded to Urban Outfitters. With an inclusive and empowering marketing message, the brand has seen its earned media value grow 335 percent in March, year-on-year. In January, Main Post Partners backed the brand with a minority investment to help the brand expand geographically and keep products in stock.

Sunday Riley
Founded in 2009
Estimated funding: Undisclosed
Estimated revenue: Undisclosed

Founder Sunday Riley started her career in a cosmetics lab, which gave her an in-depth knowledge of the chemicals in beauty products and prompted her to start a prestige line made from pure materials that don’t qualify as “natural,” but rather what she calls “clean technology.” It’s available through specialty multi-brand retailers and department stores only, but direct-to-consumer e-commerce is coming soon. Without significant outside investment, the buzz is growing: the brand’s earned media value grew 130 percent in March 2017, year-on-year.

Seed Beauty
Founded in 2014
Estimated funding: Undisclosed
Estimated revenue: Undisclosed

Siblings Laura and John Nelson turned their family makeup factory, Spatz Labs, into a platform for blockbuster beauty brands, tailor-made for the Instagram era. First came Colourpop, which delivers products developed based on social media feedback, sometimes brought to market in less than a week. Then they partnered with Kylie Jenner to produce her namesake line, which launched with liquid lipstick in 2015 and has sold a reported $400 million worth of products since launch. The Nelsons are currently developing more brands that are sure to depend on the same basic tenets for growth: viral marketing, limited edition product releases and direct-to-consumer sales channels.

Glossier
Founded in 2013
Estimated funding: Approximately $34 million from investors including 14W, Toms Capital, Manzanita Capital, WME, David Tisch, Jay Brown, Andy Dunn, Forerunner Ventures and Lerer Hippeau Ventures
Estimated revenue: Undisclosed

Three years after launching beauty blog Into the Gloss, fashion assistant turned entrepreneur Emily Weiss ventured into a product line that has quickly come to epitomise the kind of community-driven brands that are resonating with millennial consumers today. Now with the support of additional venture capital, the brand is turning its attention to expanding the product line and scaling internationally while sticking to direct-to-consumer sales channels. Back at headquarters in New York, the state's economic development agency is funding 282 new jobs at the brand through performance based tax cuts.

Ipsy
Founded in 2011
Estimated funding: $3 million in funding, $100 million in Series B funding from TPG Growth and Sherpa Capital
Estimated revenue: $300 million

When one of YouTube's biggest beauty names, Michelle Phan, launched the subscription box service Ipsy with founders Marcelo Camberos and Jennifer Goldfarb, her fan base made up much of the first million subscribers. Now the company, which has long since surpassed Birchbox with over 2 million customers, has a formal network of influencer ambassadors. In 2016, Ipsy captured 62 percent of all beauty box subscription sales, according to e-commerce tracking firm Slice Intelligence, making it the fastest growing beauty box service.

First Aid Beauty
Founded in 2009
Estimated funding: $15 to $75 million from Castanea Partners
Estimated revenue: Undisclosed

Founder Lilli Gordon, who worked at Fresh during and after it was sold to LVMH, launched First Aid Beauty to provide immediate solutions to every day skincare problems at an entry prestige price point — an attractive proposition to US consumers who want instant results from their beauty products. Private equity firm Castanea Partners took a minority investment in 2015 and in December, the brand — that counts Sephora and now Ulta as main sales channels — added a new line of makeup-prepping skincare products, also free of irritants and artificial ingredients.

Tata Harper
Founded in 2007
Estimated Revenue: Undisclosed
Estimated Funding: $5 to $15 million from Alliance Consumer Growth

Founders Tata and Henry Harper, who manufacture the line on their 1,200-acre farm in Vermont, were early entrants to the all-natural beauty market 10 years ago and are still considered leaders in the space. (Gwyneth Paltrow was an early supporter through Goop.) The 100 percent natural and non-toxic skincare products are available at sports clubs and apothecaries in addition to department stores and specialty multi-brand retailers. Alliance Consumer Growth took a minority stake in 2015.

Morphe
Founded in 2003
Estimated Revenue: Undisclosed
Estimated Funding: Undisclosed

Acquired by brother and sister duo Linda and Chris Tawil in 2008, Morphe began as a wholesale and trade show brand of accessibly priced, high-performance makeup brushes that has rocketed to prominence with the help of a loyal fan base of beauty vloggers and influencers who promote its products through an affiliate program. Morphe has also been smart about keeping engagement with fans and followers going through monthly subscriptions, new product launches and limited edition collaborations with influencers such as Jaclyn Hill and Jeffree Star. Morphe has now expanded to include the kinds of colour cosmetics that trend on Instagram, like liquid lipstick and eyeshadow palettes.

Sundial Brands (Shea Moisture, Nubian Heritage and Madam C. J. Walker Beauty Culture)
Founded in 2013
Estimated Revenue: $200 million in revenue in 2015
Estimated Funding: Undisclosed from Bain Capital

Richelieu Dennis’ portfolio of brands were launched to cater to black consumers, often relegated to drugstore “ethnic” aisles. The vertically-integrated mass market natural skincare and haircare manufacturer has continued to grow since Bain took a minority investment in 2015, expanding its distribution and introducing a new prestige haircare line, Madam C. J. Walker Beauty Culture, exclusively at Sephora the following year. But expanding its consumer base has been challenge, and controversial: a recent campaign starring several caucasian women was criticised online and eventually taken down.

Editor's Note: An earlier version of this article did not list Beechwood Capital as an investor of Tatcha. The article further misstates that Alliance Group Capital took a minority stake in Tata Harper in 2015. This is incorrect. The company is called Alliance Consumer Growth. In addition the articles misstates that 4W invested in Glossier. This is incorrect. The company is called 14W.

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