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Beauty and the (private equity) beasts – investment in the beauty industry

Posted on 18 October 2021

It might not seem to be a traditional pairing, private equity and beauty, but it makes logical sense. Make-up and skin care, are for the most part, not affected by seasonal trends, customers are usually repeat purchasers (and can be fiercely loyal), and the gross margins are typically very high.

The past few years have seen a phenomenal rise in sales of so called 'indie' beauty products and huge growth of 'indie' beauty companies. The indie beauty market is incredibly diverse, comprised of a wide range of companies that often focus on creating products that appeal to a specific demographic. For example, there is a segment of the market designing products using 'clean' ingredients and promoting sustainable living as well as inclusivity and diversity. Others may have a more medical focus or target a particular niche such as menopausal women or those seeking halal products.

These niche brands appeal to consumers more than the traditional beauty giants, through clever branding and strategic marketing. The advertising, perhaps unsurprisingly, focuses on using social media platforms and the rise of influencer culture to appeal en masse to these generations. One only has to look at Glossier, which typically packages its products in minimalistic, neutral packaging, or Too Faced which has a youthful, whimsical vibe whilst remaining fairly 'high end' – to see why the products of these brands are so popular.

Private equity and beauty brands – a match made in heaven?

It is no wonder that these indie beauty brands have been of particular interest to private equity, both in the UK and worldwide. Glossier, for example, had raised almost $35 million in 2020 from venture capital funds. Closer to home, in March of this year it was announced that Inflexion Private Equity Partners had invested in Pangea Laboratories, which owns the Medik8 skin-care brand. Medik8 focuses on science-based skin care products, and is "committed to ethical manufacturing and sustainability". Reasonably priced, with minimalist packaging and a commitment to promoting sustainable living, Medik8 ticks all the boxes of being a niche, indie beauty brand. Moreover, Medik8's products retail online at popular beauty websites such as Feelunique. It is clear why Medik8 would appeal to private equity.

These indie brands are adaptable and can anticipate trends through their prolific use of social media – which is also attractive to investors. As such, these small, independent beauty companies can turn a phenomenal profit. Although many indie brands will be too small for private equity to invest in, those with sufficient scale, robust management, strong branding and commitment to social causes, coupled with a social media presence are likely to be attractive to investors.

Sarah Miles, CEO of Feelunique, who recently partnered with Mishcon de Reya on the sale of Feelunique to Sephora, commented: “The beauty industry is an incredibly vibrant, exciting place to be. There is so much innovation and many technological advances changing the way people shop.”

The beauty industry post-Covid: what happens now?

How is the beauty industry expected to fare in a post-COVID world? The general consensus seems to be, actually, quite well.

Although the industry was initially hit by the pandemic with respect to high street sales it recovered quickly. Few independent brands ever reached the scale to justify a store presence and were therefore, unburdened with a troublesome real estate portfolio. Most rely entirely on e-commerce and continue to grow online (by way of example, beauty sales of personal care products soared by 53% in the UK in the week beginning 6 April 2020 – albeit that was a somewhat exceptional time: see here). However, while online sales will continue to dominate the growth story, we may now see indie brands taking the opportunity to give themselves a physical presence in a few select locations – and the funding and know-how that a supportive private equity partner can bring to a growing brand can make a real difference in getting that right.

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