by PARIS — European-based venture capital and private equity investors are set to accelerate their pace of beauty deals again, likely in the second half of this year. But industry insiders say the M&A landscape has changed.
Over the past two or three years, strategic companies – multinational players such as L’Oréal, Estée Lauder Cos. and Puig – have stepped up their M&A activity in the beauty industry.
“In times when you have a little less visibility on the macroeconomic landscape, when you are a big strategist with exposure to all markets and great synergies, your competitive advantage in a transaction is greater,” said Laurent Droin, Head of EMEA at Eurazeo Brands.
The period was volatile on numerous fronts. High interest rates, for example, contribute to this, making many investors more risk averse. In beauty, as in all sectors, interest rate hikes have contributed to the drying up of capital and the correction of the exuberant valuations of recent years.
“This is a macro trend, and it’s actually healthy,” one executive said.
Droin expects there will still be plenty of business and that beauty will remain a hot industry this year.
“I expect beauty to remain one of the most active segments,” she said. “The foundations of beauty are intact. Beauty is probably one of the best places to invest, because that’s what matters to people.
“We will get to a market that is differentiating brands more, valuation will also more reflect the intrinsic value of assets, and operations will be competitive, but probably competitive not only from a final valuation standpoint, but also on what you can bring to the company and so on,” Droin said.
“Valuations have been impacted for assets that aren’t good, such as brands that aren’t profitable or are single-channel, because there’s a perception that it’s too risky, particularly if you depend on d-to-c,” said Joël Palix, founder of strategy consulting and M&A Palix Unlimited.
This is in part due to new cookie regulations affecting how data can be accumulated and rising costs of transportation and logistics.
“Channel diversification is what investors have been looking at,” Palix said. “When it’s a good resource, you find the money.”
There is also uncertainty due to the weakening technology sector and, more recently, the collapse of Silicon Valley Bank last week.
“Purely tech investors will likely stay out or be less active in beauty,” Droin said.
However, some industry sources believe the beauty industry is insulated from the tech crisis.
Investors say they are now shedding light on a number of categories, including niche fragrances, haircare and differentiated skincare.
“We see new brands emerging that didn’t exist in the past in skin care, hair care and also fragrances that are performing exceptionally well, and I believe in the renewal of brands,” said Karine Ohana, managing partner of Ohana and Co. “They’re really taking over.”
Some European companies are being shopped around, including Parfums de Marly and Juliette Has a Gun in perfumes, and French pharmacy clean cosmetics brand La Rosée, for example, sources said.
It is said that investments related to beauty by non-strategic companies have not stopped. In mid-February, for example, Skin + Me, a UK-based teledermatology service, was awarded £10m in a Series B funding round led by Octopus Ventures.
“If there’s been a slowdown, it’s probably behind us in terms of beauty,” Palix said. “Technology is a different story. Funds are looking at targets again and I think a little more in Europe than in the US I wouldn’t be surprised if we have a strong second half.”
Meanwhile, some new beauty-related investment platforms have sprung up like Silverwood Brands in Europe and Waldencast in the US, which are like a hybrid of funds and strategies.
“Due to the need to be omnichannel, it is becoming increasingly difficult for individual brands to live on their own. This is where platforms come into play,” Palix said. “A well-crafted platform can deliver value, because it brings in some money but it also brings experience and brings some things together across brands in the right way, not in an intrusive way.”
Rather, it is about helping a company in its strategy, marketing, commercialization, launches and supply chain as well.
But whatever the investment vehicle, industry insiders are confident that beauty will remain a strong investment.
“I’m sure there will be many great things [beauty] companies that will come to market in the next few years with great products and will be terrific investments,” said Droin.
