PARIS — Europe-based venture capital and private equity investors are poised to pick up their pace of beauty deals again, possibly in the second half of this year. But industry experts say the M&A landscape has changed.
In the last two to 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 space.
“In periods when you have a little less visibility into the macroeconomic landscape, when you are a large strategic company with exposure to all markets and large synergies, your competitive advantage in a transaction is higher,” said Laurent Droin, head of EMEA at Eurazeo Brands .
The period was volatile on many fronts. This is due, on the one hand, to high interest rates, which make many investors more willing to take risks. In the beauty industry – as in all industries – interest rate hikes have contributed to capital drying up, and a correction of the overvaluations seen over the past few years is beginning.
“It’s a macro trend and it’s actually healthy,” said one executive.
Droin expects there will still be plenty of deals and beauty will remain a hot sector this year.
“I expect beauty to remain one of the most active segments,” he said. “The basic foundations of beauty are intact. Beauty is probably one of the best places to invest because it’s what’s important to people.
“We’re going to get to a market that does more differentiation between brands, the valuation will also better reflect the intrinsic value of the assets and the deals will be competitive, but probably competitive not only from a bottom line valuation point of view, but also what you can bring of the company – and so on,” Droin said.
“Valuations have been hit for assets that are not good, like brands that are not profitable or that are single-channel, because there is a perception that it is too risky, especially if you are dependent on d-to-c,” said Joel Palix, founder of strategy and M&A consultancy Palix Unlimited.
This is partly due to new cookie regulations that impact how data can be collected and increased transport and logistics costs.
“Channel diversification is what investors are looking at,” Pallix said. “When it’s a good asset, you find the money.”
There is also uncertainty due to the weakness of the technology sector and most recently the collapse of Silicon Valley Bank last week.
“Cleantech investors are likely to stay away or be less active in the beauty space,” Droin said.
However, some industry sources believe that the beauty industry is insulated from the technology crisis.
Investors say they are shedding light on a number of categories today, including niche fragrances, hair care and differentiated skin care.
“We’re seeing new brands emerge that didn’t exist in the past in skin care, hair care, and also in fragrances that are performing exceptionally well, and I believe in brand renewal,” said Karin Ohana, managing partner at Ohana and Co. “They’re really taking over.”
Several European companies are being shopped, including Parfums de Marly and Juliette Has a Gun in perfumes, as well as French apothecary pure cosmetics brand La Rosée, for example, sources said.
That’s not to say that beauty-related investment from non-strategic companies has stopped. In mid-February, for example, UK-based Skin + Me, a teledermatology service, raised £10 million in a Series B funding round led by Octopus Ventures.
“If there’s been any delay, it’s probably behind us in terms of beauty,” Palix said. “Technology is a different story. Funds are looking at targets again and I believe a bit more in Europe than the US, I wouldn’t be surprised if we have a strong second half.”
Meanwhile, several newfangled beauty-related investment platforms have emerged, such as Silverwood Brands in Europe and Waldencast in the US – which are like a hybrid between a fund and a strategy.
“Due to the need to be omnichannel, it is becoming increasingly difficult for individual brands to live on their own. That’s where the platforms come in,” Palix said. “A well-organized platform can provide value because they bring some money, but they also bring expertise and bring several things together between brands in the right way – not in a pushy way.”
Rather, it is about helping a company in terms of its strategy, marketing, commercialization, launch and supply chain as well.
But whatever the investment vehicle, industry experts are certain that beauty will remain a strong investment.
“I’m sure there will be a lot of great things [beauty] companies that will come to market in the next few years with great products and they will be great investments,” Droin said.