When it comes to a successful beauty acquisition, the key is to sell when interest is high.
This was the sentiment expressed by Richard Gersten, a partner at private equity firm Tengram Capital Partners, at a Fashion Group International Panel, “The Art of the Beauty Deal,” in New York last week. Gersten sits on the board of This Works, Nest Fragrances, Laura Geller Beauty and DevaCurl.
The optimal time to for a private equity firm to cash out on a beauty brand, said Gersten, is “when there’s a lot of unsolicited, inbound strategic interest.”
That interest in beauty is growing among investors and private equity firms now more than ever, as the explosion of niche brands — particularly founder-owned ones — makes it a hot market for mergers and acquisitions. Gersten noted that for private equity firms, beauty is especially appealing because of the attractive exit opportunities — larger parent companies are eager to sweep up niche lines that are resonating with consumers into their portfolios. Interest in color cosmetics is “unusually high” and skin care is right behind it, though hair care has yet to draw as much attention.
Though those larger parent companies may be weary of the cost of acquiring brands that have already received funding from private equity. “It makes more sense to acquire a brand early on, than having to pay a much higher price with the [private equity firm],” said Peter Jueptner, senior vice president of strategy and new business development at The Estée Lauder Cos. Inc. Jueptner noted that Lauder has yet to acquire a company that a private equity firm has had a stake in. Since 2014, the brand has been on an acquisition spree, snapping up Indie labels such as Le Labo, Rodin Olio Lusso, Glamglow and Editions de Parfums Frédéric Malle.
Gersten said a typical return on investment from a beauty brand for a private equity company is about three times the initial stake. Holding periods take about five years and can be halved if a brand is particularly unique and popular with consumers.
But buyers beware a brand that has been with a private equity firm larger than that five-year time period.
“There’s an old saying that if you’re in a private equity portfolio for eight to nine years, it’s not because we love it so much [that] we don’t want to part with it — it’s usually the opposite,” Gersten said.