With reopening underway, private equity executives are emerging into a changed world —one that has undergone several months of a pandemic and the global swell of the Black Lives Matter movement — and their perspectives on beauty deals have, at least somewhat, been altered.

When coronavirus first hit, beauty investors sheltered in place and routed efforts toward their existing portfolio companies to make sure that those brands could weather the storm. But now that reopening has begun and private equity executives are emerging into a changed world—one that has undergone several months of a pandemic and the global swell of the Black Lives Matter movement—their perspectives on beauty deals have, at least somewhat, been altered.

The fundamentals remain the same: Investors want growing businesses in attractive categories with good management teams and solid brand DNA. But other aspects—like profitability and a strong direct-to-consumer connection—have taken on even more importance, sources said. Diversity, too, has become a priority for leaders as they assemble boards and pick the companies they invest in, with several sources saying they will consciously work to invest in black-owned businesses and hire black executives for their brands.

For the handful of private equity executives in relatively new roles, including Michel Brousset, Rich Gersten, Janet Gurwitch and David Olsen, beauty remains an attractive category, and that while investments may have slowed down, they will pick back up as beauty proves resilient.

“Day-to-day working has changed a bit. Early on in this pandemic [we] spent more time with existing portfolio companies helping them navigate through this process. We’ve slowed down a bit, but we’ve still had a number of meetings with brands,” says Brousset, founder and chief executive officer of investment firm Waldencast, which backs Kjaer Weis, Costa Brazil, The Nue Co. and other brands.

Now that things are starting to open up again, investors are on the lookout for brands that have continued to resonate with consumer throughout the pandemic.

“I’m looking for the same thing I’ve always looked for…great beauty brands with strong upside potential globally. We are open to different channels of distribution, a brand could be in the beauty specialty store world, direct-to-consumer, masstige….I always look for a brand with a point of difference or reason to be. I kind of have to drink the Kool-Aid,” says Gurwitch, the founder of Laura Mercier and executive behind Castanea Partners’ investments in Tatcha, First Aid Beauty and Urban Decay, which all sold to strategic buyers. Now that she’s an operating partner at Advent, she’s on the lookout for larger deals across beauty and wellness.

“There are fewer large deals, but I’ve been surprised,” Gurwitch says.

She’s also considering investing in mass market brands, versus her previous focus on prestige, something other investors are looking into, too, as some expect the pandemic-related recession may cause many customers to trade down in certain areas of beauty.

“We can’t be blind to the incredible level of unemployment that we have in the country,” Brousset says. “During recessions, what you see is a strong growth in mass and a contraction in luxury.”

Brands that own their customer through direct relationships are even more appealing than before, especially as online sales have taken on increased importance as most stores closed due to COVID-19, and a new flock of first-time online shoppers have taken to the Internet.

“At least since I invested in Tatcha in 2017, it’s been a metric I’ve looked at. How sticky is the direct-to-consumer customer?” Gurwitch says.

“Brands that start with strong digital penetration are best-positioned for success,” says Olsen, a recently appointed managing director at Highlander Partners. “If they’ve got a strong customer base of 80-20, 80 percent coming from their own site and 20 percent coming from retail, there’s a huge opportunity for retail. That means the brand is resonating digitally with repeat customers.”

That type of makeup also leaves opportunity for brands to grow at retail—something investors still think is important—during the investment period.

Olsen says he also expects the brand-retail relationship to flip, and for retailers to need the brands more than the brands need retailers. “The retailers used to be the boss…now the brands have a lot more leverage, given that they know they can be strong in their own channel,” he said.

Wellness concepts are attractive, too, as are skin-care businesses, hair and even devices, given consumers’ newfound love of at-home beauty treatments. Social followings are still a significant part of what investors are looking for, they said, and profitability has become an even more important metric.

“People are much more concerned with profitable growth,” says Gersten, founder and managing partner of True Beauty Capital.

Gersten says he expects overall beauty deal flow to decrease due to COVID-19, with the exception of small deals.

“The M&A activity, putting Charlotte Tilbury aside, right now is not going to be very active. The ability for larger funds to deploy what their mandate requires them to deploy will be relatively quiet for at least the next three months in beauty,” Gersten says. Even more traditional private equity deals—a brand raising $30 million or so—may be quiet for a while, he notes, while smaller deals of between $1 million and $5 million are likely to be plentiful. Those smaller companies are generally less reliant on brick-and-mortar sales, which are expected to have a reluctant return post-COVID-19, and don’t often have massive overhead costs because of their few employees.

“[COVID-19] hasn’t fundamentally changed our thesis or how we think about investing,” Brousset says. “Beauty and wellness is a very attractive sector, and if anything, coronavirus has proven it is a resilient, attractive sector, despite everything.

“M&A has been a driving force of the beauty industry for decades,” Brousset says. “Acquisition is the way of growing.”

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