2021 was a banner year for beauty deals – and 2022 could be even better

The huge growth in deal activity has been accompanied by a continued rise in asset valuations, with deals like Paula’s Choice trading with Unilever in June at a supposed earnings multiple of 6.7x and Glossier rising an $80 million Series E round at a $1.8 billion valuation (down from $1.2 billion in 2019), despite seemingly elusive earnings. The main driver of all this activity is what we call the FOMO rally – the proliferation of strategic and financial investors seeking beauty and well-being to generate returns and growth. In the case of strategic acquirers like Unilever, Edgewell and Procter & Gamble, it was about competing for best-in-class brands to complement their portfolios, drive growth, attract new consumers and expand their expertise in areas such as than DTC and Gen Z marketing strategies. For financial investors, it was about finding the next generation of brands to replicate the success of previous investor exits like Advent’s September IPO of Olaplex, which was valued at $15 billion after its debut (it was $13.4 billion at the time of this writing). A wave of new investors in the beauty and wellness space has spurred competition for assets and deals and subsequently driven valuations higher. As previously reported in BeautyMatter, interest in the category has spurred an increase in the seed investment market, with investors considering smaller deals and seed funds to bet on the next breakthrough beauty brands. Tech-focused VCs began investing in early-stage beauty opportunities, and private equity funds launched seed and venture capital funds to fill market gaps. Greylock Partners, one of Silicon Valley’s premier venture capital firms, recently announced it would commit $500 million to seed rounds, making it the largest pool ever created for start-ups. startup ups.

To say that beauty and well-being live in a bubble is obvious; the real question is, how durable will it be? Beauty and Wellness has shown astonishing resilience throughout the initial COVID crisis and through subsequent shocks like the delta surge in the summer of 2021 and Omicron at the end of the year. As the world slowly but surely moves towards reopening, there’s a strong argument to be made that some of the fervor we’ve seen in 2021 could extend to neglected categories like color cosmetics in 2022. In November, we got a glimpse of this with SPAC’s acquisition of Waldencast’s Milk Makeup and Swiftarc’s July investment in Alleyoop from their inaugural $10 million beauty fund focused on supporting disruptive innovation in female-led beauty and wellness brands. Add to that $1.9 trillion of dry powder burning a hole in investors’ pockets, and all signs point to continued trading activity as we head into 2022.

Economic trends investors will focus on in 2022

Inflation: In December, the US Department of Labor reported that inflation, as measured by the consumer price index (CPI), rose 7%, the fastest 12-month pace in nearly 40 years. The move comes amid a shortage of goods and workers in an economy teeming with cash from the government’s COVID stimulus and measures taken by the Federal Reserve to support the economy over the past two years. This means consumers’ wallets are under pressure as everything from food to energy costs becomes more expensive. This could have a significant impact on beauty and well-being if consumers shift discretionary spending away from beauty towards the essentials. However, early data shows that has not been the case as consumers continue to shop and some analysts predict the 2021 spending boom will continue into 2022. According to the National Retail Federation, sales retail during the November-December 2021 holiday season grew 14.1% in 2020 to $886.7 billion, easily beating their forecast and setting a new record despite challenges from inflation, disruptions supply chain and the ongoing pandemic.

Rising interest rates: Federal Reserve officials announced in mid-December that they were ready to fight inflation with no less than three rate hikes, starting this spring. This could impact larger transactions that rely on leverage for funding, as borrowing costs would increase. Rising rates could also impact transactions dependent on public markets like SPACs and IPOs, as increases in interest rates can create volatility in the stock market.

Labor shortages: As we begin 2022, jobs are plentiful, but workers are not. As a result, labor costs have risen as companies compete for missing workers and do even more to retain their best workers. Shortages and phenomena such as the “Great Resignation” have had a particularly poignant impact on small and medium-sized businesses, but ultimately all businesses are affected, as labor shortages contribute to supply chain issues and reduced services. Labor shortages are expected to persist throughout the year but, according to a KPMG survey, a third of executives surveyed want to use mergers and acquisitions to acquire talent in 2022, which could help fuel the transaction activity among targets with exceptional teams.

Supply chain issues: By now, everyone has heard of the supply chain issues that have led to shortages and price increases throughout 2021. Unfortunately, most experts agree that these issues are here to stay for the major part of 2022. This manifested in beauty and wellness, with brands sold. out of bestsellers for months because they can’t get components, manufacturers are running out of key ingredients so they can’t ship product, and retailers can’t restock due to product shortages . This has resulted in pressures on both top line and bottom lines for companies, has been a major contributor to inflationary pressures and has been exacerbated by labor shortages.

US-China relations: No discussion of the beauty and wellness supply chain would be complete without mentioning China and the impact any disruption in US-China relations could have on the industry. Most brands and retailers rely heavily on China for everything from packaging components and ingredients to shipping materials and PPE they provide to their employees at work. Then, of course, there’s the tremendous growth opportunity for American brands looking to capture consumer attention in the world’s second-largest beauty market. Recent tensions with Beijing over issues such as Taiwan, the treatment of the Uyghur population in the Xinjiang region and changes in Hong Kong could come to a head in 2022 and create friction in trade relations between the two superpowers.

After-sales service regulations: In early December, SEC Chairman Gary Gensler announced that he would like to see stricter regulation of SPACs (Special Purpose Acquisition Companies). Specifically, he mentioned new rules around marketing practices, stricter disclosure requirements, and accountability obligations for PSPC’s “gatekeepers,” which could include sponsors, financial advisors, and other accountants. SPACs have been a popular beauty and wellness investment vehicle, with the BeautyMatter Deal Index recording six deals in 2021, including five in the fourth quarter. New regulations could make the investment vehicle a less attractive option as investors structure deals in the space.

Mid-term elections: In November, the United States will hold midterm elections, which has the potential to change control of Congress and the Senate. The election outcome could impact tax, regulatory, domestic spending and foreign trade policies, which could impact trading in the latter part of the year and into 2023.

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