‘We look at what creates real opportunity’: Managing partner Michael Farello on L Catterton’s beauty investment strategy

Both natural and luxury have been the two biggest growth categories within beauty, and are key areas of interest for L Catterton in addition to direct-to-consumer and ingredient-driven brands, according to managing partner Michael Farello. The U.S. prestige beauty industry reached $17.7 billion in 2017, a 6 percent increase over 2016, with natural brands specifically responsible for 55 percent of the overall gains in prestige skin care, according to The NPD Group. L Catterton typically invests between $10 million and $50 million from its North American growth fund, and between $50 million and $400 million from its flagship fund across North America and Europe.

Following these recent investments, Farello spoke about competition in the beauty investment space, the strategy behind L Catterton’s investments and how the private equity firm is actively working with brands to scale them.

Beauty companies have been actively acquiring and investing in the other players. Do you feel there is a heightened competition right now?
We don’t feel a need to keep up in terms of the number of investments, per se. But it certainly is a competitive environment, and beauty and personal care broadly are very strong categories of interest for us. We have over a dozen beauty brands worldwide, and there’s been dramatic growth in both beauty and personal-care spending globally. We see that largely driven by growing middle-class and emerging markets, but also there is the globalization of beauty trends, and there’s an acceleration of innovation in the premium category. Social media is enabling brands to build awareness and scale faster than ever before, and then you have real dynamic challenges — not just in e-commerce and direct-to-consumer, but also in the shift of department stores toward specialty [retail].

So there’s a lot of activity broadly in the categories, and we look at what creates real opportunity for emerging and nascent brands to scale quickly. I think that’s going drive a lot of the activity — not just from us but from some of the strategic [investors], as well.

What is L Catterton looking at within the beauty and personal-care space? For example, The Honest Company and Il Makiage are quite different from one another.
[They are] different, but they are both supported by underlying consumer trends. First and foremost, when we are looking at opportunities, we look at categories that have real momentum. So on the one hand, with The Honest Company, they have tremendous brand equity in natural and clean beauty. There’s been a shift toward natural across categories, from food and beverage to over-the-counter health care, to beauty and personal care; and Honest has been a real trailblazer on that front. Clean labels continue to grow, and we envision that will be strong for the next decade.

Il Makiage, on the other hand, is a premium, high-performance product, with brand authenticity and is for women, by women which is another trend we believe in strongly. You see that attitude in their advertising, where it’s strong women that know what they want, and the company sets itself to that same standard. So the two businesses, on one level, are quite different, but both are supported by consumer trends.

Once a brand becomes part of L Catterton’s portfolio, what role does your company play?
We are quite active. We have 140 investment and operating professionals globally, so it is a fairly large team. We have an operating team with experience in supply chain and manufacturing, digital marketing, pricing, talent management and a host of other disciplines to support the companies so that they scale and hopefully avoid pitfalls. So an example, with Il Makiage, is that we worked closely with them on their U.S. launch in regard to agency selection, campaign development, market selection and so on.

Do you think there is more data available on these emerging brands than before? What role has that played?
It’s certainly true for any of the businesses that have a meaningful direct-to-consumer portion of their business. Where [we have] the ability to see how the consumers behave, and we can see patterns emerge much faster, we can understand [trends like] repeat behavior and what some of the other brands are purchasing. And it’s much easier in an environment when some meaningful portion of revenue is direct-to-consumer. The direct-to-consumer component has been a new addition, and that’s why we need to identify some of the trends earlier.

Are there other areas that are revealing themselves as interesting to you right now?
There are, and a couple of which we have already invested behind, which I would view as being ingredient-driven beauty and skin care. So brands like Tula, which is a probiotic skin care, or Kopari, which is natural skin care using coconut oils and using coconut oil in an innovative way where they have strong stories to tell; we think that will be a key trend in the coming years.