In a recent Axial Middle Market Review article, author Meghan Daniels explored new trends in the beauty industry and the consequent effects on M&A and investments in the space. She called upon numerous health & wellness experts, including SDR Ventures’ Vice President, Jodi Burrows.

First and foremost, said Burrows, “Millennials aren’t buying things the way that their parents did — a lot of purchasing today is social media based and increasingly, interactive.” With this in mind, brands that “check the right boxes” of being socially conscious, natural/organic, premium and digitally native are proving successful with consumers and investors alike.

Beauty IndustryAs a result, many large, established brands are left with the dilemma of either trying to manufacture a dedicated based of millennial followers or acquire successful personal and beauty care companies that have done well with this audience from the onset. Many are opting for the latter option. Daniels cited SDR’s latest Health & Wellness Report, which highlighted several key strategic acquisitions last quarter, including Unilever’s purchase of Sundial Brands, a personal care company focused on black women and Colgate-Palmolive’s purchase of skincare brands EltaMD and PCA Skin.

Overall, “Personal Care,” which includes the beauty industry, was the most active Health & Wellness segment in terms of M&A transactions announced or completed last quarter, narrowly edging out Vitamins, Minerals & Supplements (VMS).

While private equity interest in personal care and beauty is strong, acquisitions have been dominated by strategic companies, so far. As SDR’s quarterly report calls out, 81% of Q4 2017 health & wellness acquisitions were made by strategics, and just 19% were made by financial/private equity buyers.

As Daniels calls out in her Axial Middle Market Review article, “For some PE firms, the best way to compete is to look for targets strategics aren’t interested in — yet.” This means focusing on smaller brands in need of infrastructure building and organizational transformation that are likely still off the radar of larger strategic acquirers. Tengram Capital Partners, for one, has embraced this concept. According to Tengram’s Rich Gersten, “When we are finished transforming and growing our brands, the strategics will be more interested in them.”

Looking forward, consumer input will continue to drive the development of new products, and more upstart cosmetic and skincare companies will likely become overnight successes. Consolidation should continue as well, with brands like Unilever pursuing a portfolio of “purpose-led companies” to drive a “broader company transformation” and others simply looking to leverage proven recipes for success, especially with millennials.