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M&A is the New R&D

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Disruptive brands like Pacifica make attractive investments for private equity.

What does a private equity executive look for in a prospective investment? Julian Steinberg, managing partner of Alliance Consumer Growth (ACG), recently explained that his firm’s strategy is simple: seek out large categories in which consumer preference is shifting and in which there are opportunities for entrepreneurial businesses to meet those needs, then find the disruptive brands within that space that have a little something extra.

ACG, which has invested in healthy and green brands in the food and beauty space, including Tata Harper and NudeStix, recently took a minority stake in Pacifica Beauty, which markets vegan and cruelty-free skin care, cosmetics, bath and body, fragrance, hair care and nail care products.

However, Steinberg stressed that ACG does not have a natural product-focused investment thesis. Rather, the firm is simply following the growth, driven by demographic changes, the rise of the millennial generation, and evolving consumer preferences for better-for-you products and brands.

By Steinberg’s estimation, Pacifica could grow to 10 or 20 times its current size.

He added that, today, better-for-you is merely a baseline for growth. In order to attract investment dollars, brands must offer this plus something extra.

But why invest in beauty at all? Steinberg replied that the beauty industry is exciting because of the level of innovation coming from smaller independent brands. At the same time, larger strategic players have come to realize that their legacy brands will never achieve the growth rates of today’s upstarts. As a result, M&A has, to some extent, become the new R&D.

ACG focuses on what Steinberg described as disruption leaders that are doing something exciting and differentiated in large categories. These brands, whether in the pet food (The Honest Kitchen) or fast food (Shake Shack) or beauty offer “tremendous” value to the consumer for a relatively small premium.

Brands become successful by building strong relationships with retailers and the end consumer.

Pacifica was the right fit for ACG because of its unique brand voice, lifestyle positioning and, of course, its better-for-you products. ACG’s investment will boost the brand’s infrastructure, distribution and retailer support (the brand currently retails in Ulta, Target, Whole Foods Market and Sprouts, among other channels), and drive trial and awareness among consumers. By Steinberg’s estimation, Pacifica could grow to 10 or 20 times its current size.

While every industry is different, Steinberg said, the bottom line regardless of segment is that brands become successful by building strong relationships with retailers and the end consumer.

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