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Sector Analysis: TPG Takes Stake In Skin Care Leader Rodan + Fields; PE Interest in Sector Remains Strong

Investment Summary

 This week, direct selling skin care leader Rodan + Fields announced that private equity firm TPG Capital has taken a minority stake in the firm.  Terms were not disclosed. This is another data point supporting our thesis that leading innovative direct selling companies continue to attract sophisticated institutional capital.  With the preponderance of PE investments in direct sellers, coupled with the recent demise of the second loud, highly visible and failed bear raid on public companies in the space over the past 12 years, we would look for increased IPO activity as valuations of the public peers improve and as private equity firms look to monetize their investments.

Key Points:

·       Privately held Rodan + Fields, with annual sales of $1.5B according to Direct Selling News, was named by Euromonitor as the largest skin care brand in the US in 2016 & 2017.  

·       After buying back the company from Estee Lauder (EL; $144.93; NR; $53B mkt cap) in 2007 to move it into the direct selling channel, Rodan + Fields was among the earlier direct sellers to incorporate social media into its selling platform.

·       Other TPG Capital investments include Airbnb, Spotify and Life Time Fitness according to this week’s release.

·       Two members of TPG, its co-founder and co-CEO Jim Coulter and TPG Capital’s consumer sector lead Paul Hackwell, will join the board, providing expertise and resources to take Rodan + Fields on its next phase of growth.

·       Coulter’s quote on the investment: “As a firm with a history of investing in businesses that are fundamentally changing their industries, we see Rodan + Fields as being at the intersection of emerging consumer trends and technology disruptions…This is exactly the kind of partnership we look for — an outstanding brand with proven success, an experienced and talented management team, and significant runway for growth."

·       Other PE-involved direct sellers include Stella & Dot (Sequoia) and Modere (Z Capital Partners).

·       Last year Coty (COTY; $14.35; NR; $11B mkt cap) took a 60% stake in privately held Younique, also a social selling pioneer in direct selling, with annual sales circa $500MM.

 

Analyst Certification

I, Douglas M. Lane, hereby certify that the views expressed in the foregoing research report accurately reflect my personal views about the subject securities and issuer(s) as of the date of this report. I further certify that no part of my compensation was, is or will be directly, or indirectly, related to the specific recommendations or views contained in this report.

Financial Interests

Neither I, Douglas M. Lane, nor a member of my household, owns any security (ies) which is/are the subject of this research report. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. I do not know or have reason to know at the time of this publication of any other material conflict of interest.

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Company Disclosure

Lane Research has no long or short position in any security of any of the companies mentioned in this report. The Company has no contractual relationship, nor have we received any compensation from any of the companies listed in this research report.

Stock Ratings

Lane Research assigns one of three ratings based on an expectation of absolute total return over a 12-month time frame based on the following criteria:

BUY (B): The security is expected to have an absolute return in excess of +20%.

HOLD (H): The security is expected to have an absolute return of between +/- 20%.

UNDERPERFORM (U): The security is expected to have an absolute return less than -20%.

Douglas Lane
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