Citic Capital explains makeover of New Zealand’s Trilogy

The Chinese buyout fund’s latest acquisition is the start of an M&A rollup strategy with a focus on bringing niche brands to the increasingly affluent and brand-conscious China market.

Citic Capital China Partners completed the acquisition of New Zealand-based Trilogy International this week, building its portfolio of companies along the beauty supply chain, stretching from Fifth Avenue to China.

The Chinese private equity firm is betting on Chinese women’s growing preference for natural beauty and a natural lifestyle, said Hanxi Zhao a senior managing director of Citic Capital. Citic Capital also believes it can help foreign brands navigate the country's booming Rmb169.1 billion ($27 billion) skin care market.

“The evolution of ecommerce and digital marketing has provided these global brands much more opportunities to grow bigger and faster in the Chinese market,” said Zhao, who previously worked at Boston Consulting in the US and as a brand manager at Procter & Gamble in China.

Trilogy’s flagship natural organic rosehip oil skincare brand and candles crafted from natural waxes under the Ecoya brand have a growing following.

An analysis of the global beauty sector by consultants at McKinsey, which was released this week found 31% of the beauty companies that win venture capital (VC) funding use natural or organic ingredients and commit themselves to following certain social or environmental standards.
The $250 billion beauty industry is at the cutting edge of consumer trends and a bellwether of change for the fast-moving consumer goods sector.

Private equity and VC firms have been upping their investments in companies that best embody the latest trends in online shopping—brands including Urban Decay and Anastasia—according to McKinsey.

In Asia, LVMH-backed L Catterton Asia bought a stake in Korea’s Clio in 2016 while Bain Capital has invested across the beauty supply chain, from a medical beauty specialist to cosmetics packaging.

Citic Capital is not new to the sector. It has invested in the Fifth Avenue-based skin care brand Erno Laszlo, which treated the pimples on John F. Kennedy’s back. The 90-year-old brand says the Hollywood following of its double-cleansing systems included Marilyn Monroe and Audrey Hepburn.

Citic Capital bought Erno Laszlo from private equity firm Pollen Street Capital. Erno Laszlo is also now focused on growing in China.

The buyout fund has also invested in the beauty supply chain. In January, Citic Capital finalised its acquisition of Paris-based cosmetic packaging company Axilone from Oaktree Capital Management.

Citic Capital China Partners III, L.P agreed to acquire all of the issued shares in Trilogy on December 15. Investors were paid NZ$2.90 per cash per share and the acquisition represented a EV/Ebitda multiple for the 12 months to September 30 of 13.6 times.

The following interview with Zhao has been edited for brevity and clarity:

Q What is Citic Capital’s strategy in the beauty industry?

A Today’s consumers have far more choices than before.  They are getting tired of the big “me too” brands, and are searching for niche “long tail” brands that have a unique story, legacy and characteristics.

The brands we have invested in, Erno Laszlo, and now Trilogy, are representatives of this trend.

We believe niche global brands have strong appeal to Chinese/Asian consumers as they continue to become more aware of the outside world, and continue to trade up for better lifestyle and better quality products. 

The evolution of e-commerce and digital marketing has provided these global brands much more opportunities to grow bigger and faster in the Chinese market.

Zhao sees value in beauty

Q Startups in the global beauty industry are almost all single-brand beauty companies. These nimble firms account for almost 50% of the $2.7 billion in VC investments the beauty industry has received since 2008 and 80% of VC funding in 2017.

How does your investment in Trilogy fit in with this trend?

A Trilogy is run as a group company with different business units running different brands, and each brand is run independently as it all has different characteristics and target segments. 

Trilogy is the largest and most well-known brand and is run by an independent brand team. On the other hand, the advantage of having a group company is that it provides scale at the back-end — as they share similar distribution channels, supply chain and operations.

Q In an update on its China strategy in October, Trilogy said it distributes in the world’s second-largest economy online via various platforms such as Tmall, WeChat and Weibo.

Could you tell us more about your digital strategy and how you will help Trilogy increase sales in China? 

A Trilogy today has around 25% of its revenue coming from China, and all from e-commerce (with limited efforts from the company so far).

This shows the power of word-of-mouth in the digital world. We plan to continue help the company drive both online and offline [sales] in the future. 

Q Will Citic Capital work with Trilogy on an M&A roll-up strategy?

A Yes, this is part of the strategy. There are a lot of niche, smaller but interesting brands in the Australian and New Zealand markets that share the same “natural beauty” theme and we will actively look for those opportunities.

Q Felix Danziger is joining the Trilogy board as a director and Roy Brown had been appointed as chief financial officer. Are they affiliated with Citic Capital in any way? 

A We’ve known both for a long time and have worked with them on different occasions in the past. We have engaged both of them as advisors in the diligence process and retained them to help drive post investment value-add. 

The two of them bring strong sector and functional expertise to the company and are welcomed by the current management team. 

VC investments in global beauty market


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