October 24, 2013

Castanea Partners Receives Private Equity International 2013 Operational Excellence Award for Urban Decay

During Castanea’s ownership of US business Urban Decay – from March 2009 to December 2012 – it managed to increase profits six-fold at the “beauty with an edge” company.

Castanea originally invested in Urban Decay at a time when the macroeconomic environment was extremely challenging, and there were hardly any investments being made in consumer products – particularly beauty and cosmetic brands like this one. But Castanea was drawn to the company’s customer base, which seemed to demonstrate a degree of loyalty to the brand’s product quality and edgy appeal. “One of the things we found during our diligence that really got us comfortable was that the consumer was not who you might think for a brand called Urban Decay, with the colours and packaging it had,” said Steven Berg, a partner at Castanea. “The consumer was older – not a teen or tween – and more affluent and sophisticated. [So] we thought the brand had more potential”

During Castanea’s hold period, the firm spent one week per month with the company, which is based in Newport Beach, California.

Urban Decay sells and markets its products online and through retailers including Ulta Beauty, Cosmetics & Fragrance and French group Sephora. Under Castanea’s guidance, Urban Decay’s e-commerce business grew 153 percent, while the brand became the second most productive colour cosmetic line at Sephora.

“I liked that they increased their market share,” said judge Gwyneth Ketterrer, former senior managing director and chief operating officer at Irving Place Capital. “That’s tough to do.”

The company also increased its presence at department store makeup counters, including US chain Macy’s and UK-based Debenhams and House of Fraser. And it expanded internationally, moving into Mexico, Malaysia, Brazil, the Middle East and other parts of Southeast Asia.

Castanea also helped the company build out its team, which grew from 80 employees to 110 during the period. This included the recruitment of three former Benefit Cosmetics and Sephora executives to Urban Decay’s management team.

By the end of the investment period, revenue at Urban Decay had more than tripled, thanks in no small part to the success of NAKED, the company’s newest sub-brand. For the first half of 2011, the NAKED line was the third best-selling new product launch in all prestige cosmetics (excluding Ulta sales), according to consumer market research.

“The team did a tremendous job of launching a new platform that extended the reach of the brand,” said Berg. “It had a broader appeal to the consumer but was still true to the Urban Decay brand of being edgy.”

Other products were launched outside Urban Decay’s core eye category, including new lip glosses, complexion sprays and nail colours. Castanea worked with Wende Zomnir, Urban Decay’s creative ‘visionary’, to introduce new products.

“Urban Decay had a great core team when we invested,” said Berg. “We helped expand that team over time – and at the time of our sale of the business, we were convinced they were the best in the industry.”

In late 2012, Castanea realised its investment in Urban Decay with a sale to L’Oreal, generating a return multiple of roughly 8x.

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