Industry experts weigh in on whether private equity is worth the risk.
Before Beautycounter’s billion‑dollar valuation, a partnership was forming behind the scenes that was expected to launch the company into even higher stratospheres.
The Carlyle Group, a private equity firm, was courting the clean beauty brand’s founder Gregg Renfrew with promises of increasing brand awareness and bolstering its omnichannel business model. When the deal between the two parties was finalized in 2021, Carlyle gained a majority stake and Renfrew walked away with around $50 million, according to sources close to the deal.
But all was not as it seemed. Within a year, Carlyle replaced Renfrew with an interim CEO who quickly implemented sharp pivots to the company’s product focus and announced changes to the compensation plan that would create massive reductions in commissions for top sellers. The company went into a tailspin, and in 2024 Carlyle announced the brand would enter foreclosure.
In less than three years, a brand built over a decade with more than 65,000 independent distributors went from unicorn-status to shuttered, and many industry analysts were quick to assign blame. Private equity, they said, was not the hero it purported itself to be.
The Purpose of Private Equity
Private equity can’t be viewed as a binary of right or wrong for the industry, and it certainly has its place. Private equity partners can allow shareholders an exit, they can clean up a cap table and allow a company to be more focused on enterprise value. That capital can also contribute additional cash that can help with growth and reduce behind‑the‑scenes friction from majority shareholders. Beyond financial support, the most significant and often most attractive value is human capital.
“They’re able to bring managers or board members or some expertise that can help a company break through a stagnant place,” said Brett Blake, Annuity.com Chief Executive Officer and author of Private Equity Investing in Direct Selling.
“Often a private equity company will buy a company that has been stuck within ten percent of its sales for a long time and, with the help of the network and capital they bring, they’re able to help a company break through and affect more growth. That was the hope in direct selling—that they would buy good businesses and improve their margins.”
To be clear, there are private equity success stories within the channel. In his book, Blake describes private equity firm LNK as an excellent partner for Beachbody and the two entities’ relationship as a “real success story.”
Primerica also benefited from private equity involvement. John Addison, a direct selling veteran, was Co-CEO of Primerica when private equity firm Warburg Pincus sponsored the company’s IPO as it separated from Citigroup during the challenging 2008 economic landscape. Primerica was entering an incredibly regulated industry that was subject to federal supervision from the Securities and Exchange Commission, and Warburg Pincus provided the expertise and Washington, D.C. contacts to provide a smooth transition.
“Warburg was incredibly helpful in transitioning us from being a division of a big bank into being our own public company,” Addison said. “Rick Williams and I had run a very large direct selling financial services business, but we had not run a public company as Co-CEOs. Their wisdom and guidance were incredibly helpful.”
Addison is also a board member for LegalShield, and while he was not present when private equity firms MidOcean Partners, Stone Point Capital and, later, Further Global engaged with the company, he describes the results of these collaborations as highly effective and positive. The firms have sold their positions in the business and taken profits, as expected, but they are all still significant owners of the company 13 years after their initial investment—a length of time that Addison describes as “unheard of” in the direct selling industry.
“Great private equity partnerships come down to what the private equity firm wants to do and having a quality management team that can execute the strategy they have laid out,” Addison said. “Having investors with a shared vision of management is critical.”
Jacob McLain, Head of Sales for Fluz and a former executive at Beautycounter, had a similarly positive experience when private equity firm TPG entered Beautycounter in 2014.
“It’s hard to find a successful case study of private equity in the direct sales channel, but Beautycounter was a great example of when things went really well for a long time,” McLain said.
According to McLain, TPG grasped Beautycounter’s vision and provided funding and connections that led to subsequent investors, including celebrity musician and philanthropist Bono. Together, TPG and Beautycounter took time to gradually adjust cost structures and make strategic investments that helped build the brand.
“What worked well was a balance of power with the founding team in place that intimately understood the critical success factors of that business,” McLain said. “That ecosystem was really marked by a comfortable timeline and a willingness to evolve rather than make abrupt changes and shorten an exit timeline.”
But herein lies one of the difficult truths of inviting this type of money into a company. Private equity firms aren’t legacy investors in it for the long haul. The patient ecosystem that helped Beautycounter flourish was upended when a new private equity firm purchased a controlling interest a few years later.
“Direct selling grows in a cyclical nature,” McLain said. “Revenue can fluctuate, and the private equity model doesn’t typically align to that time scale. Private equity wants its money out.”
From Cash Positive to Crushing Debt
In 2008, juice supplement company MonaVie partnered with TSG-MV Financing and received an estimated $100 million capital infusion. TSG appeared to be an obvious fit. They had worked with Coca-Cola’s vitaminwater and knew the beverage category. They had traditional Consumer Packaged Goods (CPG) expertise as well as branding and manufacturing partners that MonaVie could leverage. It was a perfect match but ultimately an unnecessary one.
According to Brick Bergeson, Color Street Chief Revenue Officer and former executive at both MonaVie and Jamberry, MonaVie had plenty of cash flow. What it lacked, it could have raised on its own or leveraged its own liquidity to manage the expansions it wanted to make. But private equity was viewed as a smarter move.
“It was almost a feather in the cap of ‘Look who we’re partnering with,’” Bergeson said. “This is one of the bigger traditional players and they’re going to help support our product strategy and fund expansion.”
Two years later, in 2010, TSG converted its equity in MonaVie into a $182 million loan at 12 percent interest, with almost all of MonaVie’s assets as collateral. Debt of this magnitude can plunge companies into unhealthy business practices, like offering deep discounts on products, in order to access cash. Business strategies become about how to postpone foreclosure and do so at the cost of future business. In MonaVie’s case, the company defaulted a few years later.
“When you’re up for so many years in a row, you never think there’s going to be a trough, but there is always a dip and you need capital to survive,” Blake said. “When the company experiences a correction, they are hamstrung. Not only do they not have the cash, but now they owe the banks so much money. Their debt service is so significant that they are in survival mode.”
Arbonne’s private equity engagement followed a similar storyline. In 2006, the company was debt free with approximately half a billion dollars in annual revenue when it brought in private equity firm Harvest Partners to help it through the IPO process. Months later the Great Recession hit. The surplus cash flow was gone, but Harvest Partners had already placed $600 million in debt on Arbonne.
“The company’s revenue was declining and so was the economy,” a former Arbonne executive who was on staff during Harvest Partners’ involvement told DSN on condition of anonymity. “When that happens, you have to spend money somewhere to reinspire the field—come up with a new killer product, expand into a new country, something—but there wasn’t any money. It was all spent servicing the debt.”
A number of buyers attempted to purchase Arbonne during this time, including a closed-door deal with Avon that featured what the source described as “a huge bid,” but Harvest Partners declined them all. By the time Arbonne entered bankruptcy proceedings, the source said, Harvest Partners had invested $75 million but taken out over $400 million.
“Creditors pushed Arbonne into Chapter 11 and Harvest Partners disappeared,” the source said. “They were there one day and gone the next with all the money. That doesn’t make them bad people. They followed the rules—but the rules suck.”
The Education Gap
Business acumen, practical strategy and connections. Private equity firms appear to have it all—because they do. Investments across a variety of business platforms typically provide them with access to a broad range of expertise that they can make available to their clients. It’s a crosspollination that can help leaders quickly acquire knowledge and make informed decisions about moves they might not have a wealth of experience in.
The problem is that vast and broad experience doesn’t often include direct selling.
“There is a tendency to think that if you understand the commercial world, you understand direct selling,” said Oran Arazi-Gamliel, Strategic Advisor to Apptor AI Solutions. “But direct selling is a different language because it relies on its most valuable asset: the people. When private equity enters the business, what they usually do is start to look at people as transactions. And when you do that, you lose the soul and the drive of what makes this business so special.”
Bergeson, who was an executive at Jamberry when private equity company Wasserstein, now known as EagleTree Capital, invested in the company in 2015, recalled how this impacted leadership decisions on a granular level.
“I remember sitting in a meeting and the Wasserstein people saying, ‘We’re going to treat them like a professional sales force. They can either do X, Y or Z,’” Bergeson said. “But you don’t just crack the whip and say ‘We’re going to fire you.’ They’re 1099 workers; they’re stay-at-home moms. This is something they do on the side. It was so tough to watch.”
“The Owners Aren’t Innocent”
Earlier this year, Rodan + Fields announced it would be ending its multi-tier direct selling channel in favor of an affiliate model. It was a switch that took field leaders by surprise, effectively ending their commissions, and led to the elimination of around 100 staff positions.
This drastic move appears to have been precipitated by what industry experts are viewing as an unhealthy private equity partnership. A source familiar with the executive decisions at Rodan + Fields spoke to Direct Selling News on condition of anonymity, saying private equity “changed the needs of the company in terms of how it operated.”
Prior to private equity involvement, Rodan + Fields was fully owned by the founders and the management team. A phantom stock program rewarded employees who helped build the company with payouts that the source described as “life-changing money.” The company’s C-Suite executives, high-ranking management and founders were excluded from this payout because of their inclusion in the company’s LLC. Private equity, the source explained, was a way to get liquidity for those leaders.
This is a familiar pattern woven into private equity involvement within direct selling. Founders invest sweat equity, if not their own money, and often draw a salary during the startup phase that is less than what they could attain on the open market. Taking cash off the table as a reward for those years of sacrifice is a natural next step for many of these leaders.
“We’re all blaming private equity but, in most cases, the owners are taking out cash,” Blake said. “The truth is private equity companies have made money even as companies have failed. There are cases, however, where they’ve taken a hit and been blamed for the challenges. But in almost every case, the founders and their families have walked out of it with millions, tens of millions, sometimes hundreds of millions of dollars. And this is on top of the tens of millions of dollars in cash that they’ve taken out every year.”
Symptoms of a Larger Problem
Every enduring direct selling company is built around a founder-led culture. It is the cornerstone for the company’s story and the glue that binds the opportunity, product and mission together into one cohesive package. This formula, while effective, makes it almost impossible to extract the founders without consequence.
In the case of private equity involvement, when founders exit or even take a step back, the field sees it as a sign of trouble, volatility or worse. The antidote to that field anxiety, Blake says, is a strategic succession plan—implemented well in advance of any investor announcements—that signals the company is primed for stability.
“The failure of private equity in our industry is a symptom of a broader problem,” Blake said. “The problem is we’re struggling as an industry to develop leaders.”
When a company is dependent on a founder’s presence to survive, the culture collapse that is common in private equity transactions can be a fatal blow. But this can be true even before outside investors without a grasp of the channel’s nuances step into internal operations. Sometimes even the rumor of private equity involvement can cause irreparable damage to the company’s ecosystem.
Bergeson experienced this at Jamberry when an upset junior employee leaked the company’s plans to partner with private equity investors. The rumor built negative buzz in the field that was confirmed when the deal was finalized. It didn’t matter that the details of the gossip were incorrect. The damage had already been done, and Jamberry struggled to recover.
“Even the perception of the founders leaving can be damaging,” Bergeson said. “The field can be finicky in that process and perception becomes reality for them. If they sense any risk to their ongoing viability or to their personal business, they will run for the hills.”
Investing in the Future
The list of alternatives to private equity isn’t lengthy. Debt recapitalization has been a safer option for some company founders, but it isn’t a cure-all. Instead, industry analysts point to the need for a mindset shift for those residing at the top of the channel’s org chart to impact lasting change.
Direct selling, for instance, doesn’t often invest in itself. Outside of the channel, it’s common for founders and CEOs to reinvest capital into their own industry. Inside of direct selling, there is a feeling of incongruency when it comes to investing in brands that are seen as competitors. As a result, “smart money” is leaking out of the industry, forcing companies into capital partnerships that aren’t always in their best interest.
Beyond that, analysts advise companies to revisit their fiscal management policies and consider a new approach to debt margins that is better suited to the current market landscape.
“Looking at the future of direct selling, companies are going to have to return cash to investors by running a fundamentally good and profitable business,” McLain said. “You really have to manage overhead carefully. That to me is the future dynamic. Operating at a loss and raising more and more money hoping someone will pay more for it than the last isn’t a viable path forward in the channel anymore.”
It would be simplistic to call out private equity investors and the predatory loan-to-debt life cycle they often inflict on companies as the only reason behind a company’s demise. These types of fiduciary partnerships may be the driving force that pushes companies out of business, but they also serve to highlight the pattern of cultural collapse and leadership vacuums that were making companies vulnerable to these types of agreements in the first place.
“From a direct selling perspective, companies need to ask themselves ‘What happened that made us lose our voice?’ and ‘What do we need to do in order to recreate it?’” Arazi-Gamliel said. “It’s not what happened in the past, but what needs to happen in the future for this to be mitigated and for the direct selling channel to return to growth.”
This is a digital preview of an upcoming Feature Article in the October 2024 issue of Direct Selling News magazine.
