SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among beauty and personal care companies with financial profiles to lure the market. We look at why they are compelling and why each could be a fit for a blank-check merger.

There are a broad range of industries and sectors that are traditionally considered recession-proof, but only a few that tend to get a boost in recession. Beauty is among the more counter-intuitive of these, but through multiple depressions and recessions the “lipstick effect” has been consistent.

In the first quarter of 2022, when this year’s stock plunge began, the NPD Group found lipstick sales were up 48% over the same period the year before. The reasons for this are generally believed to be psychological as people in economically harder times are drawn towards small luxuries that have outsized impacts on their sense of wellness.

The pandemic and work from home have each added new twists on this trend, however. Kantar found in an April 2022 study that makeup usage actually decreased -28% and lipstick specifically -40% during the pandemic, presumably as a result of fewer in-person daily interactions between people. But, despite this decrease in usage, sales per beauty category still increased on average by 6% annually during this time.

Moving forward, Inkwood Research expects the global beauty and personal care market to grow at a CAGR of 3.15% through 2030, but that may be undershooting things if continued recessionary trends match pandemic behaviors.

Morphe

Morphe was a hot ticket even before the pandemic.

It has grown fast since its 2008 founding from a digitally-native perch selling affordable makeup kits and skincare products through its website, Amazon and a limited number of branded brick-and-mortar locations.

Private Equity firm General Atlantic acquired a 60% stake in the Los Angeles-based brand in 2019 at a $2.2 billion valuation. At the time, the company was reportedly expecting $500 million in sales and $130 million in EBITDA.

That brought the company to a post-money enterprise value of $3.67 billion. But, while the company may well have expanded sales through the intervening years, the market realities are likely to have brought down that topline valuation, especially if a subsequent deal would wipe debt off of its books.

That said, if the reported 2019 numbers were accurate, Morphe was valued at the time at about 16.9x EBITDA. This would still rank as a discount to listed comps with L’Oréal (PA:OR) trading at 20.6x current revenue and Estée Lauder (NYSE:EL) at 21.6x.

But, this market has also been difficult for SPACs with the largest trusts to find right-size targets with bankable financials. A target like Morphe could have the right profile for what is currently the largest searching SPAC – KKR I (NYSE:KAHC) with an estimated $1.38 billion in trust and a consumer focus. Screaming Eagle (NASDAQ:SCRM) and its combination of a $750 million trust and prominent team could also make a strong pitch.

Brandless

Much like the rollercoaster year the SPAC market has been having, Brandless has been on a journey.

Founded in 2012, the Utah-based company raised $292.5 million in venture funding over the next six years including a $240 million SoftBank-led Series C in 2018 that came with $100 million more in development capital from the Silicon Valley Bank. But, just two years later, it shut its doors.

At that point in its story, Brandless had become a victim of its own ambition. It saw the potential for generic brandless home and personal care goods at fixed low prices. Initially, it endeavored to be something of a Three-Dollar Store with prices per SKU capped at $3. But, given that much of its business was through ecommerce, this quickly became unworkable, especially with the increasing consumer expectation that the seller is going to pick up most of the shipping costs.

Pricing adjustments were made too late, and it was forced to begin winding down in February 2020. But, digital marketing firm Ikonifi resurrected it in June of that year with backing from Clarke Capital Partners. After a phase of paring down its inventory to the high-selling basics focused on personal care, Brandless now has a bit more targeted ambition.

With a new CEO in Cydni Tetro and a $118 million debt and equity raise in 2021 to undergird efforts, the company is now EBITDA-profitable and working to blaze an aggressive path for further accretive growth. Tetro told a Utah publication in September 2021, that its goals were to “acquire a company per month”, “double revenue every six weeks”, and reach $1 billion in revenue through organic and inorganic strategies.

It wears this aggression on its sleeve with a website tab hoping to recruit consumer brands to its growing group called “Sell Your Company” in between its “Refunds” and “Terms & Conditions” landing pages. But, Tetro also emphasized to Fortune that it was only interested in putting cash to work acquiring fellow EBITDA-positive enterprises.

Jupiter Acquisition Corporation (NASDAQ:JAQC) is well acquainted with Brandless as its COO James Thayer serves as its Board secretary. But, Tetro also founded the Women Tech Council to advocate for female founders and executives, and therefore may prefer to work with Athena Technology II (NYSE:ATEK), an all-female SPAC team seeking targets that have “powerful and differentiated relationships with their customers”. It has about $254.8 million in trust and plenty of time to its June 2023 transaction deadline.

Prose

But while Morphe and Brandless have each been grinding for more than a decade, Prose has stepped onto the runway just recently with some head-turning new concepts.

Founded in 2017, Prose rode pandemic growth to an estimated $50 million in revenue in 2020, and it expected at the time to hit profitability in 2021, largely thanks to its unusually high rate of returning customers. This itself can be attributed to Prose’s differentiated approach to haircare based on personalized formulations based on each customer’s hair types.

Previous direct-to-consumer (D2C) custom product ventures have proved difficult to scale. But, Prose has managed thus far with a mix of its software that can deliver 79 trillion different formulations based on customer preferences and manufacturing tools to match this customization. Prose has set sticker prices to match this effort at about $24 per 8.5 fl oz bottle of custom shampoo or conditioner and $35 for each custom pre-shampoo scalp mask.

So far, consumers are ponying up. Those willing to pay a subscription fee get 15% off all orders, complimentary products – some of which the Prose team is testing and still gathering data on. And, the personalized hair care market is expected to outpace the broader beauty space overall, growing at a CAGR of 19.3% to $10.55 billion in 2030, according to InsightAce Analytic.

When the company last tipped its hand on financials in 2020, it was in the process of tripling its revenue year-on-year. It since raised $50 million more in a July 2021 Series C from Insight Partners, Quadrille Capital and Vitamin Capital, achieving a post-money valuation of $900 million, according to Pitchbook.

While much of Prose’s funding has come from venture investors, Lerer Hippeau is among its early investors and it could be a player to take Prose to the next level. It IPO’d a warrantless $222 million SPAC – Lerer Hippeau (NASDAQ:LHAA) – in 2021 and has until March 2023 to complete a combination under its initial deadline. The investment firm has also seen its portfolio company Transfix go the SPAC route in 2022 with a pending combination with G Squared I (NYSE:GSQD).