PE-backed nail salon chain hails NY probe into industry

MiniLuxe operates mostly in Boston for now, but the company welcomed scrutiny of the lackluster business practices that inspired it to take a different tack when it launched in 2007. Nowadays, the company runs 10 stores with plans to roughly double in the next year or so.

“For us it’s a validation,” said Tony Pino, business development officer at MiniLuxe, who worked at The Blackstone Group earlier in his career. “We’ve been successful in the business by having a very different approach to hygiene and to labor standards and to client services.”

The reform effort, which has drawn at least two lawsuits to call attention to wages and working conditions at nail salons, marks a fresh example of a labor-related issue quickly gaining traction via social media and attention-grabbing headlines.

Nail salons owned by families and entrepreneurs, not sponsors, appear to be the primary focus of efforts to call attention to illegally low pay. But the private equity industry may carry some indirect exposure to the beauty sector through businesses offering services or manufactured products aimed at consumers. The buyout industry also continues to face litigation and other issues around wages and workplace conditions overall.

Many of the nail salon businesses operate in neighborhoods where private equity executives and their families live, since much of the buyout industry remains centered in the Big Apple. It’s also possible the reform effort could pick up backers in other regions.

PE exposure

Boston-based venture firm Cue Ball launched MiniLuxe in 2007 to “Starbuck” the estimated $10 billion nail salon industry by raising standards for hygiene, service and overall client experience by employing carefully trained technicians.

“Those folks really got squeezed unfortunately and illegally and often times they weren’t heard because they [may not have been] authorized to work in the U.S.,” Pino said about nail workers in general. “We saw these things were bad for employees, and we wanted to found a company that did things differently.”

In September, MiniLuxe raised $23 million in backing from Horowitz Group, a southern California-based investment group that provided capital to Sprouts Farmers Market and Lemonade Restaurant Group. Murano Group, Silverado, Beechwood Capital, Valley Oak and others also took part in the round of financing for MiniLuxe.

Meanwhile, North Castle Partners, a Greenwich, Conn.-based private equity firm focused on health and wellness, lists Red Door Spa Holdings as a portfolio company. Red Door offers nail grooming services along with a variety of other spa treatments. The company and North Castle did not respond to a request for a comment.

Several other private equity firms own cosmetic companies that offer nail polish products, but the focus of Cuomo’s probe thus far appears to be directed not on product manufacturers, but working conditions at nail salons.

Steve Judge, president and CEO of the Private Equity Growth Capital Council, declined to comment on the nail salon furor. But he said the private equity industry overall strives to create well-paying jobs, from technology businesses to manufacturing facilities.

As part of the membership commitments of the PEGCC, firms “support the payment of competitive wages and benefits to portfolio company employees and encourage their portfolio companies to do the same,” Judge said in an email. The PEGCC has also published guidelines for responsible investment on its website.

David Fann, CEO of TorreyCove Capital Partners, a private equity advisor for major public pension funds and other limited partners, said LPs remain sensitive to labor condition issues and other matters that fall under the growing umbrella of environmental, social and corporate governance (ESG)  investing.

“Both GPs and LPs are scrutinized by the media,” Fann said. “No one wants to be associated with a company that played a role in some bad acts. I think thoughtful institutional investors will adopt policies relating to fair wages, safe work environments and aspire to promote a better society. The hard part, of course, is to determine the base line that everyone agrees to.”

Growing activism

The issue around nail salons started drawing wider attention after The New York Times interviewed more than 100 employees for a May 7 article, “The price of nice nails,” and turned up evidence that “the vast majority of workers are paid below minimum wage; sometimes they are not even paid.”

Workers also face, “all manner of humiliation, including having their tips docked as punishment for minor transgressions, constant video monitoring by owners, even physical abuse,” according to the article. Chemical exposure to nail products also drew mentions as a woe faced by workers.

Gov. Cuomo on May 10 launched a task force aimed at improving working conditions at nail salons, including officials from the state health and labor departments, among other agencies. A spokesman for New York Comptroller Tom DiNapoli said there is no effort currently underway to redirect any investments by the $177 billion New York State Common Retirement Fund as part of the nail salon reform effort.

Late last month, Cuomo also ordered nail salons to display a bill of rights poster, available in several languages, for their workers. The poster points out the minimum wage before tips is $6.60 per hour, or $8.75 an hour without earning tips for the first 40 hours per week.

Earlier this month, U.S. District Judge J. Paul Oetken allowed a lawsuit by manicurists, Chen et al v. Gypsophila Nail & Spa Inc. et al, to continue in U.S. District Court for the Southern District of New York. A separate lawsuit that alleges unpaid overtime and wage violations against several Upper East Side salons was filed in Manhattan, also in June.

The nail salon ruckus shows how rapidly issues in the public sphere can pop up for private equity firms, as activists seek to raise the minimum wage and promote other social issues.

“There’s been an explosion in the level of litigation in the wage-and-hour field,” said attorney Steve Arenson of Arenson, Dittmar, and Karban, a New York law firm that specializes in class action lawsuits for workers upset over their pay. “Ten or 15 years ago, private attorneys started taking on these cases and the number has dramatically increased.”

Multimillion-dollar settlements remain common and most major companies have been affected by litigation in some way, including Oracle Corp and others, Arenson said.

“The law is very protective of employees,” he said. “The first thing businesses have to do is have [pay and hour] records that comply with the laws – that’s a major problem for business. It opens the door for employees coming in and testifying on their hours and pay – and the employer doesn’t have a defense.”

Employment practices liability insurance (EPLI) held by businesses covers businesses against claims by workers alleging their rights as workers have been violated. One buyout pro said his firm’s portfolio companies carry EPLI insurance; others declined to comment.