ZGram - 3/12/2002 - "Did anybody say 'incestuous'?
irimland@zundelsite.org
irimland@zundelsite.org
Tue, 12 Mar 2002 20:17:44 -0800
ZGram
March 3, 2002
Good Morning from the Zundelsite:
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The Big Guys Work For
The Carlyle Group
By Melanie Warner Fortune.com
3-11-2
Are you the sort of person who believes in conspiracies--the
Trilateral Commission secretly runs the world, that sort of thing?
Well, then, here's a company for you. The Carlyle Group, a
Washington, D.C., buyout firm, is one of the nation's largest defense
contractors. It has billions of dollars at its disposal and employs a
few important people. Maybe you've heard of them: former Secretary of
State Jim Baker, former Secretary of Defense Frank Carlucci, and
former White House budget director Dick Darman. Wait, we're just
getting warmed up. William Kennard, who recently headed the FCC, and
Arthur Levitt, who just left the SEC, also work for Carlyle. As do
former British Prime Minister John Major and former Philippines
President Fidel Ramos. Let's see, are we forgetting anyone? Oh,
right, former President George Herbert Walker Bush is on the payroll
too.
The firm also has about a dozen investors from Saudi Arabia,
including, until recently, the bin Laden family. Yes, those bin
Ladens. Is it any wonder that Internet sites with names like
paranoiamagazine.com are rife with stories about Carlyle's shadowy,
corrupt global network? And it's not just wackos. "Be careful," a
tech entrepreneur in Silicon Valley wrote in an e-mail when he
learned I was doing a story on Carlyle. "The rabbit hole runs really
deep on this one.''
Leaving aside the conspiracies for a moment, what exactly does the
Carlyle Group do? Start with the basics: It's one of the world's
largest and most powerful private-equity investment firms, meaning it
buys and sells privately held companies and divisions of large public
companies for big profits. Founded in 1987 (and named after the
favorite New York hotel of the firm's first investors, the Mellon
family), Carlyle has raised a total of $14 billion from investors in
just the past five years--more than any other private-equity firm has
attracted in the same period, except the Blackstone Group and CSFB
Private Equity. Profits, too, have been pretty terrific. Not counting
the standard 20% cut that goes to Carlyle's partners and managing
directors, the firm's average annual rate of return has been 36%.
It's quite a success story, and to understand how Carlyle pulled it
off, FORTUNE spent a month and a half peeking down that rabbit hole.
One conclusion seems clear: While most of the conspiracy theories are
amusingly overblown, this is a firm that's been built on the backs of
Bush and other big shots who have lent Carlyle their names, their
golden networks of friends in high places, and their insights into
how government works. It wasn't until Carlucci joined, for instance,
that Carlyle really took off. Founded by David Rubenstein, a lawyer
who worked as an aide in the Carter White House, Bill Conway, a
former CFO at MCI, and Dan D'Aniello, a former finance executive for
Marriott, Carlyle early on invested in a motley assortment of
deals--buying an airline-catering business, a health-food chain, and
a biotech firm, for example. In 1990, Carlucci got the trio
interested in the $150-billion-a-year U.S. defense industry, making
introductions to companies that would turn into some of Carlyle's
most lucrative investments. Rubenstein quickly realized the wisdom of
recruiting a former Secretary of Defense and followed it up with a
former Secretary of State, then a former White House budget director,
and on and on.
The revolving door has long been a fact of life in Washington, but
Carlyle has given it a new spin. Instead of toiling away for a trade
organization or consulting firm for a measly $250,000 a year, former
government officials can rake in serious cash by getting equity cuts
on corporate deals. Several of the onetime government officials who
have hooked up with Carlyle--Carlucci, Baker, and Darman, in
particular--have made millions. Carlyle isn't the only organization
doing it: Metropolitan West Financial in Los Angeles recently hired
Al Gore to help with tech deals and make introductions overseas, for
example. But Carlyle, which pioneered the idea, seems more adept at
it than any other firm.
Unlike other private-equity groups, Carlyle concentrates on companies
funded by the government, such as defense contractors, or those
affected by government regulation, such as telecommunications firms,
and then hires people with relevant government experience. As the
company once put it in a brochure, "We invest in niche opportunities
created in industries heavily affected by changes in governmental
policies." Doing so, of course, raises the ultimate rabbit-hole
question: Is Carlyle's approach just a smart twist on good old
business networking or a step over the line into an ethical twilight
zone in which the public trust is broken?
Half a mile from the White House, inside nondescript offices sparsely
adorned with generic depictions of ships and ducks, co-founder
Rubenstein sits with his hands folded on a table so shiny you can see
your reflection. Next to him sits Chris Ullman, Carlyle's first-ever
full-time PR person. Habitually wary of media attention, Rubenstein
and his partners agreed to rare interviews with FORTUNE. That's
because since Sept. 11 the firm has been under unusual fire. First
there was the bin Laden thing. Shafig bin Laden, one of Osama's many
brothers and a Carlyle investor, was in attendance at a Carlyle
conference at a Washington hotel on that infamous day. As the media
were quick to point out, this meant that George H.W. Bush was working
for a firm that was helping to make the bin Ladens money. Even though
the wealthy Saudi family has reportedly cut all ties to Osama, the
press lambasted Carlyle.
The firm has since given the bin Ladens back their money, some $2
million, but controversy lingers. Sept. 11 and its aftermath also
created the appearance of further conflicts of interest--namely, that
while his son is in the Oval Office directing the war effort and
proposing the largest increase in defense spending since Ronald
Reagan, Bush is working for a firm that, through various investments,
has become the nation's 14th-largest defense contractor. "It destroys
the office of the presidency no less, in my view, than having sex
with an intern," says Larry Klayman, director of the watchdog group
Judicial Watch. On top of all that, there's the unfolding Enron saga
and the likely passage of the campaign-finance-reform bill, which
suddenly make it look bad for businesses to have too many friends in
Washington.
It's no surprise, then, that Rubenstein is anxious to downplay the
roles of Carlyle's famous people and to dispel the aura of mystery
surrounding the firm. "The word I hate most is 'secretive,' " says
Rubenstein, whose wry countenance and shock of white hair suggest a
less rubbery version of Steve Martin. Rubenstein insists that all
Bush does for Carlyle is give speeches to investors and that it is
silly to think of him whispering in his son's ear about how to help
Carlyle's companies.
On the whole, Rubenstein says, the big names at Carlyle do a lot less
than most people think. "We don't lobby the government," he says,
echoing a claim made by other partners interviewed by FORTUNE. He
insists that if Carlyle is at all remarkable, it's because of the
firm's innovative approach to private equity, its great returns, and
its global ambitions--not because it happens to employ a few famous
people. "Out of the 500 people at the firm, we have maybe eight or
nine who served in government. The rest are your typical Harvard,
Stanford, or Wharton MBAs, who do all the same things they do at
other firms,'' says Rubenstein. (In fact, the number of former
government big shots is 12, but who's counting?)
The conspiracy theorists like to imagine that Bush, Baker, and Major
are jetting around the world cutting deals and making money for
companies owned by Carlyle, but after nearly two dozen interviews
with CEOs of current and former Carlyle companies and people familiar
with Carlyle's business, it seems clear that this really isn't
happening. What Bush & Co. actually do is far less pernicious but
clearly valuable to Carlyle--they help raise money. Every year
Rubenstein sets up scores of lunches and dinners around the world
intended to woo new investors and gratify existing ones. As you might
imagine, people like Bush, Baker, and Major are a huge draw. "If you
call and say you're doing a dinner with Jim Baker or with George
Bush, and could they please attend, chances are people are going to
show up," explains a former employee, who, like all ex-Carlyle
staffers I talked to, didn't want his name used. In the mid-'90s, for
instance, Baker introduced Rubenstein to members of the royal family
in Saudi Arabia and Kuwait; since he left Parliament last year, Major
has been opening doors to big money in Europe and Canada. The allure
of a former President is particularlyirresistible. At Carlyle's
annual investor meetings, CEOs and money managers line up to have
their pictures taken with Bush.
For his camera mugging and speech giving, Bush is paid "in line with
market rates,'' says Rubenstein. That would mean about $100,000 per
speech, so if Bush makes five or six speeches a year, as Rubenstein
claims, then the former President is earning at least $500,000
annually from Carlyle, not including the money he makes investing in
deals. Rubenstein declines to specify which companies Bush has put
money into, except to say that as a rule, they have nothing to do
with the U.S. government.
There's no doubt that without these stars Carlyle would not have been
able to raise as much money as it has. The firm's impressive returns
and Rubenstein's seemingly inexhaustible energy and willingness to
spend 300 days a year traveling have certainly played a role, but
it's the bigwigs who draw crowds and really leave an impression.
Their names on Carlyle brochures and their faces at Carlyle events
give the firm a patina of power and credibility. "David's a brilliant
fundraiser," says a source formerly associated with Carlyle. "What
he's done so masterfully is traffic on the impression that the
connections they have from these guys can bring them many valuable
deals."
In the case of Carlucci, that impression happens to be true. The
deals he's brought in total close to $2 billion in profits. There
were Magnavox and GDE, makers of top-secret electronics gear, and
Vought, an aircraft-parts manufacturer, all of which Carlyle bought
and sold within two years, netting $300 million, $109 million, and
$140 million, respectively.
Carlyle today is mostly associated with the defense industry, and one
of the things Rubenstein and his partners would like to get across is
that they invest in other things too. In fact, the firm owns stakes
in everything from European automotive-parts manufacturers to Silicon
Valley startups and Japanese DSL companies; roughly 25% of its
profits last year came from real estate. But if you follow the money,
it leads straight back to defense, which is where the greatest chunk
of Carlyle's profits have come from. Today defense accounts for about
10% of the firm's total investments, but in the early days it was 60%.
The firm's biggest score to date also involved a military
contractor--United Defense, which went public in November, turning
Carlyle's $130 million investment into $900 million. But the story of
United Defense's latest coup also shows why Carlyle will probably
never be seen as just another shrewd investment firm.
Last spring, when United Defense was feverishly pitching the
Crusader, one of its new products, to the Department of Defense,
Jacques Gansler, then in charge of acquisitions at the Pentagon, got
a call from across the Potomac. It was Frank Carlucci, and according
to Gansler, he wanted to know how Gansler felt about the Crusader, a
controversial self-propelled artillery system that many inside the
Pentagon felt was out of sync with plans for a lighter, more mobile
Army. "I think he [Carlucci] wanted to make sure I was personally
involved and that it wasn't going to be one of these things that got
pushed down the bowels of the system,'' says Gansler, who has known
Carlucci since the Reagan Administration and occasionally sees him at
D.C. social events. As it turned out, Gansler was no fan of the
Crusader and told Carlucci as much, ending that conversation. But
Gansler thinks that had he been a fan, Carlucci "definitely would
have wanted to make sure I was involved.'' It wasn't the first time
Carlucci had had a conversation with a member of the Pentagon brass
on behalf of a Carlyle company. In the early '90s, when Carlyle owned
GDE, Carlucci drove over to Bethesda, Md., and met with, among
others, Major General Raymund O'Mara, who was head of the Defense
Department's Defense Mapping Agency, then a big GDE customer.
Carlucci acknowledges both conversations but asserts that neither
constitutes lobbying. In O'Mara's case, he points out that GDE
already had business from the mapping agency; in the case of Gansler,
Carlucci says his call did nothing to advance the Crusader's cause.
Nor, he says, did any of his interactions with Secretary of Defense
Donald Rumsfeld during that time. The two men have known each other
since their days on Princeton's wrestling team. The Rumsfelds have
been to the Carluccis' for dinner and on several occasions have
offered their ski house in Taos, N.M., to Carlucci and his wife,
Marsha. It certainly would be easy for Carlucci to strike up a
conversation over cocktails about the Crusader or some other
Carlyle-related matter, but Carlucci says he never does that. "In
light of our friendship, I'm particularly cautious about not
discussing Carlyle business with him. In fact, I have never mentioned
the word 'Crusader' in his presence," he says. All this may well be
true. Yet it certainly can't hurt if it's known throughout the
Pentagon that you are good friends with the Secretary of Defense. The
Crusader, incidentally, is on the 2003 defense budget, making it
likely that the Pentagon will ultimately buy 480 of the artillery
systems for $5 billion.
There's no question that Carlyle does occasionally make calls to the
government on behalf of its companies. They may not be hard-sell
lobbying calls, but making introductions to influential people is
often just as effective. One company Carlyle funded recently through
its venture fund hopes to tap into the firm's government connections.
Indigo Systems, a maker of infrared-camera technology in Santa
Barbara, has an interest in seeing the laws restricting exports of
U.S.-made infrared technology lifted or amended. Indigo's technology
goes into tiny cameras that manufacturers are starting to place in
cars. These cameras "see'' objects out of the range of the headlights
and display them on a digital monitor. "The automotive industry is
not centered on the U.S. today, and if our product is going to become
a standard item on cars, I've got to have access to a global
marketplace,'' says CEO Tim Fitzgibbons. During the five months it
took Indigo and Carlyle to put together a deal, the two sides talked
about ways Carlyle could help open doors within the government. "If
somebody at Carlyle says to whoever is chairing a committee, 'We wish
you would listen to these guys, we're invested in them, and they've
got a good point,' then that says a lot. As opposed to me landing in
D.C. and trying to get appointments, which is damn near impossible,''
says Fitzgibbons. Indigo's camera technology also has lots of
security applications, and the company would like to get a slice of
next year's $38 billion federal budget allocated for homeland
security. "Carlyle certainly can't influence the outcome, but they
can at least get us an audience,'' says Fitzgibbons.
Besides opening doors, fundraising, and marketing, there is another
advantage to getting ex-government honchos to join your firm, and
that's investment insight. Carlucci didn't help companies like
Magnavox, GDE, and Vought win any defense business, but he brought
these firms to Carlyle because of connections he'd made with defense
contractors while at the Pentagon. And as a former Defense Secretary
just a few years out of the job, he knew how to evaluate the
companies. It was the end of the Cold War and Pentagon budgets were
way down, but Carlucci knew big money was still going to be spent on
certain programs. He figured that highly classified electronic
equipment--such as the boxes for analyzing radar imagery and the
battlefield radios made by Magnavox, as well as the digital mapping
technology for cruise missiles made by GDE--was going to be very
valuable as the Pentagon tried to make the Armed Forces smarter.
Later, when Carlyle invested in Elgar Electronics in 1996, Carlucci
looked favorably on something that scared off other investors. Says
Elgar CEO Ken Kilpatrick: "Other people questioned what would happen
if our business of selling automatic testing equipment to the Navy
would go away. But Carlyle understood that the Navy was committed to
this program and that it was just in the middle of it." Carlyle sold
Elgar in 1998 for a profit of $100 million.
Carlucci downplays the extent of his insight by saying that top
analysts like Loren Thompson at the Lexington Institute know just as
much as he does about defense spending, and maybe more. Certainly
people like Thompson are quite knowledgeable and have networks of
contacts at the Pentagon, but they don't belong to the same
high-level coterie that a former Secretary of Defense does. They
don't, for instance, go to lunches like the one Rumsfeld gave a
little over a year ago where former Pentagon heavyweights like
Carlucci, William Cohen, Caspar Weinberger, William Perry, and Dick
Cheney all chatted and mingled. "Cabinet-level people are a small
fraternity who all stay in touch,'' says a former Carlyle staffer.
"Once they've reached that global 50,000-foot view, they tend to stay
there.''
Though defense has been Carlyle's most fruitful area to date,
Carlucci and the firm's current head of defense investing, Alan Holt,
don't have plans to do many deals this year. Wars are such an obvious
bonanza for defense contractors that prices get bid up, and Carlyle
thinks they're too high now. Fortunately, there are lots of other
opportunities on the horizon. Carlyle recently launched its first
energy fund in partnership with Riverstone Holdings; it is also in
the process of putting together an asset-management group, headed by
the former treasurer of the World Bank, that will invest in other
private-equity funds. With the help of former SEC chief Levitt,
Rubenstein is setting up a financial services fund. There's also
telecom, which has the biggest team of people devoted to it of any
area at Carlyle. "There are dramatic restructurings in the telecom
and media business going on right now, and the one thing they have in
common is that they're all driven at some point by government
action,'' says former FCC boss Kennard--who, like Levitt, is a
Democrat, which shows that Carlyle can be bipartisan.
Rubenstein started recruiting Kennard to be a managing director in
Carlyle's telecom group as soon as he left the commission last year,
and ultimately won out over lots of other bidders. He was quite a
catch. Kennard knows everyone who's anyone in telecom and has
extensive contacts at regulatory agencies around the world. Could
telecom be Carlyle's new defense? Rubenstein doesn't like to put in
it those terms, but he's hoping for big returns. Looking at what
Carlyle and its star-studded team have been able to do in the past,
would you bet against him?
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