- 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
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 particularly
irresistible. 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
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?