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.
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.
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.
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.
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?)
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.
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.
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."
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,
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%.
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
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.
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.
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,''
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.
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.''
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.
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
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