by Melanie Warner
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
former Secretary of Defense
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
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
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
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
"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
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
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
"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
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
Their names on Carlyle brochures and
their faces at Carlyle events give the firm a patina of power and
"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
"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
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
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,''
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
"Carlyle certainly can't influence
the outcome, but they can at least get us an audience,'' says
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
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
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
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
Looking at what Carlyle and its
star-studded team have been able to do in the past, would you bet