Crony Capitalism Goes Global
The Carlyle Group is owned by forty-nine managing partners, who hold 94.5 percent of Carlyle's private stock. (They include Baker and Major, whose Carlyle holdings are worth at least $200 million if the stock is equally divided.) The remaining 5.5 percent is held by the California Public Employees Retirement System [see "CalPERS and Carlyle," page 15]. The investors in Carlyle's various funds include US investment banks Goldman Sachs and Salomon Smith Barney; investment authorities in Abu Dhabi, Kuwait and Brunei; giant insurers like American International Group and the labor-oriented Union Labor Life; public pension funds in Ohio, Florida, Michigan and New York; and the corporate pension funds of American Airlines, Boeing, BP Amoco, GM and the World Bank.
Carlyle has distinguished itself from competitors like Kohlberg Kravis Roberts and Donaldson, Lufkin & Jenrette by branding its name on its fourteen investment funds, as Fidelity does with mutual funds. David Snow, editor of PrivateEquityCentral.net, an industry newsletter that recently named Carlyle its "deal team of the year," said the innovation was the inspiration of David Rubenstein, the lone Democrat among Carlyle's founding partners. "They've taken the name they built in defense and are stamping it on funds with different expertise," he said. "That's the direction the private equity industry is moving in." Carlyle's practice of hiring influential statesmen and politicians has also inspired imitation. Al Gore, for example, was recently hired by Metropolitan West Financial of California to start a private equity practice, and Forstmann Little, a fund co-managed by Erskine Bowles, President Clinton's former Chief of Staff, lists Newt Gingrich and Henry Kissinger among its advisers.
Carlyle doesn't provide investment figures by industry. But its focus on military and government-regulated industries is illustrated by the breakdown of Carlyle's Partner II fund, its primary vehicle for US manufacturing, which has 24 percent of its capital in defense-related companies, 23 percent in commercial aerospace and 24 percent in telecommunications and energy. Similarly in its Asia fund, 52 percent of Carlyle's investments are in financial services, where governments are deeply involved in restructuring the region's banks; 17 percent are in telecommunications; and 31 percent are in cable TV, industries that are being privatized and are under strict government supervision.
Carlucci, the mastermind of the bank's defense investments, came on board in 1989 after serving in the Reagan Administration. Carlyle says that Carlucci has never lobbied the government. He does, however, get invited to government events of great use to Carlyle simply because he is Frank Carlucci. According to recently declassified documents from the Office of the Secretary of Defense, Carlucci met with Rumsfeld twice last year--not as a representative of Carlyle but as a former Defense Secretary and National Security Adviser. The meetings, on February 9 and October 19, were organized by Rumsfeld to discuss defense issues and the war on terrorism, and included other luminaries from the national security establishment, including Kissinger and Caspar Weinberger (Shalikashvili was there too).
Rumsfeld's correspondence and Carlucci's subsequent comments underscore the utility of such meetings to Carlyle. After the February event, Carlucci and Rumsfeld agreed to follow up with discussions on how "to cut the cost of defense infrastructure and reinvest the savings in modernization and other priority programs"--key issues for United Defense. Ten days after the October 19 session, which included Wolfowitz, Carlucci offered an assessment of the situation in Afghanistan that exactly reflects the Bush Administration's endless-war scenario. "We as Americans have to recognize that [terrorism] is more or less a permanent position," Carlucci told a New York audience of business executives and labor leaders that included AFL-CIO president John Sweeney. "We're going to have to live with this kind of phenomenon for the rest of our lives."
Where Carlucci has led Carlyle's foray into defense, Bush Sr. and Baker have helped the bank forge deep ties with the Middle East. Just after his son was sworn into office, Bush was invited by Saudi ambassador Prince Bandar bin Sultan bin Abdulaziz to speak to potential US investors in Saudi Arabia at a two-day conference in Houston. Bandar, who is close to the Bush family, was not relying purely on friendship, however: The Washington Post recently disclosed that Bandar has invested in Carlyle, along with his father, Prince Sultan, the Saudi defense minister. (Bush Jr. also has a Carlyle connection: In the early 1990s he was on the board of Caterair, a Carlyle company that provided in-flight food services to airlines but never made a profit.)
Through a 51 percent joint venture with the Saudi government, Carlyle's United Defense provides tactical training and maintenance for the thousands of Bradley Fighting Vehicles purchased by the Royal Saudi Land Forces after the Gulf War. Carlyle had a long relationship with Saudi Arabia through BDM Corporation and Vinnell Corporation, which train the Saudi National Guard and were sold to TRW in 1998. In the early 1990s Carlyle advised Al-Waleed bin Talal--the Saudi prince whose $10 million donation to the World Trade Center victims' fund was rejected by Rudy Giuliani--on his US investments, including a $600 million bailout of Citicorp, now Citigroup.
Last April, Bush Sr. led a Carlyle delegation to Turkey, where Rubenstein negotiated a joint venture with the Koc Group, Turkey's largest conglomerate, which has holdings in energy, telecommunications and defense. During a dinner with Turkish business executives, Bush reminded the audience of Turkey's support during the Gulf War and promised to "help Turkey as we did in the past." FNSS, a joint venture between United Defense and the Nurol Group, is Turkey's largest manufacturer of armored vehicles and exports to Malaysia and other nations.
Over the past three years, in addition to visiting Turkey, Bush has been to South Korea, Saudi Arabia, Australia, France, Thailand and Hong Kong on Carlyle's behalf. In his speeches to investment conferences, said Conway, Bush "talks about the world, what he sees, what he thinks. Period." Carlyle's newly hired spokesperson, Chris Ullman, would not discuss Bush's compensation or his schedule, but added that Bush "does not and has never represented Carlyle before other governments or government officials. He has made no business deals for Carlyle."
Investors, however, recognize that the Bush name--and the many contacts Bush developed as President, CIA director and ambassador to the UN--carry tremendous weight as he travels around the world on behalf of Carlyle. "Nothing beats the ability to have George Bush call up some contact he's known for the last twenty years to comment on the worthiness of a particular deal," said Pat Macht, a spokesperson for CalPERS, after consulting with investment managers about Bush's role in Carlyle. That is particularly true in Asia, where personal relationships are key to business deals and Bush chairs the annual meeting of Carlyle's Asian Advisory Board.