Crony Capitalism Goes Global
William Conway, managing director and co-founder of the Carlyle Group, was talking recently about the media coverage of his bank and the cast of ex-Presidents and former officials, including George H.W. Bush, James Baker III and Frank Carlucci, on its payroll. "One of the words that has recently cropped up as an adjective around us--and I love this adjective--is the 'secretive' Carlyle Group," he said in an interview in his offices overlooking Pennsylvania Avenue in downtown Washington. "What's the secret? I don't think we have many secrets. The reality is, we're a group of businessmen who have made an enormous amount of money for our investors by making good investments over the past fifteen years."
To give Conway his due, Carlyle has done exceedingly well for the 435 pension funds, banks and investment funds--40 percent from overseas--that have entrusted their money to one of the world's largest private equity funds. Under the leadership of Carlucci, a former CIA deputy director who was Defense Secretary in the Reagan Administration, Carlyle has become the nation's eleventh-largest defense contractor, a major arms exporter to Saudi Arabia and Turkey, one of the biggest foreign investors in South Korea and Taiwan, and a key player in global telecommunications, wireless, real estate and healthcare markets. Since 1987 it has invested $6.4 billion in 233 transactions, with a rate of return of 36 percent on its completed investments. Carlyle currently has $12.5 billion invested.
"Their basic nature is not to be a long-term investor but buy low and sell high," said Philip Finnegan, an analyst with the Teal Group, a Beltway company that tracks the aerospace industry. "They always look for an exit strategy in whatever they buy. They have a sense of the stability of the business because of the accumulated expertise they have."
That's where Carlyle's global network of statesmen and former officials comes in. Bush is Carlyle's senior adviser on Asia and makes his money by giving speeches at Carlyle's investment conferences. Baker, who was Bush's Secretary of State, is Carlyle's senior counselor and a member of the firm's Asia, Europe and Japan advisory boards. John Major, the former British prime minister, was named chairman of Carlyle Europe last year. Carlyle's advisory boards are peppered with corporate executives from Boeing, BMW, Toshiba and other big multinationals, and men of influence like former Bundesbank president Karl Otto Pohl, former Thai prime minister Anand Panyarachun and former US ambassador to Japan (and former Speaker of the House) Thomas Foley. Carlyle's new asset management group is run by Afsaneh Beschloss, the former treasurer and chief investment officer of the World Bank.
By hiring enough former officials to fill a permanent shadow cabinet, Carlyle has brought political influence to a new level and created a twenty-first-century version of capitalism that blurs any line between politics and business. In a sense, Carlyle may be the ultimate in privatization: the use of a private company to nurture public policy--and then reap its benefits in the form of profit. Although the fund claims to operate like any other investment bank, it's undeniable that its stable of statesmen-entrepreneurs have the ability to tap into networks in government and commerce, both at home and abroad, for advance intelligence about companies about to be sold and spun off, or government budgets and policies about to be implemented, and then transform that knowledge into investment strategies that dovetail nicely with US military foreign and domestic policy.
How the Carlyle System Works
A good analogy to the Carlyle system is a Japanese tradition known as amakudari (literally, "descent from heaven"). Under this system, senior officials from Japanese ministries retire, only to be instantly hired as senior advisers by the companies and industry groups they were paid to regulate. "What we're really talking about is a systematic merging of the private and public sectors to the point where the distinctions get lost," said Chalmers Johnson, president of the Japan Policy Research Institute and author of two acclaimed books on the Japanese system of governance. "The Carlyle Group is a perfect example. It's the use of former government officials for their access to government bureaucracies to determine contractual relations. It's inside knowledge--knowing where the government is going to spend money and then investing in it."
In turn, Carlyle executives influence policy--sometimes profoundly. On March 12 Carlucci, who is chairman of the US-Taiwan Business Council, a coalition of US multinationals doing business in Taiwan, invited Tang Yao-Ming, Taiwan's Defense Minister, to attend a closed-door summit of US and Taiwanese defense officials sponsored by the council and key US military contractors, including Carlyle's United Defense Industries. Tang's visit, which was capped by a meeting with US Deputy Defense Secretary Paul Wolfowitz, marked the highest-level defense contacts between Taipei and Washington since diplomatic relations were severed in 1979--and paralleled President Bush's push to expand arms sales to Taiwan, where Carlyle has significant investments. Carlyle people also testify frequently before government panels: senior adviser Arthur Levitt, the former chairman of the Securities and Exchange Commission, has been ubiquitous before Congressional hearings on Enron.
Carlyle's investment philosophy, as described in its brochures, is to focus "on industries we know and in which we have a competitive advantage," in particular "federally regulated or impacted industries such as aerospace/defense." Its capital is siphoned into fourteen funds, seven focused on US industries and real estate, four on Europe and three on Asia. The $1.3 billion Carlyle Partner II fund is the majority owner of United Defense, maker of the Bradley Fighting Vehicle and other weapons systems, and owns Vought Aircraft, the world's largest supplier of commercial and military airline parts. Carlyle's largest acquisition took place two years ago in South Korea, when its $750 million Asia Buyout Fund invested $145 million to buy a controlling stake in KorAm Bank. Through United Defense, Carlyle owns Bofors Defense, a Swedish manufacturer of naval guns and other weapons. In its latest deal, finalized March 13, Carlyle is investing $50 million in Conexant Systems, a spinoff from defense giant Rockwell International, to manufacture silicon wafers for wireless communications and Internet supply markets around the world.