Saturday, October 06, 2007

Carlyle Group

For 15 years one of America's most powerful venture capital groups has tried to play down suggestions that its multi-billion dollar funds get fat on the back of global conflict.

Sometimes called the Ex-Presidents Club, Carlyle has a glittering array of ex-politicians and big league bankers on its board. Former secretary of state James Baker is managing director while ex-secretary of defence Frank Carlucci is chairman. George Bush senior is an adviser. John Major heads up its European operations. To give the conspiracy theorists plenty of ammunition, US newspapers have also highlighted the fact that current Defense Secretary Donald Rumsfeld was a wrestling partner of Carlucci's at Princeton and the two have remained close friends ever since.

Interestingly though, Carlyle was founded by two relative unknowns - Stephen Norris, a former executive with the Marriott hotels group, and David Rubenstein, a Washington lawyer and former policy assistant to Jimmy Carter. The two men saved Marriott millions by spotting a tax loophole that the company exploited to great effect. Buoyed by their success, Norris and Rubenstein struck out on their own and recruited two other co-founders, Marriott executive Dan D'Aniello and corporate financier William Conway.

Initially the group - named after New York's Carlyle hotel - shied away from the defence sector and its early investment record was spectacularly unsuccessful. It backed a management-led buyout of Caterair and appointed George W Bush to the board. The company bombed and was quickly branded Crater Air by Wall Street. Norris, who presided over the deal, jumped ship, followed by Bush Jr shortly before the company's woes became public in 1994.

The appointment of Carlucci to the company board marked a new phase in Carlyle's history. It was Carlucci who spearheaded the $130 million acquisition of BDM Consulting in 1990. The company was a specialist in the defence contracting business and had a formidable network of contacts thanks to its CEO, Earle Williams, a close friend of Carlucci. It was a good time for the Carlyle Group. Defence contracts were being slashed as the Cold War ended and cheap buyout opportunities were everywhere.

Carlyle identified a key target: Vinnell. Few people have heard of Vinnell. It started life building airstrips, but by the 1970s was training Saudi troops to protect oil fields. Unlike other US firms it stayed in Saudi Arabia during the first Gulf War and by the time Carlyle snapped the firm up in 1992 it had built up the country's national guard from 26,000 to 70,000 troops. Carlyle sold its interest in Vinnell in 1997.

But perhaps Carlyle's most famous acquisition was United Defense in 1997. The company had developed a huge 40-tonne howitzer, the Crusader, which, despite widespread opposition from the army, was commissioned by the Pentagon. The $665m contract was signed just two weeks after the attacks on the twin towers and less than a month later Carlyle decided to take the company public in a move that was to earn the group nearly $240m. Months later the Crusader programme was scrapped while United Defense was handed a new contract to build a lighter gun.

At the same time it emerged that the bin Laden family - estranged from their terrorist son - was an investor in the Carlyle fund that owned United Defense. The backlash was ferocious. Carlyle hired a PR firm but the group was under siege. In an astonishing move Democrat Representative Cynthia McKinney cited the Carlyle Group as an example of an organisation 'close to this administration poised to make huge profits off America's new war'. The bin Laden family sold their stakes in the fund. A spokesman said their investment was valued at 'only' around $2m, although insiders say the family's investment had been significantly greater in the past.

In the wake of 11 September came a fear of anthrax attack. One company that benefited was Pittsburgh- based IT Group, which won a number of contracts to clean up anthrax-infected buildings, including the Hart Senate Office Building. Carlyle owned 25 per cent of the firm, which it subsequently sold on. Likewise its investment in US Investigation Services, a company that specialises in checking the background of employees, saw business improve dramatically.

'I do not exaggerate when I say that Carlyle is taking over the world in government contract work, particularly defence work,' one employee said. Other Carlyle companies also benefited, including EC&G which makes X-ray scanners, Composite Structures, a maker of metal-bond structures in fighter jets and missiles, and Lier Siegler Services Inc, a major military contractor, providing logistics support.

Carlyle - whose high-profile investors include George Soros and Saudi Arabia's Prince Alwaleed bin Talal - refutes suggestions it profits from war. Co-founder William Conway even went on record saying 'no one wants to be a beneficiary of 11 September.'

This may be true, but unfortunately for the Carlyle Group its investments are beneficiaries of this new era of multilateral conflict. Indeed, a case can be made that even those companies Carlyle wouldn't class as defence investments have benefited.

Last month it bought CSX Lines, an ocean carrier firm that specialises in shipping heavy equipment. One of its biggest customers is the US military. Late last year it bought Firth Rixson, a specialist engineering firm that makes aerospace parts. It also has a 33 per cent stake in Qinetiq, the government's Defence Evaluation and Research Agency.

Whatever Carlyle says, its image as being at the apex of what Eisenhower termed the 'military industrial complex' endures.

Note: The collection of influential characters who now work, have worked, or have invested in the group would make the most convinced conspiracy theorists incredulous. They include among others, John Major, former British Prime Minister; Fidel Ramos, former Philippines President; Park Tae Joon, former South Korean Prime Minister; Saudi Prince Al-Walid; Colin Powell, former Secretary of State; James Baker III, former Secretary of State; Caspar Weinberger, former Defense Secretary; Richard Darman, former White House Budget Director; the billionaire George Soros, and even some bin Laden family members. You can add Alice Albright, daughter of Madeleine Albright, former Secretary of State; Arthur Lewitt, former SEC head; William Kennard, former head of the FCC, to this list. Finally, add in the Europeans: Karl Otto Poehl, former Bundesbank president; the now-deceased Henri Martre, who was president of Aerospatiale; and Etienne Davignon, former president of the Belgian Generale Holding Company.

Officers Of Carlyle:
Louis V. Gerstner, Jr., Chairman
The Rt. Hon. John Major, Chairman of Carlyle Europe
Frank Charles Carlucci III, Chairman Emeritus
William E. Conway, Jr., Co-Founder and Managing Director
Daniel A. D’Aniello, Co-Founder and Managing Director
David M. Rubenstein, Co-Founder and Managing Director
James Addison Baker III, Co-Founder and Senior Counselor
Edward Mathias, Managing Director
Richard G. Darman, former Managing Director
B. Edward Ewing, Managing Director and CEO, Carlyle Management Group
John F. Harris, Managing Director and CFO
Leslie L. Armitage, Managing Director, US Buyouts
S. Abramowitz, Managing Director, US Buyouts, Healthcare
David Kupperman, Principal, Carlyle Asset Management Group
Michael B. Kim, President, Carlyle Asia; Non-managing Director Koram Bank
Arthur Levitt, Senior Advisor
"Mack" McLarty, Senior Advisor

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