THE NATION: - April 1, 2002Carlyle's global network of statesmen and former officialsMon Apr 10, 2006 03:24
Carlyle's global network of statesmen and former officials
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Crony Capitalism Goes Global
by TIM SHORROCK
[from the April 1, 2002 issue]
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.
The Conexant deal illustrates the extraordinary mix of business acumen and contacts that makes Carlyle tick. Carlyle's entry into wireless is being led by William Kennard, who regulated the wireless industry as chairman of the Federal Communications Commission before being hired as managing director of Carlyle's global telecommunications group. Carlyle's investment will help Conexant expand its already sizable market in China, where its wireless division recently won approval to supply a key cell-phone technology to state-owned China Unicom, the second-largest telecom provider in the world's largest wireless market. In a convenient twist, China Unicom's national network is operated by Canada's Nortel Networks under a contract signed during a visit to Beijing by Carlucci, who was Nortel's chairman from 2000 to 2001.
A classic example of how Carlyle's political connections work was the Pentagon's decision last year to develop United Defense's Crusader mobile artillery system. The decision to fund the Crusader, which could eventually cost $11 billion, came after years of strenuous objections from senior military planners, who said it was outdated, too heavy and of little use in contemporary warfare. But United Defense's modifications to the system--and a lobbying campaign by a handful of lawmakers who received a total of $300,000 in donations from a United Defense political action committee--apparently made the difference.
Then came September 11 and its aftermath. With the Crusader contract in hand and President Bush's war in Afghanistan well under way, Carlyle decided the time was ripe to sell some of its United Defense holdings on the stock market. The initial public offering on December 14 raised $237 million for Carlyle. In January United Defense, whose board of directors includes Carlucci and John Shalikashvili, former chairman of the Joint Chiefs of Staff, said its fourth-quarter profits had risen 62 percent, due in large part to sales of the Crusader, which received $472 million in the Pentagon's latest budget.
Those events raised a few eyebrows, particularly at a time when the media were dishing out daily revelations about Enron's political influence in Washington. Columnist Paul Krugman described the Pentagon's policy switch on the Crusader as a "very nice gift" from Rumsfeld to Carlucci, whom Rumsfeld brought into government, and an example of "crony capitalism," the Asian model of capitalism scorned by US economists and the International Monetary Fund [for more on Carlucci, see "Company Man" at www.thenation.com]. Conway, who is chairman of United Defense, scoffed at the speculation. "Frank [Carlucci] is not going to lobby somebody in the Defense Department about a program for Carlyle," he said. As for the timing of the IPO, which was organized after the hijack attacks, "no one wants to be a beneficiary of September 11," he said.
Friends in High Places
Bush Sr., who chairs the annual meeting of Carlyle's Asian Advisory Board, has not hesitated to communicate with his son regarding policies that could affect Carlyle and other US investors in the region--particularly South Korea, where Carlyle could soon have an investment stake of more than $2 billion. Last spring, after President Bush stuck a knife in Kim Dae Jung's sunshine policies by saying North Korea couldn't be trusted, Bush Sr. sent the President a memo written by Donald Gregg, his former National Security Adviser who once served as CIA station chief in Seoul, urging the new Administration to ease its hard-line policies.
A few weeks later, in a decision the New York Times described as "the first concrete evidence of the elder Bush's hand in a specific policy arena," George W. said he was willing to talk to the North "anytime, anyplace." But the President's "axis of evil" speech on January 29, which North Korea took to be a near-declaration of war, ended any hopes of rapprochement and led Pyongyang to cancel a February visit by Gregg and several other former diplomats. Bush Jr. tried to soften his rhetoric during his late February visit to Seoul but was met instead by the largest anti-American demonstrations of his career. Conway, however, was sanguine about the investment climate in Korea. Bush's axis speech "doesn't add to my level of concern," he said.
In Europe, Carlyle's strategy is to invest in companies seeking to become Europewide and global players. Conway, who attends the annual meetings of the European board, which are chaired by Britain's Major, described the advisory boards as an expansive process where advisers strategize about how to create and nurture companies with a global reach. At the last meeting of the European board, the consensus was that "all these companies that have been more single-country companies are going to have to expand onto the European stage and ultimately a global stage," he said. "Frankly, if they don't, they'll have a tough time competing with the Americans and the Asians." To implement the strategy, Carlyle acquired and combined three companies, from Italy, Germany and the United States; in another case, it combined two German and Canadian auto firms.
In buying Bofors, Carlyle and United Defense crossed into an extremely sensitive policy area. To smooth the process, a member of Carlyle's European board "helped us on that even though it was an acquisition by a US company of a Swedish company," said Conway. "Most people, when you talk about defense assets, tend to get a little bit sensitive, just as we do in this country."
Sensitivity is one lesson Carlyle has learned the hard way. Last September, less than three weeks after the attacks on the twin towers and the Pentagon, the Wall Street Journal disclosed that the bin Laden family of Saudi Arabia had committed at least $2 million to one of Carlyle's funds. Carlyle quickly returned the money. Conway, in the bank's first public comments on the incident, said the decision to part ways with the bin Ladens was made at the senior partnership level. "Anything that had the word bin Laden in it, you just didn't want to be associated with it," he said. "Its not that the people we were dealing with had done anything wrong." But in the end, "we said, 'Gee whiz, we'll buy you out at fair market value and get on with our life.'"
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 bu
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