Profit Motive of Phoney Conservatives:
Elder Bush in Big G.O.P. Cast Toiling for Top Equity Firm
By LESLIE WAYNE
WASHINGTON - During the presidential campaign last year, former
President George Bush took time off from his son's race to call on
Crown Prince Abdullah of Saudi Arabia at a luxurious desert
compound outside Riyadh to talk about American-Saudi business
affairs.
Mr. Bush went as an ambassador of sorts, but not for his
government. In the same way, Mr. Bush's secretary of state, James
A. Baker III, recently met with a group of wealthy people at the
elegant Lanesborough Hotel in London to explain the Florida vote
count.
Traveling with the fanfare of dignitaries, Mr. Bush and Mr. Baker
were using their extensive government contacts to further their
business interests as representatives of the Carlyle Group, a $12
billion private equity firm based in Washington that has parlayed a
roster of former top-level government officials, largely from the
Bush and Reagan administrations, into a moneymaking machine.
In a new spin on Washington's revolving door between business and
government, where lobbying by former officials is restricted but
soliciting investments is not, Carlyle has upped the ante and taken
the practice global. Mr. Bush and Mr. Baker were accompanied on
their trips by former Prime Minister John Major of Britain, another
of Carlyle's political stars. With door-openers of this caliber,
along with shrewd investment skills, Carlyle has gone from an
unknown in the world of private equity to one of its biggest
players. Private equity, which involves buying up companies in
private deals and reselling them, is a high-end business open only
to the very rich.
Over the last decade, the Carlyle empire has grown to span three
continents and include investments in most corners of the world. It
owns so many companies that it is now in effect one of the nation's
biggest defense contractors and a force in global
telecommunications. Its blue-chip investors include major banks and
insurance companies, billion-dollar pension funds and wealthy
investors from Abu Dhabi to Singapore.
In getting business for Carlyle, Mr. Bush has been impressive. His
meeting with the crown prince was followed by a yacht cruise and
private dinners with Saudi officials, including King Fahd, all on
behalf of Carlyle, which has extensive interests in the Middle
East.
And Mr. Bush led Carlyle's successful entry into South Korea, the
fastest-growing economy in Asia. After his meetings with the prime
minister and other government and business leaders, Carlyle won a
tough competition for control of KorAm, one of Korea's few healthy
banks.
The steady flow of politicians to lucrative private-sector jobs
based on their government contacts is a familiar Washington tale.
But in this case, it is being played out for more dollars, on a
global stage, and in the world of private finance, where the
minimal government rules prohibiting lobbying by former officials
for a given period are not a factor. These rules say nothing about
potential conflicts when former government officials use their
connections and insights for financial gain, and they may attract
more notice now that George W. Bush is president. Many of those
involved with Carlyle, which invests largely in companies that do
business with the government or are affected by government
regulations, have ties to the Oval Office.
For instance, Frank C. Carlucci, a Reagan secretary of defense who
as much as anyone is responsible for Carlyle's success, said he met
in February with his old college classmate Donald H. Rumsfeld, the
secretary of defense, and Vice President Dick Cheney, himself a
defense secretary under former President Bush, to talk about
military matters - at a time when Carlyle has several
billion-dollar defense projects under consideration.
Carlyle officials contend that the firm's activities do not
present any potential conflicts since Mr. Bush, Mr. Baker and other
former Republican officials now at Carlyle - including Mr.
Carlucci, who is Carlyle's chairman, and Richard G. Darman, Mr.
Bush's former budget director - do not lobby the federal
government. Carlyle executives point out that many corporations
have former government officials as board members.
"Mr. Bush gives us no advice on what do with with the federal
government," said David Rubenstein, the firm's founder and a former
aide in the Carter White House. "We've gone over backwards to make
sure that we do no lobbying."
Others, however, see little difference between potential conflicts
involving lobbying and those involving investments.
"Carlyle is as deeply wired into the current administration as
they can possibly be," said Charles Lewis, executive director of
the Center for Public Integrity, a nonprofit public interest group
based in Washington. "George Bush is getting money from private
interests that have business before the government, while his son
is president. And, in a really peculiar way, George W. Bush could,
some day, benefit financially from his own administration's
decisions, through his father's investments. The average American
doesn't know that and, to me, that's a jaw-dropper."
It is difficult to determine exactly how much money the senior Mr.
Bush and Mr. Baker have made. Mr. Baker is a Carlyle partner, and
Mr. Bush has the title senior adviser to its Asian activities. With
a current market value of about $3.5 billion on Carlyle's equity
and with the firm owned by 18 partners and one outside investor,
Mr. Baker's Carlyle stake would be worth about $180 million if each
partner held an equal stake. It is not known whether he has more or
less than the other partners.
Unlike Mr. Baker, Mr. Bush has no ownership stake in Carlyle; he
is an adviser and an investor and is compensated by obtaining
stakes in Carlyle investments. Carlyle executives cited, for
example, Mr. Bush's being allowed to put money he earns giving
speeches for Carlyle into its investment funds. Mr. Bush generally
receives $80,000 to $100,000 for a speech. He sits on no corporate
boards other than Carlyle's.
Carlyle also gave the Bush family a hand in 1990 by putting George
W. Bush, who was then struggling to find a career, on the board of
a Carlyle subsidiary, Caterair, an airline-catering company.
From Carlyle's point of view, the involvement of Mr. Baker and the
former president is invaluable.
"It punches up the brand awareness for us globally," said Daniel
A. D'Aniello, a Carlyle managing director. "We are greatly assisted
by Baker and Bush. It shows that we are associated with people of
the highest ethical standards."
With $12 billion from investors, Carlyle claims to be the nation's
largest private equity fund and makes money by investing in
undervalued companies and reselling at a profit. These numbers put
Carlyle in the same league as better-known private equity firms
like Kohlberg Kravis Roberts & Company and Forstmann-Little &
Company.
Two hundred forty Carlyle employees are stationed throughout the
world either raising money or finding ways to spend it. Carlyle has
ownership stakes in 164 companies, which last year employed more
than 70,000 people and generated $16 billion in revenues. About 450
institutions - mainly large pension funds and banks - are Carlyle
investors.
The California state pension fund invested $305 million with
Carlyle, and the Texas teachers pension fund - whose board was
appointed when George W. Bush was governor - gave Carlyle $100
million to invest in November. Carlyle also works as a financial
adviser to the Saudi government.
"Let's say Carlyle is going fund- raising in the Middle East and
they bring Bush along," said David Snow, editor of Private Equity
Central, a trade publication. "He led the U.S. Army into that
region. That will catch the attention of very wealthy investors in
Saudi Arabia and Kuwait. The fact that Bush is involved doesn't
mean that Carlyle will make great investment decisions. But it will
get them access to certain deals and certain countries that they
might otherwise not have."
One former Carlyle employee said, "The firm understands that
having Bush and Major around is like having movie stars around."
Yet Carlyle's success is not just because of its high-powered
connections. Carlyle has done well for its investors, returning an
average of 34 percent a year over the last decade, in line with
other private equity funds. It has done this by buying what it
knows best - companies that are regulated by the government. Nearly
two-thirds of its investments are in defense and telecommunications
companies, which are affected by shifts in government spending and
policy.
Carlyle has become the nation's 11th largest defense contractor,
owning companies that make tanks, aircraft wings and a broad array
of other military equipment. It also owns health care companies,
real estate, Internet companies, a bottling company and even Le
Figaro, the French newspaper.
"Carlyle is one of the most successful fund-raising groups," said
Mario L. Giannini, president of Hamilton Lane, a Philadelphia
consultant to institutional investors. "They have tremendous access
and they have done very well with their money."
And its access extends well beyond American shores. In Europe,
Carlyle has assembled an advisory board that besides Mr. Major
includes Karl Otto Pöhl, former president of German's Bundesbank,
and the past or present chairmen of B.M.W., Hoffman-LaRoche,
Nestlé, LVMH-Moët Hennessy, Louis Vuitton and Aerospatiale, the
French Airbus partner.
Carlyle's Asia advisory board, which helps raise money and finds
and reviews deals, includes former President Fidel V. Ramos of the
Philippines, the former prime minister of Thailand and the
executive director of the Abu Dhabi Investment Authority. The
former South Korean prime minister Park Tae Joon was also an
adviser to Carlyle.
This star power is a source of great pride for Carlyle and part of
an acknowledged long-term strategy to associate the firm with
brand-name politicians and business executives in order to attract
more of the same - along with their money, insights and
connections. That said, Carlyle partners bristle at any suggestion
that the firm's success is based only on high-powered schmoozing.
"If our track record was not good, people would not invest with
us," said Mr. Rubenstein, the founding partner. "No one would gives
us money just because Mr. Bush is one of our advisers."
On that point, others agree. "People took potshots at Carlyle
early on and tried to denigrate their investment credentials
because they had all these government officials over there," said
Bernard Aronson, managing partner at ACON Investments, a private
equity firm in Washington. "But that's sort of a myth. The all-
hat-and-no-cattle has disappeared because they performed
consistently, delivered excellent returns and have become global
players."
One of the people who put Carlyle on the map - developing its
riches and its image - is Mr. Carlucci, who joined the firm in 1989
when it had engaged in a string of ill-fated ventures. He is
credited with steering Carlyle into successful defense industry
acquisitions - just when other investors were shunning them - and
with using his seat on more than a dozen corporate boards to bring
Carlyle deals and investors.
In an office adorned with photographs of Mr. Carlucci and the
politically mighty - he sits beneath an Oval Office picture of
himself and Mr. Reagan - Mr. Carlucci makes it clear that his
extensive government and global ties are as fresh as ever.
"I know Rumsfeld extremely well," Mr. Carlucci said in an
interview. "We've been close friends throughout the years. We were
college classmates."
Pointing to a picture of the Chinese president, he said, "There's
a photo of me and Jiang Zemin. And there's me and the president of
Taiwan."
Right now, Carlyle is hoping that financing is provided for the
$13.7 billion Crusader program. The Crusader is a heavy-duty tank
made by a Carlyle portfolio company and other contractors. And
Carlyle just lodged a complaint with the government after another
of its portfolio companies lost a $4 billion contract to build a
lightweight combat vehicle.
While Mr. Carlucci is open about his discussions with Mr. Rumsfeld
on Pentagon policies, he said he never lobbies. "I've made it clear
that I don't lobby the defense industry," Mr. Carlucci said. "I
will give our Carlyle bankers advice on what they might do and who
they should talk to. But I do not pick up the phone and say you
should fund X, Y or Z."
If Washington's revolving door brought Republicans to Carlyle
during the Clinton presidency, now the firm is preparing for an
onslaught of Democrats. The day these interviews took place at
Carlyle's Washington office, Gene Sperling, one of the Clinton
administration's top economic advisers, was in for a job interview. |
