(continued)
____________________
While the Center for Public Integrity looks for its smoking gun, others in Washington say hard evidence is unimportant. "Whether the decisions made by the former president are a real or apparent conflict of interest doesn't matter, because in the public's eye they're equally as damaging," says Larry Noble, executive director and general counsel of the Center for Responsive Politics. "Bush [Sr.] has to seriously consider the propriety of sitting on the board of a group that is impacted by his son's decisions."
And the controversy is expected only to increase as Carlyle's investments in Saudi Arabia are scrutinized during the war on terrorism. Mr. Eisner says that very little is known about Carlyle's involvements in Saudi Arabia, except that the firm has been making close to $50 million a year training the Saudi Arabian National Guard, troops that are sworn to protect the monarchy. Carlyle also advises the Saudi royal family on the Economic Offset Program, a system that is designed to encourage foreign businesses to open shop in Saudi Arabia and uses re-investment incentives to keep those businesses' proceeds in the country.
But the money flowing out of Saudi Arabia and into the Carlyle Group is of even more interest. Immediately after the September 11 attacks, reports surfaced of Carlyle's involvement with the Saudi Binladin Group, the $5 billion construction business run by Osama's half-brother Bakr. The bin Laden family invested $2 million in the Carlyle Partners II fund, which includes in its portfolio United Defense and other defense and aerospace companies. On October 26, the Carlyle Group severed its relationship with the bin Laden family in what officials termed a mutual decision. Mr. Bush Sr. and Mr. Major have been to Saudi Arabia on behalf of Carlyle as recently as last year, and according to reports, the Federal Bureau of Investigation is currently looking into the flow of money from the bin Laden family. Carlyle officials declined to answer any questions regarding their activities in Saudi Arabia.
But for all the questions, Carlyle has stayed clean in the eyes of the law. Lobbying laws in Washington, D.C., are ambiguous at best, requiring only that former politicians observe a one-year "cooling-off period" before they re?nter the lobbying scene on behalf of industry. It is playing within this gray area that has given the Carlyle Group some of the best returns in the business.
After David Rubenstein, a former aide in the Carter administration, and William Conway Jr., former chief financial officer of MCI Communications, hooked up at New York's Carlyle hotel in 1987 to form the company, the Carlyle Group spent two lost years investing in a hodgepodge of companies. It wasn't until 1989, when the company brought in Mr. Carlucci, fresh off his two-year stint as U.S. secretary of defense, that Carlyle got serious in government. In 1991 the company made a name for itself by facilitating a $590 million purchase of Citicorp stock for Prince Alwaleed bin Talal. Shortly thereafter, Carlyle snatched up defense contractors Harsco, BDM International, and LTV, turning the companies around and selling them to the likes of TRW, Boeing, and Lockheed Martin.
The Carlyle Group has diversified its holdings since then, investing in everything from bottling companies to natural-food grocers. In the process, it has become one of the biggest, most successful private-equity firms in business, with annualized returns of 35 percent. (Judging by the early numbers from some of their funds, however, like many other private-equity funds, 2001 will be a considerably less profitable year for Carlyle.) "They are the new breed of private equity, acting more like a large mutual fund of private companies," says David Snow, editor of PrivateEquityCentral.net, a Web site that tracks private-equity firms. The numbers are impressive: Carlyle employs 240 people, as opposed to the 10 or 12 typical of most private-equity firms. It has ownership stakes in 164 companies, which collectively employ more than 70,000 people. George Soros invested $100 million in the group's funds; the California Public Employees' Retirement System is in for $305 million.
Carlyle has succeeded by raising money first, then finding the talent to manage it. For instance, it raised a fund for buying out telecom companies and hired William Kennard, the former U.S. Federal Communications Commission chairman, to run it. Accused early on of being nothing more than a bunch of Washington grip-and-grinners, Carlyle has proven its critics wrong. At a Salomon Smith Barney private-equity conference last March, a panel of professional investment managers were asked who the best fund managers are. Carlyle cofounder Mr. Conway was one of two managers chosen.
With its size and success, questions about the firm's ability to grow revenue has arisen. Carlyle has placed its bets for futurce growth on the VC markets, which it entered in 1996. But to date, it has found that venture capital is a game with far different rules than that of corporate buyouts. "They may be very established in private equity, but it seems to me that they don't really know the venture capital business," says one VC who has done deals with Carlyle. "In buyouts, you take over a company and fight the management, but in venture capital it's the opposite. You want to work with people."
Carlyle executives admit as much. As a result, the Carlyle Europe Venture Partners fund has been slow to commit its capital. So far, it has spent just more than 20 percent of its $660 million, and 3 of its original 17 investments have already folded. None has gone public or been acquired. As Jack Biddle, cofounder of Novak Biddle Venture Partners, dryly puts it, "I haven't been involved in a lot of venture deals where the participation of a president mattered that much. In venture capital, it's all about the technology."
For a firm that has made its money in highly regulated, politically charged industries, picking business-to-business plays is hardly second nature. While Carlyle has investments in highly regulated sectors like telecom and banking, it has avoided defense entirely, instead focusing on tech industries that have already gone flat. The firm's European fund alone boasts six B2B companies, two optical-networking companies, and Riot-E, a wireless media play. Jacques Gara?alde, managing director of the Europe fund concedes that expectations have been shifted. "Clearly, we can't make 100 times returns on B2B, but there are some situations in which we can make 3 times."
But the struggles in its VC business may be offset, at least temporarily, by the expected windfall from the war on terrorism. The federal government has already approved a $40 billion supplemental aid package to the current budget, $19 billion of which is headed straight to the Pentagon. Some of the additional government spending is likely to find its way into Carlyle's coffers.
The Bush administration isn't afraid to mix business and politics, and no other firm embodies that penchant better than the Carlyle Group. Walking that fine line is what Carlyle does best. We may not see Osama bin Laden's brothers at Carlyle's investor conferences any more, but business will go on as usual for the biggest old boys network around. As Mr. Snow puts it, "Carlyle will always have to defend itself and will never be able to convince certain people that they aren't capable of forging murky backroom deals. George Bush's father does profit when the Carlyle Group profits, but to make the leap that the president would base decisions on that is to say that the president is corrupt."
Additional reporting by Lawrence Aragon, Mark Chediak, Julie Landry, Christopher Locke, Eric Moskowitz, Mark Mowrey, and Michael Parsons.
Write to Dan Briody.
____________________
While the Center for Public Integrity looks for its smoking gun, others in Washington say hard evidence is unimportant. "Whether the decisions made by the former president are a real or apparent conflict of interest doesn't matter, because in the public's eye they're equally as damaging," says Larry Noble, executive director and general counsel of the Center for Responsive Politics. "Bush [Sr.] has to seriously consider the propriety of sitting on the board of a group that is impacted by his son's decisions."
And the controversy is expected only to increase as Carlyle's investments in Saudi Arabia are scrutinized during the war on terrorism. Mr. Eisner says that very little is known about Carlyle's involvements in Saudi Arabia, except that the firm has been making close to $50 million a year training the Saudi Arabian National Guard, troops that are sworn to protect the monarchy. Carlyle also advises the Saudi royal family on the Economic Offset Program, a system that is designed to encourage foreign businesses to open shop in Saudi Arabia and uses re-investment incentives to keep those businesses' proceeds in the country.
But the money flowing out of Saudi Arabia and into the Carlyle Group is of even more interest. Immediately after the September 11 attacks, reports surfaced of Carlyle's involvement with the Saudi Binladin Group, the $5 billion construction business run by Osama's half-brother Bakr. The bin Laden family invested $2 million in the Carlyle Partners II fund, which includes in its portfolio United Defense and other defense and aerospace companies. On October 26, the Carlyle Group severed its relationship with the bin Laden family in what officials termed a mutual decision. Mr. Bush Sr. and Mr. Major have been to Saudi Arabia on behalf of Carlyle as recently as last year, and according to reports, the Federal Bureau of Investigation is currently looking into the flow of money from the bin Laden family. Carlyle officials declined to answer any questions regarding their activities in Saudi Arabia.
But for all the questions, Carlyle has stayed clean in the eyes of the law. Lobbying laws in Washington, D.C., are ambiguous at best, requiring only that former politicians observe a one-year "cooling-off period" before they re?nter the lobbying scene on behalf of industry. It is playing within this gray area that has given the Carlyle Group some of the best returns in the business.
After David Rubenstein, a former aide in the Carter administration, and William Conway Jr., former chief financial officer of MCI Communications, hooked up at New York's Carlyle hotel in 1987 to form the company, the Carlyle Group spent two lost years investing in a hodgepodge of companies. It wasn't until 1989, when the company brought in Mr. Carlucci, fresh off his two-year stint as U.S. secretary of defense, that Carlyle got serious in government. In 1991 the company made a name for itself by facilitating a $590 million purchase of Citicorp stock for Prince Alwaleed bin Talal. Shortly thereafter, Carlyle snatched up defense contractors Harsco, BDM International, and LTV, turning the companies around and selling them to the likes of TRW, Boeing, and Lockheed Martin.
The Carlyle Group has diversified its holdings since then, investing in everything from bottling companies to natural-food grocers. In the process, it has become one of the biggest, most successful private-equity firms in business, with annualized returns of 35 percent. (Judging by the early numbers from some of their funds, however, like many other private-equity funds, 2001 will be a considerably less profitable year for Carlyle.) "They are the new breed of private equity, acting more like a large mutual fund of private companies," says David Snow, editor of PrivateEquityCentral.net, a Web site that tracks private-equity firms. The numbers are impressive: Carlyle employs 240 people, as opposed to the 10 or 12 typical of most private-equity firms. It has ownership stakes in 164 companies, which collectively employ more than 70,000 people. George Soros invested $100 million in the group's funds; the California Public Employees' Retirement System is in for $305 million.
Carlyle has succeeded by raising money first, then finding the talent to manage it. For instance, it raised a fund for buying out telecom companies and hired William Kennard, the former U.S. Federal Communications Commission chairman, to run it. Accused early on of being nothing more than a bunch of Washington grip-and-grinners, Carlyle has proven its critics wrong. At a Salomon Smith Barney private-equity conference last March, a panel of professional investment managers were asked who the best fund managers are. Carlyle cofounder Mr. Conway was one of two managers chosen.
With its size and success, questions about the firm's ability to grow revenue has arisen. Carlyle has placed its bets for futurce growth on the VC markets, which it entered in 1996. But to date, it has found that venture capital is a game with far different rules than that of corporate buyouts. "They may be very established in private equity, but it seems to me that they don't really know the venture capital business," says one VC who has done deals with Carlyle. "In buyouts, you take over a company and fight the management, but in venture capital it's the opposite. You want to work with people."
Carlyle executives admit as much. As a result, the Carlyle Europe Venture Partners fund has been slow to commit its capital. So far, it has spent just more than 20 percent of its $660 million, and 3 of its original 17 investments have already folded. None has gone public or been acquired. As Jack Biddle, cofounder of Novak Biddle Venture Partners, dryly puts it, "I haven't been involved in a lot of venture deals where the participation of a president mattered that much. In venture capital, it's all about the technology."
For a firm that has made its money in highly regulated, politically charged industries, picking business-to-business plays is hardly second nature. While Carlyle has investments in highly regulated sectors like telecom and banking, it has avoided defense entirely, instead focusing on tech industries that have already gone flat. The firm's European fund alone boasts six B2B companies, two optical-networking companies, and Riot-E, a wireless media play. Jacques Gara?alde, managing director of the Europe fund concedes that expectations have been shifted. "Clearly, we can't make 100 times returns on B2B, but there are some situations in which we can make 3 times."
But the struggles in its VC business may be offset, at least temporarily, by the expected windfall from the war on terrorism. The federal government has already approved a $40 billion supplemental aid package to the current budget, $19 billion of which is headed straight to the Pentagon. Some of the additional government spending is likely to find its way into Carlyle's coffers.
The Bush administration isn't afraid to mix business and politics, and no other firm embodies that penchant better than the Carlyle Group. Walking that fine line is what Carlyle does best. We may not see Osama bin Laden's brothers at Carlyle's investor conferences any more, but business will go on as usual for the biggest old boys network around. As Mr. Snow puts it, "Carlyle will always have to defend itself and will never be able to convince certain people that they aren't capable of forging murky backroom deals. George Bush's father does profit when the Carlyle Group profits, but to make the leap that the president would base decisions on that is to say that the president is corrupt."
Additional reporting by Lawrence Aragon, Mark Chediak, Julie Landry, Christopher Locke, Eric Moskowitz, Mark Mowrey, and Michael Parsons.
Write to Dan Briody.
