Carlyle Group has employed some of the most powerful figures in
Washington, including former Secretary of State James Baker, former
President George H.W. Bush, former Secretary of Defense Frank Carlucci
and former FCC Chairman William Kennard.
By M. Asif Ismail
WASHINGTON, November 18, 2004 —
The Carlyle Group, a Washington, D.C.-based private equity firm that
employs numerous former high-ranking government officials with ties to
both political parties, was the ninth largest Pentagon contractor
between 1998 and 2003, an ongoing Center for Public Integrity
investigation into Department of Defense contracts found.
A dozen companies in which Carlyle had a controlling interest netted more than $9.3 billion in contracts.
Overall, six private investment firms,
including Carlyle, received nearly $14 billion in Pentagon deals
between 1998 and 2003. (See related report, "The Sincerest Form of Flattery.")
From its founding in 1987, the Carlyle Group has pioneered investing in
the defense and national security markets, and through its takeover of
companies with billions of dollars in defense contracts became one of
the U.S. military's top vendors, ranking among better known defense
firms like Lockheed Martin, Boeing Co., Raytheon Co., Northrop Grumman
and General Dynamics.
Unlike those firms, however, the Carlyle Group itself is not a
manufacturer. It offers no services directly to the Pentagon, and has
no defense contracts. Rather, it manages investments—some $18.4 billion
from 600 individuals and entities in 55 countries, according to its Web
site. The firm's business is making money for these investors, the vast
majority of whose identities are not disclosed to the Securities and
Exchange Commission or other government bodies.
Though Carlyle itself has won no contracts,
the companies it has owned or controlled have done billions of dollars
worth of business with the Pentagon. The Carlyle unit that brought in
the largest share—$5.8 billion—was United Defense Inc., which
manufactures combat vehicles, artillery, naval guns, missile launchers
and precision munitions. United Defense also owns the country's largest
non-nuclear ship repair, modernization, overhaul and conversion
company, United States Marine Repair Inc. Its most famous product may
well be the Bradley fighting vehicle. United Defense brought in more
than 60 percent of Carlyle's defense business.
Carlyle took United Defense public in 2001; by April 2004 it had sold all its shares in the company.
Lear Siegler Services, a leading contractor in aircraft logistics
support, maintenance, pilot training and ground support, received
contracts worth more than $1 billion. Carlyle sold the company in
Southwest Marine Inc. also received
contracts worth more than $1 billion since 1998, and Norfolk
Shipbuilding & Drydock received contracts worth $827 million. In
1998, Carlyle merged these two companies into United States Marine
Vought Aircraft Industries, a large
subcontractor doing work for military cargo planes, bombers, and
fighters, received contracts worth $85 million. Vought is among the few
defense contractors that the Carlyle Group has not sold.
Among other private equity firms, New York-based Veritas Capital Management firm that employs many former high-ranking military officials received Pentagon contracts to the tune of more than $2.2 billion. Veritas is the 41st ranked defense contractor.
Companies under the ownership of Vectura
Holding Co., another New York-based group, got deals to the tune of $1
billion, while companies controlled by Berkshire Hathaway, led by
billionaire investor Warren Buffett, won contracts worth $688 million.
Companies owned by Green Equity Investors II LP ($275 million) and
Gores Technology Group ($153 million) also received substantial defense
Private equity firms did not have any
significant presence in the defense industry until the end of the Cold
War. Traditionally, the Defense Department depended on mega contractors
such as Boeing Corp., Lockheed Martin and Raytheon for weapons and
services. But since the 1990s, the military has increasingly outsourced
to private contractors a variety of jobs and services, ranging from
planning of operations to the supply of linguistic services. A U.S.
government decision in the 1990s to encourage small-business
participation in contracts also contributed to the expansion of the
market for smaller, privately-owned companies.
The Carlyle Group acquired controlling
interests in several underperforming defense contractors, installed its
own management teams and revitalized the companies, in part by landing
big Pentagon contracts. Then, they sold the contractors to other
investors for a large profit.
"There have always been [private equities]
that went in with management and bankrolled management," said Stuart
McCutchan, editor of Defense Mergers & Acquisitions.
"What Carlyle has done differently is they have taken it to a new level
both in terms of size and in terms of being committed to an entire
"Carlyle is the biggest single success in
Washington of a venture capital firm," Dr. Loren B. Thompson Jr., a
national security expert at the libertarian Lexington Institute, said.
In 1997, for example, the group made a
650-percent profit when it sold BDM International Inc., a McLean, Va.,
defense contractor. And in December 2001, Carlyle sold off the majority
of its holdings in United Defense Inc. Altogether, Carlyle earned $1
billion in profit from the United Defense investment.
A windfall of war
The group cashed out many of its investments
when the stock of defense companies rose dramatically in the aftermath
of September 11 and the buildups to the Afghanistan and Iraq wars.
"Defense properties are too expensive these days," explained Carlyle spokesman Chris Ullman.
In 1997, Carlyle liked the price of United
Defense, and beat out General Dynamics and Alliant Techsystems, which
also coveted the underperforming artillery firm. General Dynamics bid
more than Carlyle offered for the company, but potentially faced a
lengthy, drawn out antitrust battle if it acquired United Defense.
Carlyle ended up winning the bid.
Carlyle finally sold its stakes in United after taking it public in the aftermath of the September 11 attacks. The Washington Post called the hugely successful public offering "one of the most successful single venture investments of recent years."
But United did not seem all that lucrative before September 11.
"They [Carlyle] were really kind of in a
pickle with United Defense," McCutchan said. "They wanted to cash out
on the equity. There wasn't much money to be made... When 9/11 happened
and the defense budget took off, suddenly they had a winner on their
Even Carlyle, which typically does not disclose its financial and operational details, crowed over the sale.
"It was one of Carlyle's best investments,"
Carlyle's Ullman told the Center. "We did make more than a billion
dollars on that deal, and we are very pleased that we served our
investors quite well."
The reason Carlyle's defense portfolio is
lean at the moment is the high value of defense firms, thanks in part
to the ongoing U.S. wars. "If there comes a time when defense
properties are priced in a way that we think makes sense for private
equity investors, then we will certainly consider investing more of our
dollars in that sector," Ullman told the Center.
Carlyle has a diversified portfolio, focusing
its investments in sectors that have heavy government regulation and
contracting—defense, telecommunications and banking. Carlyle has
matched its investments with the expertise of high ranking government
officials, whom the firm has courted almost from its inception.
It was under the leadership of former
Defense Secretary Frank Carlucci—first as a managing director, from
1989 to 1993, and as chairman from 1993 to 2003—that Carlyle grew from
a small private equity to a global investment giant, and became a major
player among defense contractors.
Other former government officials who have
recent or current ties to the firm include former British Prime
Minister John Major and former Philippines President Fidel Ramos;
former Office of Management and Budget director Richard Darman; former
Clinton chief of staff Thomas F. "Mack" McLarty; former Securities and
Exchange Commission chairman Arthur Levitt and former Federal
Communications Commission chairman William E. Kennard. Former Secretary
of State James Baker works for the firm, as did his former boss,
President George H.W. Bush, who was an adviser for the firm's Asian
investment funds until he left Carlyle in 2003.
Critics have long denounced Carlyle's
practice of recruiting former high-ranking government officials at the
same time as it invests in companies regulated by their former
agencies, dubbing it "access capitalism." For example, Kennard, who
served as Bill Clinton's FCC chairman, is now managing director for
Carlyle's global telecommunications and media group, directing the
firm's business investments in companies he regulated.
"Carlyle would never have gotten to the
level that it is at today had it not been for this premeditated
commingling of business and politics," said Dan Briody, author of The Iron Triangle: Inside the Secret World of the Carlyle Group, a book that takes a critical look at the rise of the firm.
One of Carlyle's most controversial hirings was of former president
Bush to serve as a senior adviser for its "Asia advisory board."
"The fact that George H.W. Bush was working for them while his son was
president, while his son, in fact, was dramatically increasing defense
spending—that seems to me one of the most blatant conflicts of
interests in history," Briody said.
Bush—who joined Carlyle in 1998, before his
son, George W. Bush, became president—ended his relationship with the
firm in October 2003, Ullman told the Center. But that hasn't stopped
the former president from continuing to give speeches for Carlyle,
which he did at a Shanghai event sponsored by the firm in April 2004.
Ullman refused to disclose the remuneration
Bush received for his services. "That's not information that we
disclose," he said. "That's his personal business. You are certainly
welcome to ask him."
Bush's office did not respond to the
Center's request for an interview. Written questions faxed to the
former president's Houston office, at an aide's request, did not elicit
Though none are placed as closely as the
president's father, Carlyle's other Washington insiders have ties to
current Bush administration officials. Current Defense Secretary Donald
Rumsfeld and Carlucci went to college together, for example, and
Secretary of State Colin Powell was Carlucci's deputy on the National
Security Council in the mid-1980s.
The continued presence of Baker and
Carlucci riles critics such as Briody. "If you look at the relationship
that Frank Carlucci still maintains with Don Rumsfeld and Colin Powell
and the reach that he has to those folks—and he has in fact used that
reach in the past and tried to influence decisions those folks were
making, decisions that could directly or indirectly affect Carlyle's
fortune," Briody said.
Carlyle dismisses the notion that Carlucci
or any other former government or military leader on its payroll has
any conflicts of interest. "Are you aware of any solicitations from
[Carlucci] to Secretary Rumsfeld to ask for any particular benefits to
United Defense or any of our other portfolio companies?" Ullman said.
"All they [Carlyle critics] do is, they say: 'Oh, Carlucci used to work
in the government and he went to college with Donald Rumsfeld, and
Carlyle has defense investments, and now Secretary Rumsfeld is
secretary of defense. Therefore, there is a conflict of interest.'"
Despite Ullman's assertions, media accounts
have noted occasions when former government officials working for
Carlyle have approached the Pentagon brass. For example, Fortune
magazine reported in March 2002 that Carlucci had contacted at least
two senior Pentagon officials, though Carlyle claimed these contacts
did not constitute lobbying.
Ullman added that all former government
officials working for Carlyle abide by "all of the conflict of
interests rules related to lobbying former colleagues for a year." He
pointed out that the Pentagon had cancelled the Crusader artillery
system, produced by United Defense, adding, "So if we are as powerful
as everyone thinks, why did they cancel it?"
Rumsfeld announced in May 2002 the termination of the artillery system;
until then, the Pentagon had paid United Defense some $2 billion to
develop the Crusader.
Researcher Sheetal Doshi contributed to this report.