by Jamie Doward
The Observer - UK
It is the sort of thing they really
could have done without. 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.
But now, with the invasion of Iraq under way, a new book chronicling
the relatively short history of the Carlyle Group threatens to draw
attention to the company's close links with the Pentagon.
Dan Briody, author of
the Iron Triangle - Inside the Secret World of
the Carlyle Group, alleges the company's executives were so worried
about his book they told staff not to talk to him. The Carlyle Group
rejects this and argues the book is little more than a cuttings job
based around some of the more crazy conspiracy theories found on the
internet. It also points out that only around 7 per cent of its
funds are invested in defense companies, far less than several other
venture capital groups.
'Peel away the layers of factual
errors and self-righteousness and all you're left with is
baseless innuendo. This book should be exposed for what it is: a
compilation of recycled conspiracy theories masquerading as
investigative journalism,' said Chris Ullman, Carlyle's
But Briody's account of how an upstart
venture capital firm went from nothing to managing funds of nearly
$14 billion in just 15 years, earning investors returns of around 36
per cent, is likely to reinforce the controversial image of the
Carlyle Group and raise concerns about its influence in Washington
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 defense 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, Briody's book chronicles how 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 defense 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 defense 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.
Defense 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 organization '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 Briody quotes insiders who 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 specializes 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 defense work,' one employee told Briody.
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
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 defense investments - and which aren't
examined by Briody - have benefited.
Last month it bought CSX Lines, an ocean carrier firm that
specializes 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 Defense
Evaluation and Research Agency.
Whatever Carlyle says, its image as being at the apex of what
Eisenhower termed the 'military industrial complex' endures.