In 18 years of doing business, The Carlyle Group has earned two reputations.
One is by the numbers--Carlyle ranks among the nation's most successful private
investment firms, earning an astonishing 35 percent in annual returns.
The other is the stuff of lore and pulp novels. It casts the firm, founded
by a quartet of capital money men, as a secretive place built on the hand-in-pocket
relationships with former government leaders, among them President George H.W.
Bush, British Prime Minister John Major and secretaries of state and defense.
Those connections, the conspiracy spinners and even legitimate government watchdog
groups allege, have given Carlyle its inside edge and outsize profits.
"Having John Major and former President Bush is an attempt to impress
investors, but it's also essentially an effort to obtain influence among government
elites," said Charles Lewis, the founder of Washington's Center for Public
Integrity, which for years has tracked Carlyle's investments in defense corporations.
There's no disputing Carlyle's financial success. The company states it manages
nearly $30 billion in 31 funds and has more than 500 employees in 14 countries.
Film spurs spin effort
But Carlyle's partners have moved aggressively in recent years to debunk the
notion that the firm runs on the power of its connections. That effort was stepped
up markedly after the firm's cameo appearance in "Fahrenheit 9/11,"
the anti-Bush administration film by director Michael Moore.
"In our mind, we have clearly turned the corner from an image standpoint,"
said Chris Ullman, a Carlyle principal and spokesman.
But new questions about political connections have emerged over the firm's
efforts to win business from the Illinois Teachers' Retirement System pension
Last week one of Carlyle's founders and managing directors, David Rubenstein,
appeared before the teacher fund's board of trustees to explain why his firm
paid Springfield lobbyist and Republican National Committee Treasurer Robert
Kjellander a $4.5 million fee.
The payment was ostensibly in exchange for work that Kjellander did to persuade
the pension fund to invest $500 million with Carlyle.
While the arrangement violated no laws and was disclosed earlier by Carlyle
to the teacher pension fund, it has drawn the interest of a federal grand jury
in Chicago that in a different case has indicted a former teacher fund trustee,
Stuart Levine, and two Chicago lawyers, Joe Cari and Steven Loren.
Federal investigators recently subpoenaed the pension fund's records of its
Carlyle investments and interaction with Kjellander. Ullman said Carlyle has
not been subpoenaed, but "we have reached out to the prosecutors to offer
our assistance if they seek it."
Kjellander declined to discuss his work for Carlyle.
`A highly ethical firm'
During his appearance before the board, Rubenstein said that Carlyle has "enjoyed
our reputation over the years as a highly ethical firm."
Carlyle, however, found itself in a similar pension fund controversy in Connecticut
several years ago, when a federal investigation led to the state's disclosure
of fees paid to consultants by investment firms that won pension fund business.
Carlyle had paid an influential Republican figure, Washington lobbyist Wayne
Berman, $1 million in 1998 to help it win state pension money.
Berman declined to discuss the deal. Neither he nor Carlyle was accused of
violating the law.
Carlyle's success was built on the principle of finding friends who can help.
It's nothing new in business, but the firm's founders early demonstrated a knack
for attracting top government officials as they left office and then leveraging
their credentials to attract business.
They were led by Rubenstein, an attorney who had cut his public policy teeth
as an adviser on domestic affairs for President Jimmy Carter. Rubenstein practiced
law after Carter was defeated in 1980, but by 1987 he and William Conway, Steve
Norris and Dan D'Aniello decided Washington had room for a leveraged buyout
firm that would buy companies, streamline them and then sell them at a profit.
(Norris left Carlyle in 1995.)
First big fish
Carlyle's first big catch was in 1988, when it hired Fred Malek as he left
his job as deputy chairman of the Republican National Committee. The next year
it attracted Frank Carlucci, a former defense secretary, as its new chairman.
Following the defeat of George H.W. Bush in 1992, Carlyle hired James Baker,
a former secretary of state and longtime political confidant to Bush, and Richard
Darman, who had been a director of the Office of Management and Budget for Bush.
Bush joined the firm as an adviser in the mid-1990s for an undisclosed fee.
So did Major.
Carlucci's defense industry contacts helped steer Carlyle toward buying companies
with Pentagon contracts, and by 1998, according to the Center for Public Integrity,
The Carlyle Group had made itself, on paper anyway, the nation's ninth-largest
Those who defend the firm said Carlyle's sway is greatly exaggerated while
its positive effect on the defense industry has been overlooked.
"There were a number of unwanted or distressed properties whose values
had been temporarily depressed by the downturn in military demand," said
Loren Thompson, chief operating officer of the Lexington Institute, a defense
think tank. "Carlyle took those properties, they made them more efficient
and they sold them off, usually at a hefty profit."
The Sept. 11 terrorist attacks raised questions about Carlyle and the Saudi
investors it had attracted over the years. That very day, in fact, a half-brother
of terrorist Osama bin Laden was attending a Carlyle meeting.
The bin Laden family, which built its wealth through a construction business
that worked closely with the Saudi royal family, long ago disowned Osama bin
Laden. But Carlyle executives knew the connection would create only bad publicity
and returned the family's investment.
Over the past several years, Bush, Baker and Carlucci have left the company,
perhaps because of their ages as much as a change in Carlyle's corporate strategy.
The firm, though, hasn't stopped hiring well-known figures. It simply included
leaders from the business world.
Carlyle's chairman is Louis Gerstner, former CEO of IBM.
Its dozen senior advisers include Arthur Levitt, former chairman of the Securities
and Exchange Commission, and Charles Rossotti, who from 1997 to 2002 was Internal
Revenue Service commissioner.
Main sources of cash
Like other private equity firms, Carlyle relies heavily on investment cash
from large institutional pension funds, such as the state Teachers' Retirement
In Illinois, though, questions remain about how Kjellander came to work for
Ullman said Kjellander was crucial in introducing Carlyle to retirement system
"We had approached the Illinois teachers [fund] on various occasions and
found that we weren't able to get a hearing," Ullman said. "So a Carlyle
colleague knew of Bob Kjellander and said he's a seasoned lobbyist, he knows
lots of people in the state and perhaps could help."
Ullman said Kjellander worked to help broker the deal with Carlyle and the
pension fund for more than nine months.
But in a 2002 response to a Teachers' Retirement System questionnaire inquiry
about third-party fees, Carlyle said its contact with the Teachers' Retirement
System "in connection with this potential investment was accomplished directly
by our staff."
Similarly, a retirement system memo dated Aug. 21, 2002, stated that "Carlyle
contacted TRS investment staff directly." In that memo, pension fund officials
noted that Carlyle felt "obligated" to pay Kjellander the fee, which
was up to 1 percent of the amount of the pension fund's investment in Carlyle,
because of an existing contract between Carlyle and Kjellander.
Ullman said Carlyle has records of numerous meetings with Kjellander and cannot
explain why the 2002 documents do not describe any work done by Kjellander.