Re-inventing the notorious Carlyle Group

Carlyle Changes Its Stripes
n the two decades since private equity firms first stormed the business world, they’ve been called a lot of things, from raiders to barbarians. But only one firm has been tagged in the popular imagination with warmongering, treason, and acting as cold-eyed architects of government conspiracies.

Its ranks were larded with the politically connected, including former Presidents, Cabinet members, even former British Prime Minister John Major. It used its partners’ collective relationships to build a lucrative business buying, transforming, and selling companies–particularly defense companies that did business with governments. 

Carlyle might have continued happily in that niche except for the confluence of three events. First there were the terrorist attacks of September 11. In the aftermath, conspiracy theorists seized on Carlyle’s huge profits, intense secrecy, and close dealings with wealthy Saudi investors. The scrutiny reached a crescendo in Michael Moore’s documentary Fahrenheit 9/11, which made Carlyle seem like the sort of company image-conscious investors like public pension funds might choose to avoid. The second factor was the tsunami of capital that has been sloshing around the globe for five years, providing almost limitless funding for the kind of dealmaking that is Carlyle’s specialty. All that liquidity has brought with it immense opportunity as well as stiff new competition. Finally, there’s the succession issue. Carlyle’s baby boomer founders can see retirement around the corner. And they badly want the firm, their legacy, to outlast them.


Stage I of what some have dubbed the Great Experiment was largely cosmetic. The founders asked members of the bin Laden family to take back their money. They sat down with George H.W. Bush and John Major and discussed, improbable though it might seem, how the two were no longer wanted as senior advisers because they hurt the firm’s image. Out went former Reagan Defense Secretary Frank C. Carlucci as chairman. In came highly regarded former chairman and CEO of IBM (IBM ), Louis V. Gerstner Jr., along with former Securities & Exchange Commission Chairman Arthur Levitt, former General Electric (GE ) Vice-Chairman David Calhoun, and former Time Inc. (TWX ) Editor-in-Chief Norman Pearlstine, among others, to underscore Carlyle’s commitment to portfolio diversification and upright corporate citizenship. Carlyle also pared back its defense holdings dramatically.

Stage II went much further and, indeed, might come to redefine the very nature of private equity. While other major buyout firms raise a few massive funds that hunt big prey–companies they can take private, rejigger financially, and, eventually, sell off or take public again–Carlyle has spread its money among no fewer than 48 funds around the world. Whereas the other giant firms–Blackstone Group, Kohlberg Kravis Roberts, and Texas Pacific Group–manage just 14, 7, and 6 funds, respectively, according to Thomson Financial, Carlyle launched a mind-boggling 11 in 2005 and 11 more in 2006.


Carlyle’s radical makeover has turned the firm into the biggest fund-raising juggernaut the private equity world has ever seen. By the end of this year it expects to have an unprecedented $85 billion in investor commitments under management, up sixfold from 2001 and more than any other firm expects.


“There are going to be some major financial institutions that emerge from the phenomenal growth [in private equity] of the last years,” says Colin Blaydon, director of the Center for Private Equity & Entrepreneurship at Dartmouth’s Tuck School of Business. “Carlyle is very deliberately moving in that direction. It looks a bit like the mid-’80s, when a handful of big, multiline investment-banking firms emerged as the bulge bracket.”

Make no mistake–Carlyle is already massive. It owns nearly 200 companies that generate a combined $68 billion in revenue and employ 200,000 people. Last year it bought a new company approximately once every three days and sold one almost once a week–all while dabbling in increasingly esoteric investments.

Coping with the hypergrowth is Stage III of the Great Experiment. Carlyle has overhauled its management structure, decentralizing decision-making in a way that would shock the typical larger-than-life buyout baron. Now, instead of relying on the founders to bless every deal, it sprinkles investment committees around the firm, each made up of managers from different funds and backgrounds.


 Founder Conway acknowledges the worry. “Our business right now is being propelled by the rocket fuel of cheap debt,” he says. “Rocket fuel is explosive, and you have to be careful how you handle it.” Daniel F. Akerson, co-head of the firm’s U.S. buyout fund, says one bank last year offered to give Carlyle twice the financing it needed for an acquisition. “That’s when you say to yourself: Wow.’ That’s the craziness of it.”

Such easy access to capital now can set up big trouble later on. To paraphrase Alan Greenspan, the worst of deals are made at the best of times. Right now almost all dealmakers look like geniuses. But history tells us that when the cycle turns, many who are riding the current wave of hope and euphoria will be washed out to sea. If interest rates rise, opportunities to refinance debt will disappear. Cash flows will shrivel. There will be bankruptcies.







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