BIG DEALS David Rubenstein and His Partners Have Made Billions With , the World’s Hottest Firm. How Have They Made All That Money? Why Are They in Washington?

By James K. Glassman

he Carlyle Group may be the Twenty years ago, the idea of a signifi cant school where he realized that “virtually no- city’s richest, most success- private global financial institution being body is Jewish. . . . I didn’t have any real ful business, but most people based here would have been considered ludi- money, so I got a scholarship to Duke and know it only through rumor crous. But Washington is now a very differ- went there.” and innuendo. ent city. “This is no longer a hick town,” says At the start, it is a classic bildungs roman: T It is a private-equity fi rm, by most mea- Arthur Levitt Jr., former chair of the Securi- Rubenstein graduated from college Phi sures the largest in the world. It owns 144 ties and Exchange Commission and a Carlyle Beta Kappa, went on to get his law degree companies plus 99 sizable pieces of real es- adviser. “It is a major fi nancial center.” at the , where he was tate. Around the world, its businesses last The story of the Carlyle Group—and on the law review, and then to Paul, Weiss, year employed 184,000 people and gener- of its most conspicuous partner, David Rifkind, Wharton & Garrison, a Democrat- ated $46 billion in revenues. Rubenstein—is the story of how Washing- ic law fi rm in New York. He chose the fi rm If it were a conventional corporation, ton has changed. because he was attracted by Ted Sorensen, Carlyle would rank 37th on the Fortune a partner: “I didn’t think that I had the 500, ahead of Microsoft and every com- “If you’re Jewish, sometimes looks or the money or the personality to be pany based in DC, , and Virginia. people think your father is a lawyer or a John Kennedy, but I was inspired by pub- Each of Carlyle’s founding partners is worth doctor,” Rubenstein says as we sit down in lic service, and Sorensen was the adviser to more than a billion dollars. his offi ce, which features some of the wid- Kennedy. I fi gured maybe I could be an ad- Private equity has become the white-hot est expanses of blank walls I’ve ever seen in viser to somebody.” center of finance—“the most compelling Washington. His father was a postal clerk He worked at Paul, Weiss for a few years thing going on now,” says cable mogul who didn’t graduate from college and never and got up the nerve to ask Sorensen to John Malone. What is so remarkable is that made more than $8,000 a year. help him fi nd a position in Washington. “By the hottest of the hot is headquartered not Rubenstein spent an insulated childhood hook or crook, I got a job as chief counsel in New York or San Francisco but here in in : “I was literally 12 or 13 before for the guy I thought might be president of modest offi ces on Pennsylvania Avenue be- I realized that everybody in the world isn’t the United States: Birch Bayh.” Rubenstein tween the Capitol and the White House. Jewish.” Then he went to a public high was Bayh’s counsel on a Senate Judiciary

WASHINGTONIAN 1 JUNE 2006 Photograph by Gary Landsman Photograph

In his twenties, David Rubenstein became king of the workaholic wonks at the White House. Then, with three partners and not much money, he started the Carlyle Group. A dry, witty ascetic, Rubenstein is an unlikely salesman, but last year he raised $12 billion.

WASHINGTONIAN 57 JUNE 2006 Darman photograph by Terry Ashe/Time Life Pictures/Getty; D’Aniello by Gary Landsman; others courtesy of the Carlyle Group

Carlyle’s brain trust, clockwise from above: Cofounders Dan D’Aniello, a former high-school gymnast and Marriott executive who concentrates on real estate and operations, and Bill Conway, former chief fi nancial offi cer of MCI and now Carlyle’s top dealmaker; Ed Mathias, who raised the cash that got Carlyle started and now focuses on venture- capital deals; former White House offi cial Dick Darman, who has become more mellow and rich at Carlyle.

If you have heard of the Car- Democratic congresswoman Cynthia lyle Group at all, you probably know it McKinney, who gained notoriety this year in the black-helicopter version made popular in a confrontation with Capitol police, by in the movie Fahrenheit pointed a finger at Carlyle after the 9/11 subcommittee, but the 1976 campaign for 9/11 and by writers like Maureen Dowd of attacks, claiming that “persons close to this the White House fi zzled. , who recently referred administration are poised to make huge Then he lucked into working with Stu- to Carlyle as “the creepy John Grisham–style profi ts off America’s new war” and that de- art Eizenstat on the presidential campaign Washington firm . . . suffused with Arab spite “numerous warnings,” they did not of a Georgia governor, , connections and money.” Carlyle has been alert the “people of New York who were who won the Democratic nomination and tagged as the inspiration for the firm that needlessly murdered.” She asked, “What do then defeated incumbent president Gerald tries to get its brainwashed candidate into they have to hide?” Ford. Eizenstat was named domestic-policy the White House in the 2004 remake of the The conspiracists are right about Carlyle’s adviser. “I was Stuart’s deputy,” says Ruben- movie The Manchurian Candidate. employing many out-of-work political stein. “So I’m 27 years old. I’ve got an offi ce As Chris Ullman, Carlyle’s communica- celebrities. In addition to former president in the West Wing of the White House.” tions chief, admits, “Carlyle is an easy tar- George H.W. Bush, they have included one- He practically lived there. In early 1978, get.” The only book on Carlyle, a slim, over- time Secretary of State James Baker, Defense Rubenstein gained minor celebrity as a sort wrought volume called The Iron Triangle: secretary Frank Carlucci, and British prime of king of the wonks. He became the sub- Inside the Secret World of the Carlyle Group minister John Major. A common view of ject of a fi ve-paragraph story in Newsweek, by Dan Briody, says on its jacket fl ap: “Ac- the fi rm is that it has succeeded by practic- coauthored by Eleanor Clift, with the head- cording to some, the Carlyle Group is a ing what Michael Lewis, in a 1993 New Re- line WHITE HOUSE WORKAHOLIC. The article company that epitomizes corporate crony- public article, called “access capitalism.” In said that while Carter was typically the fi rst ism, confl icts of interest, and war profi teer- other words, old pols beguile investors into person to report for work in the West Wing ing—and they may be right.” giving Carlyle their cash, then the pols fi nd of the White House each morning, Ruben- In a long article in Le Monde, the daily defense companies for Carlyle to buy on the stein was second. newspaper of the French intelligentsia, Eric cheap, then the pols cajole the Pentagon “But when Carter calls it quits about Leser wrote, “Carlyle is a unique model, into giving these companies big contracts. sixteen hours later, Rubenstein is usually assembled at the planetary level, on the Big profi ts result, and Carlyle and its inves- still toiling . . . . He rarely leaves before 11 capitalism of relationships. . . . The group tors make lots of money. o’clock at night, even on weekends, and he incarnates the ‘military-industrial complex’ In the early days, it’s true that Carlucci frequently stays as late as 2 in the morning.” against which Republican Dwight Eisen- was critical in identifying defense deals, Bush Living in an efficiency apartment, hower warned the American people.” and Baker opened doors, and Carlyle often Rubenstein didn’t have enough money to If you Google “Carlyle Group,” you’ll fi nd promoted the Washington connections as buy a car. He skipped breakfast, ate lunch in thousands of entries touting conspiracy theo- a branding strategy. But today, the politicos the West Wing mess, and dined on yogurt ries—the main one being that George W. Bush are gone—they’re no longer needed. The big and crackers from a vending machine. started the war on terror in order to enrich his names Carlyle has been attracting are former “Machine food,” he said, “is underrated.” father, a Carlyle adviser from 1998 to 2003. CEOs like Kent Kresa of Northrop Grumman,

WASHINGTONIAN 3 JUNE 2006 The Carlyle Group is headquartered at 1001 Pennsylvania Avenue, between the Capitol and the magazine White House.

Washington Life Washington David Rubenstein and his wife of 23 years, Louis Giuliano of ITT Industries, and Louis How do Rubenstein and his partners do Rubenstein, in Nantucket, V. Gerstner Jr., who became chair of Carlyle in it? Being in Washington makes a difference. where their compound is on an 18-acre 2003 after leaving IBM. Gerstner’s main func- peninsula. Alice, a Harvard Business tions are to give advice on transforming the Carlyle still takes on former School graduate, worked as Donald Graham’s assistant at the Washington companies Carlyle buys and to help the fi rm government offi cials as advisers, but Post Company and as chief fi nancial become an institution that, unlike others in they’re hired more for their business expertise offi cer of U.S. News. She now chairs the business, will survive its founding partners. than their connections: Mack McLarty, who an organization that promotes native His corporate ties also are useful. “Lou Ger- was President Clinton’s chief of staff and, Alaskan art. stner,” says Dan D’Aniello, one of Carlyle’s before that, chief executive of a large util- founders, “is one phone call away from every ity company; Arthur Levitt Jr., who became —a pension fund that manages $200 bil- chief executive offi cer in the United States.” chair of the Securities and Exchange Com- lion for the state’s current and future re- mission after running an investment fi rm and tirees and has a reputation as an advocate What does a private-equity a stock exchange; and Charles Rossotti, who for socially responsible investing—bought a fi rm do? It gathers cash from outside in- cofounded American Management Systems, 5.5-percent ownership stake in the Carlyle vestors into a fund. It dips into that pool of the Virginia-based information-technology partnership. That’s the business equivalent money to buy companies, holding them for firm, and later became Internal Revenue of the Good Housekeeping Seal. Building photograph courtesy of the Carlyle Group; Rubensteins by Porter Gifford/ courtesy of the Carlyle Group; Building photograph an average of fi ve years, then selling them to commissioner. McLarty helps with Mexican Today, defense represents just 1 percent of other companies or taking them public. acquisitions; Levitt has made key introduc- the value of Carlyle’s holdings, although the The private-equity firm makes its prof- tions, including Gerstner and Warren Buf- fi rm still has expertise in businesses that are it by running the company better, by fett, to the Carlyle partners and sits on the heavily regulated or otherwise dependent restructuring it—for example, selling off boards of Carlyle companies; and Rossotti on government, including firms like Ha- subsidiaries or refi nancing loans—and, ul- focuses on high-tech acquisitions. waiian Telecom and a company called U.S. timately, by finding someone to buy it at Carlyle is now viewed on Wall Street and, Investigations Services, the largest supplier a higher price. When the company is sold, more important, among the pension funds of background checks for the federal Offi ce Carlyle takes a 20-percent cut of the gain, a that provide nearly half of its capital, as a of Personnel Management. But what now fi gure called the “carry.” top-tier fi nancial fi rm that has lots of inves- distinguishes Carlyle from its competitors is Carlyle’s success at this game has been tors and does lots of deals. It’s an established not the political nexus but its investing style remarkable. Since its founding in 1987, the organization. and the breadth of the companies it buys. fi rm has produced average returns of 33.8 “When IBM was on the top of its game, “Just take a look,” says Danielle Fugazy, percent annually. Subtract Carlyle’s carry, there was a saying that you couldn’t get editor of the trade journal Thomson Buyouts, and investors get returns of about 27 per- fired for buying their equipment,” says fl ipping through reports. “In the past few cent—compared with the 12 percent the William Walton, head of Allied Capital, months, they have done a manufacturing stock market gained in the same period. a Washington-based company that’s also deal, an education deal, a consumer-prod- Usually, high returns come with high in the buyout business. “Well, now you ucts deal, a buildings deal, and a fi nancial- risk, but Carlyle’s strength is its consistency. can say, ‘You can’t get fired for investing services deal.” The firm has lost money for investors in in Carlyle.’ ” Carlyle owns such household names as only 3 percent of the buyout deals it has In early 2001, the giant California Public Hertz, Dunkin’ Donuts, and Baskin-Rob- completed. Employees Retirement System, or CalPERS bins. In early April, the firm finished rais-

WASHINGTONIAN 4 JUNE 2006 ing $4.5 billion for two funds to invest in you have to spend all of your time calling raised $12 billion—to be, as Rubenstein energy, including renewable infrastructure, people, begging them to get on the boat. himself puts it, “a guy who wears suspend- like a giant solar-generating operation in If I don’t have it occupied, it’s like a hotel ers, smokes cigars, chases women, and plays the Mojave Desert. Among scores of other room that’s vacant at night.” Second rea- golf.” Rubenstein does none of those things. properties, Carlyle owns an educational-soft- son: “I’m not a boat person.” His only concession to Wall Street conven- ware provider based in Washington (Black- What kind of person is he? Back in his of- tionality is the dark pinstriped suit, white board), a chain of acute-care hospitals (Life- fice on Pennsylvania Avenue, I asked him shirt, and red Hermès tie (only once I saw Care Holdings), the nation’s ninth-largest what he did in his spare time. him wear a blue tie). He’s been married for cable-TV company (Insight Communica- “This,” he said, pointing to the desk. 23 years, has a daughter at Harvard; another tions), a maker of invisible teeth straighten- daughter, a competitive skier, on the way to ers (Align Technology), the world’s largest To those who know him, Harvard in September; and a son in eighth supplier of artifi cial Christmas trees (Boto Rubenstein is the subject of won- grade at a local private school. International), an infant-car-seat manufac- derment and speculation. Much of Carlyle’s Spend some time with Rubenstein and turer in Britain, a jet-engine maker in Italy, success is owed to the division of labor you understand some of his appeal. “David the largest heavy-equipment manufacturer among the three founders: William Conway is extraordinarily intelligent, focused, and in China, and a job recruiter in Japan. is the investment specialist, admired in the charming,” says Levitt, who advised Carlyle Middle East money—the subject of many of industry for his ability to judge and structure both before and after he was at the SEC. the conspiracy tales—represents roughly the deals. Dan D’Aniello, number two on the But Rubenstein’s sense of humor is as dry same proportion of Carlyle’s investment dol- investment side, concentrates on real estate as dust, and he doesn’t spend time chitchat- lars as it always did: 3 percent. There’s virtually and on operations—Carlyle prides itself on ting. “He’s not a schmoozer,” says a friend, no money from ; almost all of it having a strong back offi ce, where the checks but he does like gossip in small helpings. comes from small Gulf states like Kuwait and are cut, the forms are fi lled out, and the re- He perseveres. One investor turned Qatar and from Arabs who live in New York ports are written. Rubenstein is the asset Rubenstein down on eight sales calls, then and London. People who fall for the Michael gatherer, the money raiser, though he has a relented on the ninth go-round. The inves- Moore vision of Carlyle, says Fugazy, “don’t hand in investments as well. tor went on to become Carlyle’s largest. understand how private equity works.” Why does the troika work so well? “We’re “Nobody realized he would be the fund- The way it works is that investment dollars not on top of each other,” says Rubenstein. raiser par excellence,” Arthur Miltenberger, fl ow to fi rms that have great track records. “We don’t socialize.” who handled the Mellon family’s money, Carlyle was started with $5 million of One Carlyle watcher says that the key to says about Rubenstein. “It isn’t what you other people’s money by four young men success is that the three wives are not jealous expect when you meet him.” who had never made a private-equity deal. of one another as none wants to be a DC Still, says Edward Mathias, a Carlyle man- Today, Carlyle has 653 employees in 14 socialite and as they rarely see each other. aging director who, as an executive at T. countries and has $39 billion under man- “Wives can ruin partnerships,” says the ob- Rowe Price, was present at the creation, Ru- agement—which means, even with a mod- server. “But not this one.” benstein has qualities that encourage people est amount of borrowing, it can do deals A fourth partner, Stephen Norris, left af- to turn over large sums to him. “He is persis- worth a total of about $150 billion. ter seven years. Norris’s more fl amboyant, tent and unbelievably direct,” says Mathias. independent, mercurial style did not sit well “He answers questions on the spot. He gives From his White House vend- with the other three current partners, and the impression that he is going to be success- ing-machine days, David Ruben- his exit, to run his own fi rm, was negotiated. ful, and you ought to get aboard.” stein’s career took some unlikely turns. By all accounts, it was unpleasant. Rubenstein doesn’t seem to sleep, which Now, 29 years later, he’s not a lobbyist or All three also place a high value on mod- helps. I fi rst interviewed him on a Friday. The a deputy Treasury secretary or a lawyer at esty. When I ask Rubenstein whom he next day he was fl own in the Gulfstream jet he Covington & Burling like his mentor Ei- admires, he says George H.W. Bush, father owns to Japan, where he dined Sunday with zenstat. Instead, Rubenstein, with two of the current president: He’s “an easygo- his staff and some investors. Monday he had other founding partners, runs the Carlyle ing, nice, polite, gentle, and charming indi- nine meetings, then a dinner speech, then a Group. Besides his home in Bethesda, he vidual without a big ego.” fl ight to Germany. On Tuesday and Wednes- has a 10,000-square-foot house in Beaver day in Frankfurt, he gave four speeches and Creek, Colorado, and a compound on an Collectively, Rubenstein, met with investors and staff. Rubenstein picks 18-acre peninsula in Nantucket. In 2004, Conway, and D’Aniello—David, up the itinerary: “I got on a plane and fl ew to he gave $10 million to the John F. Kennedy Bill, and Dan—are known in the firm as New York, where I spent all day Thursday in School of Government at Harvard. “DBD.” Richard Darman, one of Carlyle’s meetings and went to the Asia Society dinner In many ways, Rubenstein has changed managing directors, describes the firm’s Thursday night. And I left that dinner and fl ew not a whit. He’s still a workaholic and an as- decision-making process for investing in down to Duke, where I’m on the board, and cetic. He doesn’t drink or smoke or eat meat. companies: “The fund has veto power, but it had meetings all day Friday.” He fl ew back to When I went to lunch with him one Sunday also needs the approval of something called Washington late Saturday for more meetings in Georgetown, we skipped the restaurant the investment committee. The investment and watched his son’s basketball game. On at the Four Seasons, our meeting place, be- committees are either DBD plus a few other Sundays, he and the other two founders meet cause he thought it was too noisy and instead people or are one or two of DBD plus a at a McLean hotel for a two-hour breakfast to walked down the street to La Madeleine. He couple of other people.” discuss how the business is going. dined on a bowl of lettuce without dressing. Rubenstein, primus inter pares of DBD, Rubenstein travels on business 250 days He doesn’t ski or sail. I had heard that he doesn’t look like a salesman. Far from domi- a year and reads ten newspapers a day and owned a 200-foot yacht. nating a room, it’s almost as if he isn’t there. eight books a week. From the time he grad- “Do you own a boat?” I asked. At fi rst, he appears shy and blends into the uated from law school at the University of “No,” he said. “The reason is, one, as I background of his offi ce. You expect some- Chicago in 1973, he says he’s never missed observe people that have these large boats, one in his position—someone who last year a day of work because of illness. “He works

WASHINGTONIANWASHINGTONIAN 60 5 JUNE JUNE 2006 2006 harder, longer hours than anyone I’ve ever W h e n J i m m y C a r t e r l o s t t o The chosen few: Carlyle senior associate Michael Gershenson of the real-estate known,” says Levitt. Ronald Reagan in 1980, Rubenstein group; vice president Mark J. Johnson, a Rubenstein has another asset as a manag- underwent another classic Washington telecom expert who grew up in Anacostia; er. “He doesn’t internalize problems,” says experience, that of being a loser. and associates Candice Szu, also in the Mathias. “He deals with them. His attitude “All these people had told me, ‘David, telecom group, who chose Carlyle for its

Photograph by Gary Landsman Photograph is, try it. If it works, do it some more. If not, you are one of the smartest young lawyers reputation for having good mentors, and M. Benjamin Dorr, who works with Ed drop it.” I’ve ever met. You are a brilliant young guy. Mathias in the venture-capital division. All Carlyle, for example, moved into the hedge- When you want a job, you call me up.’ Well, four like Washington. “It’s a great town, fund business in 2001, with a fund of funds I started calling those people right after the it’s a young town,” says Szu, 25, who, run by Afsaneh Beschloss, a former World election, and I haven’t gotten those calls like Johnson and Dorr, went to Harvard. Gershenson graduated from Georgetown. Bank offi cial and wife of historian Michael Be- returned yet. . . . When you’re out of power, schloss. It didn’t work as well as private equity. you’re a dead man.” Carlyle spun it off 18 months later. Especially if you’re a 30-year-old former school in Butler, a steel town in western Carter aide trying to sell access to the Rea- Pennsylvania. He was president of the stu- While Rubenstein was at the gan administration. Eventually, Rubenstein dent council, captain of the state-champion White House in the 1970s, he worked joined the law fi rm now known as Pillsbury gymnastics team, everyone’s friend. so late that with no one around he would go Winthrop Shaw Pittman. And this is where He still is. Like Rubenstein, D’Aniello is into the President’s private study and put his the story takes an un-Washington turn. not what you expect in a billionaire private- own memo on the top of Carter’s in-box each “I didn’t really enjoy what you had to equity executive. He’s Rubenstein’s oppo- night. That way, it would bypass the gatekeep- do to be a successful Washington lawyer/ site, bubbling over with enthusiasm. I ask ers and be read fi rst the next morning. lobbyist,” he says. “I didn’t want to raise him about travel. “I love to travel,” he says. T he green-eyeshade types at the Of- money for politicians.” “Occasionally, the family can double up on fi ce of Management and Budget were not He also realized that “the skills you acquire a business trip and have fun. This is my life! happy about being undermined by some to be a great young lawyer are acquired years Really, I levitate out of bed. I don’t get out of Rubenstein’s spending memos, so, he four to six or seven out of law school. Well, of bed. What a gift! What a gift to run to says, “they hired a young woman to fi gure I was in the White House then, so I didn’t work in the morning.” out what some of my tricks were to get the acquire those skills.” What he found he did “Dan is a regular guy,” says a colleague. President to do certain things.” very well was getting business—that is, rain- “He’s a sort of balance wheel for the other The young woman—Alice Rogoff, a re- making, bringing clients to the fi rm. two. His big thrill is getting up in front cent Harvard Business School graduate— of the audience and introducing the tal- did figure out how Rubenstein got his Wh e n D a v i d R u b e n s t e i n w a s ent [like Tony Bennett or the cast from memos to the top of the pile. She then put growing up in Baltimore’s religious Chicago] at the annual investor confer- her memos on top of his. “I didn’t talk to ghetto around Park Heights Avenue, Dan ence.” He’s been married 30 years, has two her for a couple months because I was so D’Aniello, three years older, was a big man daughters in their twenties, and devotes mad. But ultimately we got married.” on campus of the class of 1964 at a high himself to an entrepreneurial internship

WASHINGTONIANWASHINGTONIAN 616 JUNEJUNE 20062006 program he funds at his alma mater, Syra- Boulevard to work together. At the time, mergers and acquisitions, Bruce Wasserstein cuse University. we both lived in Hillmead, a development writes about “a legendary early LBO,” or But growing up was not easy. D’Aniello’s of split-level ranch homes in Bethesda. : father died when Dan was eight, and he Conway has moved up. In 1999, he bought “In 1981, Wesray, an investment partner- went to work in a food market at nine. He Merrywood, the 17,000-square-foot man- ship owned by former Treasury secretary was raised by his mother, an insurance claims sion on seven acres overlooking the Po- William E. Simon and investment manager adjuster who was also a pianist. tomac in McLean where the future Jackie Ray Chambers, purchased Gibson Greet- D’Aniello went to Syracuse on a scholarship, Kennedy moved when her mother married ings from a stumbling RCA. Debt financ- joined the Navy for three years, then went to Hugh Auchincloss. Conway sold Merry- ing provided $79 million of the $80-million Harvard Business School, Trans World Air- wood last year for $24.5 million to Steve purchase price. Gibson’s existing managers, lines, PepsiCo, and fi nally Marriott. Case, cofounder of AOL. who stayed on to run the company, owned In the 1980s, J.W. Marriott Jr. had assem- D’Aniello, by contrast, lives in the same 20 percent of the common equity. A year bled a kind of corporate SWAT team, doing Vienna house he owned when he was at later, Bill Simon looked like a genius.” mergers and acquisitions and fi nancing bil- Marriott. He jokes that at a Carlyle gath- The recession ended, corporate operating lions of dollars of hotel deals. “I was working ering, employees were shown slides to help profits rose, and the stock market turned with one powerhouse of a team there,” says them distinguish among DBD. First, a big around. On May 19, 1983, Wesray took D’Aniello. It included Steve Bollenbach, house in Nantucket. Next, Merrywood. Fi- Gibson public, selling about a third of the now CEO of Hilton Hotels; Al Checchi and nally, for D’Aniello, a log cabin. company for $96 million. In all, Simon and Gary Wilson, who in 1989 led a leveraged A high-profile home like Merrywood Chambers would reap a $250-million profi t buyout of Northwest Airlines (Wilson is still doesn’t fi t the Conway persona. He’s a mem- on a $1-million investment. chair of NWA, the parent company); and ber of Burning Tree golf club (with a 15 Rubenstein took notice. He went to Bill John Dasburg, former CEO of Burger King handicap), but he’s low-key and shuns public- Miller, his colleague from the Carter admin- and now head of DHL Airways. ity. He’s a Catholic who goes to Mass almost istration, and said, “Bill, you were secretary But what was occupying much of every day, profoundly admires his father, and of the Treasury, like Bill Simon, and you D’Aniello’s time was an adventure that brags about his son, a Georgetown Law stu- were chairman of the Fed. So why don’t we has become known in some quarters as the dent who works for the DC public defender. form a fi rm in Washington that can do what Great Eskimo Tax Scam. The Eskimos were In his thirties, Conway, like D’Aniello, Bill Simon did, these kinds of buyouts?” the force that brought together D’Aniello, was working for what was then one of Wash- Miller agreed, and Rubenstein recruited Norris—who was also a Marriott execu- ington’s few large national businesses. Both three employees for him, including Alice tive—and Rubenstein. Marriott and MCI were run by very smart Rogoff, who was working as Donald In 1984, a law was passed allowing native leaders. The late William McGowan, who Graham’s assistant at the Washington Post corporations in Alaska—that is, Eskimo- recruited Conway, was probably the most Company. owned companies created by Congress to gifted CEO in the city’s history. He broke G. William Miller & Co. evolved in a dif- manage native lands—to sell their losses to the AT&T monopoly and built a small com- ferent direction from what Rubenstein had businesses looking for tax write-offs. The pany providing communications services to in mind. Rather than taking bold positions Marriott executives, working with Ru- truckers into the nation’s second-largest like Bill Simon, Miller preferred a quiet, ad- benstein at Shaw Pittman, discovered the long-distance carrier. visory role. But Miller, who died in March Eskimo clause and vigorously bought the “You know,” Conway told me, “the at 81, can be called the founder of Wash- losses to offset gains. world is full of people who do the irrelevant ington’s fi rst buyout fi rm—though it bears perfectly. McGowan was exactly the oppo- little relation to the Carlyle Group of today. Meanwhile, the last of the site. He did the essential about as well as it Rubenstein’s wife, Alice, left the Miller founders, William E. Conway Jr., was could be done. . . . The other big thing I firm shortly after joining it. She went to following a more conventional path. He learned from him is to try to fi gure out what U.S. News & World Report, where she and grew up in New Hampshire, where his fa- people can do rather than what they can’t I worked together for Mortimer Zucker- ther, now a consultant and author of several do. Nobody can do everything, so I’ve tried man—she for 12 years as business manager books on management, worked his way up to learn what can somebody do, and then I and chief fi nancial offi cer, I for just two as to chief executive officer of Nashua, then put them in a job they can do.” executive vice president. a Fortune 500 manufacturer. Young Con- Dan Akerson, who followed Conway as She is a down-to-earth, engaging way graduated from Dartmouth in 1971, CFO of MCI and then joined Carlyle much woman who is no slouch in the workaholic then worked for a Chicago bank and got his later (after stints running such businesses department. When her fi rst child was born, MBA at night at the University of Chicago. as General Instrument and Nextel Com- she went back to work at U.S. News in ten One of the bank’s clients was MCI Com- munications), was also infl uenced by Mc- days. Today, in one of the coincidences munications, and in 1981, Conway was Gowan. “The one thing I learned from that decorate this tale, Rogoff chairs the recruited as treasurer, eventually becoming him,” said Akerson, “is that you can just Alaska Native Arts Foundation, which she chief fi nancial offi cer. never, never quit.” cofounded. Conway learned a lot about finance Good companies spring from other good What about Scarsdale Fats? at MCI, which was trying to grow fast, companies, and without Bill Marriott and Immortalized in Adam Smith’s 1967 building out a fiber-optic network with Bill McGowan laying the groundwork by book, The Money Game, Scarsdale Fats, little funding. MCI’s angel at the time was bringing talents like D’Aniello and Conway a.k.a. Bob Brimberg, now deceased, was a Michael Milken of Drexel Burnham Lam- to Washington and inspiring them, there Wall Streeter who had a knack for conven- bert, who in 1983 helped the company raise might have been no Carlyle Group. ing fi nanciers informally to talk about what $1.1 billion in what was then the largest they were buying and selling. debt fi nancing in history. Two other people were neces- “He exists, he gives lunches and every body Conway and I have something in com- sary. One was William Simon, the other comes,” wrote Smith—the pen name of mon. We used to take the bus down Bradley Scarsdale Fats. In Big Deal, his history of George Goodman. In the 1970s, Scarsdale

WASHINGTONIANWASHINGTONIAN 130 7 JUNE JUNE 2006 2006 Fats brought his operation to Washington. “He had dinners, usually at the Madison Hotel,” says Ed Mathias, who makes it a point to try to know everyone. “His whole While Carlyle is business was bringing people together.” In mainly known for buying Washington, he brought the fi nancial types businesses, the fi rm has been investing heavily in into contact with the political types. Smith Washington real estate, offers a Wall Street/Washington anecdote: such as this Clarendon “Scarsdale is supposed to have intro- building in Arlington. duced Neddy Johnson, the junior Johnson of Fidelity, to a senator and to have said, ‘This man controls two billion dollars.’ And the senator says, ‘So what, we spend that in a half an hour.’ ” It was at a Scarsdale Fats dinner that Mathias met Rubenstein. They kept in touch.

Let’s pause to explain more about how private equity works. There are three parts to the process. First, the private-equity fi rm goes around to large investors—pension funds like CalP- ERS, large insurance companies like Equi- table Life, hedge funds like the Soros Fund Management as well as banks, university endowments, and wealthy individuals—and gathers commitments for a fund. Carlyle has 900 investors in 55 countries. About 65 percent of Carlyle’s money comes from Spending Billions on buildings with problems and turning them the USA, 25 percent from Europe, and 6 Local Real Estate around. An example is 261 Fifth Avenue, at percent from Asia; the rest is from Latin 29th Street in New York. It was 85 percent America and the Middle East. “In the last 18 months,” says Robert leased when Carlyle bought it. “We leased it In recent years, the typical pension fund or Stuckey, director of Carlyle’s US real-estate to 97 percent,” says Stuckey, through capital university endowment has been increasing funds, “we’ve invested about $1.4 billion in improvements and good marketing and sold the share of its assets devoted to private eq- Washington. We’ve done 18 projects. That it in 18 months, making a profi t of 2½ times uity. Today, the average proportion is 5 to 10 involves offi ce and residential, hotel, retail, Carlyle’s equity investment. percent, but Yale’s endowment, considered senior living, and mixed use.” In Washington, Carlyle is going through the the best in the business, has had as much as Carlyle is one of the biggest real-estate same process with 1275 K Street, Northwest, one-fourth of its assets in private equity. players in Washington and New York, but the turning the building into a “core investment” At the time they make their commit- fi rm works quietly, with partners’ names, not for a buyer who won’t have to worry about ments, the investors don’t know exactly its own, in the public eye. hunting for tenants. Washington real estate where their money will go beyond broad Stuckey likes Washington because “on the “has a strong international following, so categories. Carlyle has funds for Europe, demand side, the metro area benefi ts from a there are always buyers here,” says Stuckey. Asia, real estate, energy, —a strong job-growth engine, which adds over “I would say the District is perceived as the total of 39. The biggest are the US buy- 60,000 jobs per year” while on the supply best offi ce market in the country.” out funds. There have been four to date. side, “it’s relatively diffi cult to develop new Carlyle also owns condominium projects Carlyle Partners I closed in 1990 with properties.” Also, he says, “our headquar- like the new one at 1010 Av- $100 million. CP II, as it’s called, closed ters is here, so we have been able to find enue, Northwest, and, with Jerome J. Parks in 1996 at $1.3 billion; CP III in 2000 opportunities.” Companies, is developing 12 acres in down- at $3.9 billion; and the largest, CP IV, in Carlyle now has seven real-estate funds, town Annapolis into a complex called Park March 2005 at $7.85 billion—at the time with total equity of $4 billion (indicating buy- Place that will include condos, a hotel, offi ces, the largest buyout fund in history. ing power, based on typical borrowing, of retail space, and a performing-arts center. With the target money raised, the fi rm about $12 billion). Four funds concentrate Looking ahead, Stuckey likes the multi- moves to the second stage: making buys. on the USA, two on Europe, and one on Asia. family rental market in the Washington area, That’s the job of the fund’s investment The funds own 99 pieces of property, in- the offi ce sector in Virginia, and hotels prac- professionals. For CP IV, there are 66 of cluding 77 acres on Manhattan’s West Side tically everywhere. them, based in Washington, New York, between 59th and 65th Streets, purchased Stuckey became head of Carlyle’s real-es- and Charlotte and led by Allan Holt and from Donald Trump and a consortium of Chi- tate operations at the age of 36 after a stint Daniel Akerson, both MCI veterans. The nese investors last year for $1.8 billion. as a wunderkind at CarrAmerica, a Wash- team has made eight acquisitions in the The internal rate of return on Carlyle’s ington-based REIT. Blackstone Group, one of fi rst 12 months. It’s a diversifi ed portfo- real-estate purchases has been about 30 Carlyle’s private-equity rivals, announced in lio that, in addition to Dunkin’ Donuts percent annually. How do you get num- March it was buying Carr for $5.6 billion. and Hertz, includes a maker of axles and bers like that? Stuckey likes buying older —JAMES K. GLASSMAN brakes, a maker of steel pipe, two health-

WASHINGTONIAN 8131 JUNE JUNE 2006 2006 “We want people,” says David Rubenstein, “who have their egos in check and aren’t Masters of the Universe.” care companies, and one each in software and video services, for $2.6 billion. The cash who work here invested in these deals,” says and telecommunications. investment from CP III was $146 million. Rubenstein. “And it helps convince inves- If you’re an investor who has committed “Within two months,” says Akerson, “we tors we are serious.” $10 million to a fund, you aren’t asked for did a dividend recap on 40 percent of the What about the other $100 million or your money all at once—but you do have to equity, and then we took it public.” so that Carlyle earns from the carry on a pay an annual fee of 2 percent of the total, or In other words, nearly immediately, the $1-billion deal? It goes to the partnership $200,000. When the fi rm decides to make a investors got about $60 million back. With- that owns the private-equity fi rm and pays purchase, it goes back to you for your share. in another six months, PanAmSat launched its operating expenses. Carlyle managing You might be asked for $1 million, for ex- an initial public offering, and the investors directors—there are 104—make $275,000 ample, a few months after the fund closes got all the rest of their initial investment a year (just raised from $250,000, where it and another $500,000 a month later. while hanging on to a big chunk of PanAm- had been since 1987), and there are more Sat stock. Then in August 2005, another than 500 other employees, about half in- When a private-equity firm publicly traded satellite company, Washing- volved in back-office operations. Carlyle makes a purchase, it uses money ton-based Intelsat, announced it was buy- also hands out bonuses. from the fund plus outside borrowings and ing PanAmSat. That deal is expected to be Of the remaining profit after expenses, sometimes additional equity. Last year, Car- approved soon. If it happens, says Akerson, about half goes to the three founding part- lyle and two other fi rms bought Hertz, the “then, within about 2½ years, we’ll make ners, one-twentieth to CalPERS, and the world’s largest car-rental company, from over four times our money.” rest to Lou Gerstner and the 42 other part- Ford Motor Company for $15 billion. The Another CP III acquisition was Dex ners, all managing directors. private-equity firms put up $2.3 billion Media, a phone-book publisher bought from their investors and borrowed the rest. from another motivated seller, Qwest Com- The cash rolls in—and out. In That’s more leverage than usual, but Hertz munications, in November 2002. The price 2005, Carlyle distributed to in- was a special case. It had a fl eet of 450,000 tag was $7 billion, which Carlyle split with vestors more than $4.6 billion: $3 billion vehicles, and, says Conway, “those cars were another private-equity firm, Welsh, Car- from corporate buyouts, $800 million from very fi nanceable and very liquid.” The loans son, Anderson & Stowe. Each put up $809 energy deals, $500 million from real estate, came at low rates from Lehman Brothers and million—a Carlyle record. A year later, Car- $260 million from venture-capital invest- Deutsche Bank. Hertz was owned by the lyle took out $375 million in a dividend ments, and $96 million from what’s called kind of company you want to buy from—a recap, then another $125 million. In July “leveraged fi nance,” or high-interest lend- motivated seller in need of cash. 2004, Dex went public, and Carlyle sold a ing. Europe was hot, generating $1.3 bil- Says Akerson: “We looked at Hertz and large chunk of stock, pulling out another lion, about the same as the United States. said, ‘Gee whiz, this is an interesting com- $367 million for investors. Then in Janu- The new Europe fund is producing an 82 pany!’ ” There were economies that could ary 2006, R.H. Donnelley, a publicly traded percent internal rate of return. In Japan, be taken quickly, including a bloated infor- printer and publisher, bought most of Dex, Carlyle made more than fi ve times its money mation-technology department. “So,” says and Carlyle took out $480 million more. on Asahi Security, a cash-management com- Akerson, “you say to yourself, ‘Can we go The total now stands at $1.35 billion pany, in a sale to Toyota Industries. in there and manage this company even extracted for investors on an investment In a typical year, it is not unusual for a marginally better?’ And the answer, as we of $808 million. But Carlyle continues to Carlyle managing director to make more did our due diligence with our partners, was own 9 million shares of Donnelley, valued than $1 million. Sometimes, if a fund scores a resounding yes.” The new owners discov- at about $500 million. So, if the fi rm cashed a huge profi t, there are multimillion-dollar ered that a hidden gem—Hertz Equipment out now, fund investors would more than payments—sent in what Bill Walton of Allied Rental Corporation, which rents construc- double their money—a gross profit of $1 Capital calls “a life-changing wire transfer.” tion cranes, backhoes, and the like—had billion—in 3½ years. As for the three founders, my research in- a relatively young inventory and a strong Carlyle’s cut of the billion-dollar profi t, dicates that the net worth of each is around competitive position. its carry, is 20 percent, or $200 million. $500 million—not including the value of The process of buying companies their ownership in the partnership itself. usually goes on for fi ve years until the fund Where does the $200 million Since CalPERS bought 5.5 percent of Car- exhausts its capital. Then, over the next fi ve go? Rubenstein says that because of lyle for $175 million, we can deduce that years (and occasionally more—Carlyle has competition for top dealmakers, Carlyle gives the value of the entire partnership is $3.2 owned U.S. Investigations since 1997), between half and three-fi fths of the carry to billion. But that was in 2001. Carlyle today the fi rm conducts the third part of the pri- the team that runs the fund. Imagine that as has three times as much money under man- vate-equity process: selling the companies. a team member you are entitled to 2 percent agement, and if it went public, it could be CP III is six years old. It has bought about of its share of the carry. You would pocket, in worth more than $6 billion—which means 30 companies and has “realized,” or com- this example, about $2 million. that each of the three, if he cashed out, pletely sold, eight of them. Sometimes the In addition, Carlyle’s investment profes- could collect about $1 billion. sales happen faster. And sometimes the fi rm sionals can invest their own money in the When I showed Rubenstein an article in can do a “dividend recap,” pulling cash out funds without paying the carry. These op- Forbes that listed nine private-equity execu- of the purchased business and distributing portunities are the main incentives for for- tives—including Stephen Schwarzman of it to the investors. mer CEOs and Washington offi cials—like the Blackstone Group and Thomas H. Lee In August 2004, with two private-equity Rossotti and Levitt—to serve as advisers to of Thomas H. Lee Partners—as billionaires fi rms as partners, Carlyle bought 80 percent the fi rm. “We now have probably a billion and asked why he wasn’t on it, he said: “We of PanAmSat, a satellite provider of audio and a half dollars of the money from people spread the wealth.”

WASHINGTONIANWASHINGTONIAN 132 9 JUNE JUNE 2006 2006 If you want to join Carlyle, you tacts with so-and-so? Does anybody know Blackstone Group. An African-American, he have plenty of company. It hires 13 someone on the board of this company?’ grew up in DC’s Anacostia, started school to 17 people annually for a two-year asso- people help you.” off Naylor Road, then transferred to Murch ciates program plus a few others at higher Elementary, a public school in Northwest levels. About half the associates are women. If you’re planning to get a start DC, and eventually to St. Albans. When I The three founders are aware that the fi rm at Carlyle as a summer intern, forget it. asked Johnson how he got to St. Albans, he is short on females. “The dictate from on The firm takes none. The partners don’t smiled and said he took the 36 bus. John- high is to hire more women,” says a Carlyle want to be pressured to hire clients’ kids, son received his undergraduate degree from executive. “The headhunters know it.” and the work is too sophisticated for college Princeton and his MBA from Harvard. Only seven of the 104 managing direc- students—or even the newly graduated. In- Like everyone on Carlyle’s investment tors and only three of the 46 partners are stead, says Allan Holt, co-head with Akerson side at the level of senior associate and women. But Carlyle has two of the high- of the US buyout group, “We tend to bring above, Johnson, a vice president, gets a piece est-ranking women in the industry—Sandra in people after two years on Wall Street.” of the acquisitions his team makes. He fl ies Horbach, head of the global consumer and Each year Carlyle hires associates fresh to Japan every two months to work with a retail team, and Karen Bechtel, co-head of from investment-banking fi rms like Gold- wireless company called Willcom, but he’s global healthcare. Horbach spent 17 years man Sachs and Lehman Brothers. Roughly happy to be back in his hometown (his wife at Forstmann Little & Co., a private-equity half work in Washington, and most stay at is from Northern Virginia) after his time in fi rm, after graduating from Wellesley, spend- Carlyle for two years and leave, usually to New York. Does he worry about being out ing time in Shanghai in the early 1980s, and get their MBAs. Afterward, some return to of the Wall Street loop? Not at all. “I try to going on to business school at Stanford. Carlyle as senior associates. make sure I am not out of the loop in To- Bechtel, a graduate of the University of Tex- Carlyle recruits its associates almost as kyo,” he says. “New York is a lay-up.” as and Harvard Business School, spent 28 though they were CEOs, using headhunting The associates with whom I spoke were years at Morgan Stanley. fi rms. Candice Szu, for instance, graduated enthusiastic about Washington. “It’s a great What is Carlyle looking for? The baseline from Harvard College in 2002 and went to town, it’s a young town,” says Szu, who has is intelligence and hard work. It is not a work at Goldman—Carlyle’s favorite source lived in California, New Hampshire, New place for eccentrics or loners. “You might of talent, in part because its cooperative at- York, , and Taiwan. be a brilliant, brilliant person and a great mosphere is closest to Carlyle’s own—in a “The one word that comes to mind,” says deal doer,” says Rubenstein, “but if you two-year program analyzing telecommuni- Michael Gershenson, “is how livable Wash- can’t work as part of a team, you’re prob- cations companies. After the fi rst year, she ington is. You have a lot going on here, ably not going to work out here.” We want started getting calls from headhunters and but people are not on top of each other.” people, he says, “who have their egos in meeting with fi rms. Szu, now 25, liked pri- Gershenson, a senior associate with a de- check and aren’t Masters of the Universe,” vate equity because “I knew I wanted to be gree from Georgetown, is in the real-estate the term for Wall Street hotshots that Tom on the principal side”—that is, to work with group. He says that over the four years he’s Wolfe made popular. a company that owned things—“not just be been at Carlyle, he’s seen the fi nance sector D’Aniello told me about a slide show he an adviser.” She chose Carlyle because of its in Washington grow signifi cantly. There’s put on for Carlyle employees. “One had reputation for having good mentors. now an organization for young profession- the three monkeys—don’t hear you, don’t M. Benjamin Dorr, 27, an associate in als in private equity. see you, don’t talk to you—and I said, ‘No the venture-capital division in Washington, isolationists.’ The second slide had a baby agrees. A 2001 Harvard graduate, he came Holt, who has been at Carlyle crying: ‘No crybabies.’ And the third had to Carlyle—after stints at Morgan Stanley in since 1991, says that Washington is this Mexican bandito with bullets across his New York with Mary Meeker, a leading in- probably a plus in recruiting: “So, far we’ve chest and said, ‘No mercenaries.’ vestment banker in high technology, and at been able to attract talented people from “We want people who want to be part- Salomon Smith Barney in Silicon Valley— Wall Street and top business schools.” ners, colleagues. Life is too short. You want to work with Ed Mathias. What do you do your first few years at to get up in the morning and look forward Harvard pops up a lot. We analyzed the Carlyle? “Right from the start,” says Szu, to the people you work with. The skill base backgrounds of the 362 Carlyle profession- who will go to Harvard Business School is presumed. The compatibility thing is the als—108 in Washington—listed on its Web later this year, “you’re an integral part of big issue.” site and found that Harvard accounts for the deal team. You look at possible deals, Most of the private-equity business—or 20 undergraduate and 55 graduate degrees. run models, help with the due diligence,” any other high-powered financial occupa- In Washington, we found that among working with lawyers and accountants and tion, like bond trading or investment bank- professionals . . . doing a lot of on-site work with companies ing—does not lend itself to cooperation and 92 are men, 16 women. that may be acquired. camaraderie. You get paid mainly for what 19 have Asian surnames. Rubenstein may be a workaholic, but he you produce, not for what the fi rm produces. Top undergraduate colleges were Har- claims that Carlyle doesn’t take smart young In fact, you might make more if you under- vard (nine), Georgetown (seven), Princeton people, drive them through hundred-hour mine your colleagues—not only refuse to (fi ve), Dartmouth (fi ve), and Duke (fi ve). workweeks, and discard them, as many help them but steal clients from them. Top graduate school for MBAs is Har- of the New York investment-banking fi rms Carlyle says it tries to be different and, vard (16), followed by the Wharton School do. “We don’t have a macho style here,” from what I saw, seems to succeed. The of the University of Pennsylvania (fi ve) and he says. idea is “One Carlyle,” introduced about fi ve the University of Chicago (three). “The investment business is about judg- years ago. Says Conway: “If you come here, But don’t conclude that it is a homoge- ment,” says Johnson. “You can’t burn and you say to anybody at Carlyle in an e- neous place. Mark J. Johnson, 32, came people out and then have them coherently mail or a voice mail or a phone call, ‘Hey, I to the telecom division of Carlyle in 2004 assess projects.” Szu, Dorr, and Gershenson need help. Does anybody know about the after working at Merrill Lynch and two pri- agree. You work hard at Carlyle, and when fi berglass business? Does anybody have con- vate-equity fi rms, J.H. Whitney & Co. and a deal is closing, the hours can be grueling,

WASHINGTONIAN 10 JUNE 2006 but the firm doesn’t eat its young. “It’s a share of the business as an incentive. The The financial industry quickly recov- more collegial here” than at a New York debt would be repaid from the company’s ered, in part because pension funds, whose fi rm, says Dorr. profits and through the sale of its subsid- stockholdings were clobbered three years in Richard Darman, who joined Carlyle in iaries. These deals were called leveraged a row, were looking for alternative invest- 1993 from the first Bush administration, buyouts because their essential element was ments to balance traditional equities. By where he was budget director, says that not debt, or leverage. 2004, there were 1,600 buyout and venture being in New York is a help. “The New York In 1984 KKR had put together its first fi rms, running 3,000 funds with a total of culture,” he says, “is still largely set by the billion-dollar buyout fund, and two years $764 billion under management. Carlyle’s investment banks, and it’s somewhat of a later the fi rm bought Beatrice, a Chicago- $7.85-billion CP IV fund was soon eclipsed dog-eat-dog mentality.” based conglomerate, for $6.2 billion. Here’s by Apollo at $10 billion, Blackstone at By contrast, Conway ended his January where the money came from: $4 billion in $10.5 billion, and, in April, Pacific 31 memo to Carlyle employees with this: bank loans, $2.5 in junk-bond financing, Group, headed by David Bonderman, once “Be humble, ethical and optimistic.” and just $407 million in equity (cash put a lawyer at Washington’s Arnold & Porter, And then there is the style of living. Wash- up by the investors). The junk bonds, key at $14 billion. ington offers a “far more attractive life” to many of the LBOs of the 1980s, were The individual deals are getting larger. than New York, says Bill Walton, whose Al- fl oated by Milken. Carlyle joined Clayton, Dubilier & Rice, one lied managing directors, making between Then, in 1988, in a similar LBO, KKR of the oldest private-equity fi rms, and Mer- $750,000 and $1.5 million a year, can buy bought RJR Nabisco in a deal immortalized rill Lynch Global Private Equity in buying far more housing for the money than in in Barbarians at the Gate, a book by Bryan Hertz last year for $15 billion. Then early New York. “And you can be eight minutes Burrough and John Helyar. RJR still stands in 2006, Cerberus Capital Management led away from the offi ce.” as the biggest private-equity deal in history a group of private-equity firms along with For Darman, Washington was important at $24.5 billion. Supervalu and CVS (which, as operating in his decision to join Carlyle. He wanted to During the 1980s, Darman, referring to businesses, are called “strategic buyers”) in stay here “because my kids were very happy a Brookings Institution study, says, “There buying Albertson’s, the supermarket chain, in school.” really was not much value creation. There for $17 billion. In April, Cerberus said it was When Darman joined Carlyle, at the same was fi nancial engineering, and . . . there was buying 51 percent of GMAC, the fi nancing time Jim Baker came on as a senior adviser, the artful creation of leverage. Once you did arm of General Motors, for $14 billion. Cer- the firm had 26 employees in a single of- it, you had the ability to attach yourself to a berus has former vice president Dan Quayle fi ce and “just $7 million—not billion, but stable cash fl ow, and the math did the rest as its chair of global investments. million—in dry powder.” At 63, he’s now automatically.” Other recent buyouts by private-equity a senior adviser and managing director at By the mid-1990s, some of the buyout fi rms include J.Crew, Toys “R” Us, Neiman Carlyle, specializing in energy, telecom, deals were producing profi ts that were quick Marcus, Georgia-Pacifi c, and Metro-Gold- and high-growth companies and sitting on and huge. Forstmann Little made $700 mil- wyn-Mayer. In Washington, Carr America, about half the investment committees that lion selling Ziff-Davis Publishing to a Japa- a real-estate investment trust, was bought make the go/no-go decisions. nese company after a year. Thomas H. Lee out by Blackstone, whose chair is Peter What’s surprising to Darman is that Car- and Bain & Co. made $500 million by sell- Peterson, secretary of Commerce under lyle has kept its collegiality for nearly two ing a division of TRW in just seven weeks. President Nixon. decades. “I wouldn’t have predicted that Later in the 1990s, venture-capital None of these deals approaches the RJR this organization would grow as it has, both deals—which involved early-stage compa- record of $24.5 billion, but I expect that re- in size and geographic scope, and still be nies with big potential for growth—domi- cord will fall fairly soon. One reason is that able to preserve that,” he says. nated. Venture investments tend to be going private has become more attractive to The answer seems to be both the division smaller and riskier, with fi rms typically tak- executives of public companies. Complying of labor among the three founding partners ing minority positions and riding on the with the Sarbanes-Oxley law, enacted after and the Washington setting, which has pro- founders’ coattails. Kleiner Perkins Caul- the Enron and WorldCom scandals and vided Carlyle with intellectual capital, given fi eld & Byers, best known of the venture applying only to publicly traded corpora- it a distinctive identity, brought it deals as a fi rms in Silicon Valley, has invested in more tions, is expensive and time-consuming. global crossroads, and kept its partners sane than 300 companies, including AOL, Am- Also, says Bill Walton of Allied Capital, and happy. azon, and Google. the scandals led to new regulations that forced Wall Street fi rms to cut back on their Rubenstein likes to say that The fun ended, for both buy- research, so smaller public companies get Christopher Columbus was the outs and venture deals, in the late ignored—and, in many cases, fi nd their stock forerunner of the successful private-equity 1990s as the high-tech bubble burst, the prices suffering. “It’s not viable to be public executive. Columbus insisted on getting stock market skidded, and liquidity dried unless your market cap is over $1 billion or reimbursed for all his expenses in advance. up. Rubenstein calls the period from 1999 you have a compelling growth story,” he says. And he negotiated a 10-percent carry from to 2002 the “dark ages” for private equity. CEOs are also getting tired of having to set Queen Isabella. Holdings lost $300 billion in value, and and meet quarterly-earnings targets or lose But the modern buyout fi rm is only three many firms went out of business. Carlyle, Wall Street’s support. They’re unhappy about decades old. In 1976, Jerome Kohlberg and run more cautiously than the others, fared having their compensation exposed in the two cousins, Henry Kravis and George Rob- well. It has lost money in only a handful of press and about being treated like criminals erts, left Bear Stearns, a Wall Street fi rm, to buyout deals, including Gemini Air Cargo, on probation—having to endorse the com- try to succeed on their own with $120,000 a Dulles-based supplier of outsourced air- pany fi nancial statement and risk jail terms. in capital. The fi rm, known as KKR, special- freighter services, bought in 1999 for $121 Lou Gerstner warns, however, that being ized in using large amounts of debt to buy million, and DigiPlex, a European commu- owned by a private-equity fi rm has benefi ts publicly traded companies. Typically, KKR nications-infrastructure company, bought and drawbacks. “For some managers,” he would retain the top managers, giving them in 2000 for $45 million. says, “the change is positive. You are no

WASHINGTONIANWASHINGTONIAN 134 11 JUNE JUNE 2006 2006 Businesses are going private. CEOs are getting tired of having to set and meet quarterly targets or lose Wall Street’s support. longer being watched by the equity markets Conway’s story: He realized that he was In 1988, Carlyle bought Oakite Products, or the media. You can concentrate on the never going to run MCI, so he started look- a chemical company. One of the three divi- long term. For others, the permanent pres- ing around for a job. Rubenstein, who, like sions went bankrupt, and the company was sure of the funds and the relentless expecta- Mathias, maintains a wide intelligence net- eventually sold at a small profi t, but the in- tion for performance is hard to deal with. work, heard about the imminent departure. ternal rate of return (or IRR, the measure of The management teams often change along He called “out of the blue,” says Conway, success in the trade) was only 8 percent. The the way.” “and he said that he and a group of guys were purchase of Coldwell Banker Commercial thinking of starting this buyout fi rm in Wash- Group also produced an IRR of only 8 per- Just as there are more com- ington, that he didn’t know me and I didn’t cent, and Ticketron’s sports and entertain- panies to buy and take private, know him, but . . . I should check him out ment division was a total loss. there are more private-equity fi rms to buy and then we should get together and meet.” Carlyle was foundering until Bob Wood- them. “All these dollars looking for returns Rubenstein had a hard time committing. ward intervened. are driving returns down” by driving acqui- Mathias recalls: “Finally he said, ‘Oh, well, sition prices up, says Bill Walton. Bargains I’ll do it.’ So I said, ‘I’ll raise the money.” In 1976, Woodward and Carl are disappearing. Mathias raised $5 million—$2 mil- Bernstein had published The Final Cash, both equity and debt, is abundant lion to operate the fi rm for two years and Days, their book about Richard Nixon’s because of low interest rates and record $3 million to invest. The capital came from self-destruction. Among other things, it profi ts. Buyouts of existing companies, on Baltimore investment fi rms T. Rowe Price highlighted the President’s anti-Semitic a friendly basis, dominate. Only one-fifth and Alex. Brown & Sons, First Interstate paranoia. “Late in 1971,” they wrote, of the money raised by private-equity fi rms Bank of Los Angeles, and the Richard “Nixon had summoned the White House goes into venture capital. King Mellon family. After a year, Mellon personnel chief, , to his offi ce In addition to Lou Gerstner, former bought out the other investors. Thirteen to discuss a ‘Jewish cabal’ in the Bureau of top CEOs getting into the private-equity years after Carlyle was launched, Mellon Labor Statistics. The ‘cabal,’ Nixon said, game include Jack Welch of General Elec- sold its interest to CalPERS for what one was tilting economic figures to make his tric and Jacques Nasser of Ford. “Back in Carlyle partner told me was the largest re- Administration look bad. How many Jews the 1980s,” wrote BusinessWeek, “most B- turn the Mellon family had ever made on were there in the bureau? He wanted to school students wanted to be investment an investment. know. Malek reported back on the num- bankers. In the 1990s, it was tech-related The new business was named after the ber and told the President that the bureau’s venture capital and dot-coms. Now, private New York hotel where André Meyer, se- methods of weighing statistics were normal equity is hot.” nior partner of the investment fi rm Lazard procedure that had been in use for years.” Perhaps too hot. Rubenstein says, “Noth- Frères, used to live. Mathias recalled that Flash forward to 1988. Malek, summoned ing this good can go on forever.” Nearly Carlyle’s founding partners were reading by George H.W. Bush, leaves the job as presi- everyone with whom I spoke—inside and Cary Reich’s biography of Meyer, and Nor- dent of Marriott Hotels that he’s held for outside Carlyle—predicted that the days of ris especially was enthralled. Reich’s book, seven years to run the Republican convention 30-percent internal rates of return are com- Financier, described Meyer’s Carlyle apart- and then become deputy chair of the party. ing to a close. ment as “a two-bedroom suite crammed With Malek back in the news, Woodward, Lately, after the carry, investors at Car- with rare Louis XIV furniture and adorned with fellow reporter Walter Pincus, revived lyle have been earning about 15 percentage with an imposing collection of Monets, the story about counting Jews (Malek found points—or 1,500 basis points, as they say in Chagalls and Picassos.” 13 in a sample of 35), and it created a furor. the trade—more than the stock-market in- “There was no serious business plan,” Malek, denying that he was anti-Semitic, dexes. Rubenstein sees that fi gure dropping, says Mathias, who is now a Carlyle manag- was now out of a job because of the up- but he is sanguine about investment dollars ing director concentrating on venture-capi- roar and looking for a place to land. His continuing to come in: “As long as you can tal deals, “but we knew that they would do ex-colleagues Norris and D’Aniello were keep 700 to 1,000 basis points ahead, you well, whatever they did.” at Carlyle. Rubenstein thought Malek, a will keep your base.” loyal lieutenant to Nixon, had been treated In the early days, Carlyle tried shabbily. “Geez,” he told me over lunch in “Some of this stuff gives me lots of ways to make money. The March, “I thought it was a little unfair.” heartburn,” says Ed Mathias. We are partners continued doing Eskimo tax-shelter Malek, then 51, did not offi cially join Car- having lunch at Les Halles near the White deals until the loophole was closed. They in- lyle. He just camped out in the offi ce, but he House, and he’s not talking about the cas- vested $1.25 million in a movie-production played a key role in luring Frank Carlucci to soulet. He’s recalling the birth pangs of the company associated with Gerald Rafshoon, the fi rm—an important moment in Carlyle’s Carlyle Group. a former adviser to Carter. They bought history, says Mathias. Carlucci, Reagan’s Rubenstein wanted to start his buyout up shares of Chi-Chi’s, the Mexican-res- departing Defense secretary, “gave Carlyle fi rm—“we called it a ‘merchant bank,’ what- taurant chain, in what Rubenstein called a credibility.” Carlucci and Malek have been ever that was,” says Mathias—but he didn’t “toehold” or “bear-hug” deal—an attempt close for more than 30 years. They served want to leave his day job at the Shaw Pitt- to take over the company by starting with a together under Nixon, and they live near man law fi rm. Still, everything was moving. small purchase of stock. Carlyle was outbid each other in McLean. D’Aniello and Norris were on board and so, by Foodmaker but still made a $3.5-million after a cold call, was Conway. (There was profi t. A similarly small profi t was generated Malek also helped bring Carlyle a fifth founder, Greg Rosenbaum, but he in a toehold deal with Fairchild Industries, a buyout the partners would rather for- dropped out after less than three months.) the Virginia defense contractor. get. “I teed the deal up,” he told me. The

WASHINGTONIANWASHINGTONIAN 135 12 JUNE JUNE 2006 2006 “We put him on the board. . . . He told a lot of jokes. . . . I kind of said to him, . . . ‘Maybe you should do something else.’ . . . His name is George W. Bush.” company was Caterair—originally In-Flite, benstein’s, are adorned with photos of the “So here we are in Washing- the airline-catering arm of Marriott, which offi ce occupant smiling with the great and ton, DC,” says Rubenstein. “When was trying to unload the business in 1989. near-great: Colin Powell, Reagan, George Frank Carlucci joined us, we were willing to Caterair had revenues of about $1 billion W. Bush at a Texas Rangers game. kind of learn the defense business, the aero- and was earning pretax profi ts of $100 mil- Thayer Capital has $1.5 billion in capital space business. Nobody wanted to get into lion. Carlyle bought it for $637 million. It and owns such companies as Qualitor, a that business because it was too complicated, looked like a great deal, but it ended up il- Michigan manufacturer of auto parts. An- too diffi cult to learn, too many arms of the lustrating the pitfalls of private equity. As other specialized partnership, Thayer Hotel federal government involved. So we began Rubenstein would say later: “It’s number Investors, has $2 billion in assets and has to say, ‘Look, we can do aerospace deals, de- one in the world. Management team has lately been selling many of its real-estate fense deals. . . .’ It just made logical sense.” been there for ten years, and Marriott said, properties—including the Marriott Ward- Rubenstein admits Carlucci’s importance: ‘We’re not going to do an auction. We’re man Park, a $300-million deal—taking ad- “Frank was really a guy who could get his going to sell it to you guys because some vantage of high prices. calls returned by almost anybody. He was on of your people used to work at Marriott.’ a lot of corporate boards. So we found him . . . What could be better?” Back in its early days, Car- to be very helpful. . . . His credibility as the The timing, for one thing. Shortly after lyle, with Norris as the point man, former secretary of Defense was helpful.” Carlyle made its purchase, the Gulf War, was developing a relationship with Prince Defense looked good to Carlyle for an- higher fuel prices, and a recession had the al-Waleed bin Talal of Saudi Arabia, a con- other reason. The Berlin Wall came down in airlines looking for ways to cut costs. “They nection that came through Alphonso Chris- 1989, the communist empire was implod- began pulling food off planes,” says Malek. tian, a lawyer at the DC law fi rm Hogan & ing, and cutbacks in the defense budget Caterair suffered. On Wall Street, it earned Hartson. The prince had about half a billion were certain. As a result, conglomerates and the nickname “Craterair.” to spend, and Carlyle advised him to buy other large corporations that had gobbled In 1990, Malek brought a 43-year-old a chunk of America’s largest banking com- up defense contractors in the 1970s and Texan to Carlyle’s attention as a possible pany, Citicorp—an investment that turned 1980s now wanted to get out. They were Caterair board member. As Rubenstein into a big success, worth $7.6 billion by the motivated sellers. later related it in a speech, Malek told him, time Citigroup was created in a merger with One of those sellers—which would emerge “ ‘Look, there’s a guy who would like to Travelers in 1998. again 15 years later with Hertz—was Ford. be on the board. He’s kind of down on Luck played a role. Carlyle won the In 1990, Ford decided to divest its aero- his luck a bit. Needs a job. Needs a board prince’s business in part because practically space division. Carlyle wanted it dearly but position.’ I met the guy. I said I don’t think every investment-banking fi rm in New York lost out to Loral, a New York electronics he adds that much value. We’ll put him on had potential confl icts of interest through company. Ford Aerospace owned a subsid- the board because—you know—we’ll do a their dealings with Citicorp. The prince lat- iary called BDM International, founded by favor for this guy,” meaning Malek. er made investments in Euro Disney, Mo- three physicists but now based in McLean Rubenstein continued, “We put him on torola, Rupert Murdoch’s News Corp., and and run by Earle Williams. It turned out the board, and [he] spent three years. Came Apple Computer. that Williams did not like the notion of to all the meetings. Told a lot of jokes. Not The Saudi connection earned fees, but it BDM being swallowed up by Loral. many clean ones. And after a while, I kind wasn’t the private-equity business. There, “Earle knew Frank,” D’Aniello recalls, of said to him, . . . ‘You know, I’m not sure it was the Carlucci connection that proved “and wanted to know whether his team this is really for you. Maybe you should much more rewarding. could manage a negotiated departure from do something else. Because I don’t think Carlucci had met the four founders late the Loral deal and whether Carlyle would you’re adding that much value to the board. in 1988, but they hadn’t heard from him in be interested in investing in them. Frank You don’t know that much about the com- months. D’Aniello picks up the story: “Car- brought it to us, and we said, ‘Gee, this pany.’ He said: ‘Well, I think I’m getting out lucci was going to be on David Brinkley’s is terrifi c!’ ” of this business anyway. And I don’t really Sunday-morning show. So Bill, David, and So on September 18, 1990, the same like it that much. So I’m probably going to I were watching. And Brinkley asked him, day Loral bought Ford Aerospace, Carlyle resign from the board.’ And I said thanks. ‘Secretary Carlucci, what do you plan to do bought BDM from Loral. The price was Didn’t think I’d ever see him again. His upon leaving the administration?’ $130 million—compared with the $425 name is George W. Bush.” “ ‘Well,’ he says, ‘I’m probably going to million Ford had paid for BDM just two Bush left the board. Caterair defaulted on sit on some boards, do some consulting, years earlier. Carlyle put up $43 million in some of its bonds in 1994, and Carlyle sold and I’m going to be joining a private-eq- equity, and Williams and the other managers the company at a loss to Onex, a Canadian uity fi rm in Washington called the Carlyle received an ownership stake in the company. private-equity fi rm. Group.’ Malek went on to start his own private- “This is on national TV! I almost fell out BDM proved important to Car- equity firm in 1993. It is called Thayer of the chair. It was stunning. The phone lyle not just for its own perfor- Capital Partners after the founder of the US rang the rest of the day.” mance—investors made 14 times their Military Academy at West Point, Malek’s Carlucci, who served as Carlyle’s chair money in seven years—but also for the intel- alma mater. Thayer’s offices are also on from 1993 to 2002, was important because lectual capital it provided to the fi rm. “You Pennsylvania Avenue, but they’re in the he knew defense, and defense not only be- have a government-contracting business that offi ce building attached to the Willard In- came profi table for Carlyle, it also gave the really can understand the future of defense, terContinental Hotel and are much nicer fi rm an identity—a way to be distinctive as a what’s going to be worthwhile and—in the than Carlyle’s. Malek’s walls, unlike Ru- private-equity business outside New York. context of defense budgets—the potential

WASHINGTONIANWASHINGTONIAN 136 13 JUNE JUNE 2006 2006 profitability of other companies in the fu- Being in Washington helped in other ways. but he’d left. Jim Baker and John Major ture,” D’Aniello says. “And you have a per- Lots of foreign leaders and business executives were still in attendance, as were dozens of son, in Frank Carlucci, who can be a credible came here to visit government officials. Be- wealthy individuals, pension-fund offi cials, mentor to management teams.” cause Carlyle was the only private-equity game and Carlyle executives, including DBD. A The BDM managers, plus Carlucci, in town, they would stop by the offi ces—and buzz went through the crowd, television helped Carlyle with other defense acquisi- the fi rm would pick up intelligence and deals. sets came on, and the gathering watched, tions, including LTV Aerospace, Magnavox Also, Carlyle was fl ying beneath the radar. The horrifi ed, as videotape showed—again and Electronic Systems, and Howmet, a maker partners could make mistakes—like Caterair— again—an airliner crashing into the World of jet-engine turbine blades. Carlyle inves- and no one would notice because they weren’t Trade Center. tors made eight times their money on How- in New York, where competitors would be Among the investors at the Ritz that met, a $104-million investment in 1995. sniping at them. morning was Shafi q bin Laden, one of Osa- Another of Carlyle’s biggest winners was “For raising money, it was a smart con- ma bin Laden’s many half-brothers. Shafi q United Defense, maker of Bradley armored cept at the time,” says Darman. But there was representing his family, which built its vehicles, the Crusader giant howitzer, were risks. “Carlyle was incorrectly under- wealth in the construction business and dis- missile launchers, and other precision mu- stood to be peddling infl uence in some way owned Osama in the 1990s. But Shafiq’s nitions. Carlyle bought United in 1997 for or other, which is not true. Just to take my presence at the Ritz on that day in Ameri- $850 million, of which $180 million was own case: In all the years I’ve been here, I can history—“a disconcerting and freakish equity. Buyout fi rms have a reputation, left have never, ever, not once, contacted the coincidence,” according to author Dan Bri- over from the cut-and-slash LBO days, for US or any other government on behalf of ody—helped establish Carlyle as a mother fi ring workers, selling off subsidiaries, and anything related to Carlyle.” lode for conspiracy theorists. reducing spending on R&D and capital Rubenstein and the other founding “In fact,” says narrator Michael Moore in investments—that is, plundering the com- partners have stayed out of politics. Carlyle Fahrenheit 9/11, his fi lm about George Bush pany for a quick sale. But today Carlyle has no PAC, and DBD, as individuals, are and the war on terror, “the bin Laden family and other fi rms are just as likely to enlarge relatively minor contributors to campaigns, was invested in one of their defense funds, a business they purchase through further especially in comparison to other private- which ironically meant that, as the US in- acquisitions. That was the case with United equity moguls. Bonderman has given loads creased defense spending, the bin Laden Defense. of money to Democrats, and Schwarzman, family stood to gain from those investments The $11-billion Crusader program, in the 2004 election cycle, made about through the Carlyle Group.” which some analysts saw as the crown jewel 70 separate contributions, nearly all of them Actually, Carlyle has no “defense funds.” at United Defense, was funded in eight to Republicans. The bin Ladens had invested $2 million in CP consecutive Clinton-administration bud- Rubenstein worked for a Democratic ad- II, a $1.3-billion US buyout fund that closed gets, but Bush cancelled it (with $9 billion ministration and now says his political affi li- fi ve years before. CP II’s portfolio did include to go) a year after taking offi ce. The Army ation is “capitalist.” Conway is a Democrat, Howmet and United Defense, but it also fea- did reinstate a smaller contract, but United but he’s given at least $15,000 to Republican tured many nondefense companies, including Defense no longer depended on the Cru- groups. D’Aniello leans Republican, though the Dr Pepper/7-Up Bottling Group. sader for major profi ts. The stock contin- he’s made several contributions to Democratic About a month after 9/11, the bin Lad- ued to rise, and Carlyle made its fi nal exit in senator Evan Bayh of Indiana. But the hiring ens severed their ties with Carlyle. But the 2004, earning investors $1.3 billion, an in- of politicians like Baker and Bush—whose word had spread. The Ritz affair opened ternal rate of return of 50 percent annualy, jobs were to give speeches, fi lling a room with the fl oodgates for caricature. In his movie, before the carry. potential Carlyle investors, and to use global Moore claimed that Saudi interests “have Conway had some personal holdings and contacts to open doors of government and ex- given” $1.4 billion to fi rms connected to the stayed on another year, and the stock kept ecutive suites—reinforced the image painted family and friends of George Bush. Nearly climbing before United Defense was sold by author Michael Lewis in 1993 of a fi rm that all that money comes from a Saudi contract to a British company. “When you’re a chair- was merely selling access. for military training that went to a company man,” Conway says, “you have an inability What Carlyle was really doing was us- called Vinnell, which came into the Carlyle to sell—and it paid off for me.” ing its presence in Washington—its lines of fold when BDM purchased it in 1992. But Rubenstein says that from the intelligence here and the advice of partners Carlyle sold BDM to TRW in 1997—five start he tried to create an asset out like Carlucci—to make good acquisitions in, months before George H.W. Bush joined of what was a potential liability: that Carlyle as Darman puts it, “sectors that are heavily Carlyle as an adviser. was based in Washington, seen by investors determined by government.” Defense, of The Economist magazine, citing the bin at the time as a fi nancial backwater. “Ever- course. And then telecom and healthcare. Laden connection, claimed, “The secretive ett Dirksen famously said that when you’re “But today,” says Conway, “we’re every- Carlyle Group gives capitalism a bad name. getting kicked out of town, get out in front thing. We’re consumer. We own Dunkin’ . . . At a time when America is aggressively and pretend you’re leading a parade,” he Donuts, and I don’t know what the connec- promoting democracy and capitalism abroad told me. tion is there to the US government. Maybe . . . it would be helpful if its politicians and As Rubenstein said, “You have what you the FDA will publish something on coffee businesses were regarded as cleaner than have, and you sell it as an advantage. Well, that says it’s bad for you.” clean. Shrouded in secrecy, Carlyle calls cap- here we were in Washington, DC—because italism into question.” I lived here and didn’t know New York and On a crystalline Tuesday so forth. . . . We would tell our investors morning in September nearly five If you look, you’ll find Carlyle that we understand government-oriented years ago, the Carlyle Group was holding is one of the least secret private businesses better than other people. And its annual investor conference at the Ritz- companies anywhere. Carlyle’s Web site people would say, ‘Okay, these guys are in Carlton Hotel on 22nd Street. Former lists every employee and adviser, with brief Washington. This guy worked in the White president Bush had spoken at a Carlyle biographies, plus descriptions of more than House. Maybe he does.’ ” dinner the night before at Union Station, 200 businesses it owns or owned.

WASHINGTONIANWASHINGTONIAN 137 14 JUNE JUNE 2006 2006 But Carlyle deserved some of the criti- founders realized they needed to change, involved; and so was George W. Bush, the cism—not because it was doing anything and they began before 9/11. son of a former Carlyle adviser. Ergo . . . . illegal or unethical but because it had pro- “What we started to do in 2000,” says moted the notion that it was well connected D’Aniello, “is to morph a bit from sort of “The problem with the future and provided the grist for the conspiracy a Washington-based, politically connected is that it has not happened yet,” theorists’ mills. firm to more of a business base, bringing wrote Bill Conway in his memo to Carlyle In recounting Carlyle’s history, Ruben- in a larger complement of former CEOs employees at the start of 2006. In the early stein described to me how Baker, the fi rst to work with our deal teams and sit on years of the new millennium, the wind was Bush, and Major had joined up and, “after a our boards.” at Carlyle’s back, Conway tells me. “You while, people began to say, ‘Wait a second! The presidents club was disbanded. “Their had flat energy rates, you had flat interest These guys in Washington, they have all this contributions were invaluable in helping to rates, you had enormous spare capacity in power, all this infl uence.’ People began to build the fi rm,” Rubenstein told me, “but the US. Everything just conspired to make intuit that we had infl uence, that we were our needs evolved.” Also, Bush, Baker, and things wonderful.” That’s changing: “I infl uencing government, that we had power Carlucci hit Carlyle’s retirement age of 75 think energy prices will stay high. I think that we really didn’t have.” (Bush exceeded it by fi ve years). there will be increased competition” from He added, “Because the press, particu- Rubenstein likes to say, “This is not your other private-equity fi rms. larly the press in Washington, was involved father’s Carlyle.” He’s right, but in part Conway says that as a result, he’s “a little with all these names, we got so much atten- the founders have themselves to blame more conservative than I used to be . . . but it tion that I think to some extent maybe we for becoming the conspiracy theorists’ would be hard for me to say I’ve crawled into were happy with it at times because it gave favorite punching bag after the Trilat- [a] shell.” Today, it’s tough to fi nd compa- us visibility in the early years, and people eral Com mission (of which Rubenstein is nies to buy at the valuations of ten years ago, knew who we were. a member). when Carlyle typically paid six or seven times “But then later, it became a bit of a prob- The image persists. During the Dubai EBITDA (annual earnings before interest, lem because people thought we were this ports imbroglio this year, Maureen Dowd taxes, depreciation, and amortization), the club of ex-presidents. . . . It got maybe a and other opinion makers jabbed Carlyle industry standard for profi ts. Now, Conway little out of control.” for a shadowy conspiracy that never existed. is paying eight times and more.

More than a little. Carlyle had become Dubai International Capital was an investor Dunkin’ Donuts, which also owns the Photograph by Cade Martin/courtesy of Allied Capital too important an institution to risk being in CP IV; Carlyle once owned a container- Baskin-Robbins ice-cream chain, went for regarded as a nest of access capitalists. The shipping company; national security was 11.5 times EBITDA, a total of $2.4 bil-

If You Want to Invest in gain of $430 million on an investment of $75 million—its most Private Equity . . . profi table deal ever. Allied, as a business-development corporation, passes earn- After reading that the Carlyle Group has produced annual re- ings through to investors in the form of dividends, which have turns of some 34 percent since 1987, you may want to invest. But been paid since 1963 and have risen for 12 straight years. Cur- to qualify you have to commit a minimum of $5 million. Because rently, the stock yields 7.9 percent. a reasonable personal portfolio should include a proportion of pri- Another publicly traded choice is Apollo Investment Corp. vate equity no bigger than 10 percent, that means you should have (AINV), a business-development company started in 2004 that $50 million in investable assets. lends money to midsize businesses and takes equity stakes If you’re not so well heeled, you can invest indirectly in Carlyle in them. It currently has a yield of 9.5 percent. The company’s or several other private-equity funds through J.P. Morgan, Credit William Walton runs CEO, John Hannan, cofounded Apollo Management, one of the Suisse, and other private banks using “feeder funds.” Morgan was Allied Capital, a largest private-equity fi rms. recently offering its clients the chance to invest in a Carlyle Asia DC-based company KKR, the fi rm that pulled off the largest private-equity deal in fund with a minimum of $500,000—and, with a Morgan waiver, that behaves like a history, has launched KKR Financial (KFN), a real-estate invest- private-equity fi rm perhaps even less. Morgan charges an “origination fee” of 2 per- and trades on the New ment trust that mainly invests in mortgage loans and yields 7.4 cent if you put in less than $1 million and, of course, Carlyle takes York Stock Exchange. percent. its 20-percent carry. You can buy a share In early May, KKR brought another security public— There are other choices in the public markets if you don’t want to for about $30—a good KKR Private Equity Investors. It will use its capital to invest in invest lots of money. One of the best is a Washington-based compa- deal less than the KKR funds. So for a few hundred bucks or even less, you can $5-million minimum ny, Allied Capital, traded on the New York Stock Exchange as ALD. at Carlyle. become a private-equity investor. The security trades like a Allied, founded in 1958, used to be primarily a lender to midsize conventional stock but only on European exchanges in Amster- companies. But more and more it has become a part-owner of dam, Munich, and elsewhere. Starting in mid-July, you can ask such businesses, and it now describes itself as “a publicly traded private eq- your US broker to buy it for you, but beware that disclosures and protections uity fund.” William Walton, its CEO since 1997, says that Allied’s advantage is are less extensive than they are in the United States, and fees are high. that it makes its purchases using a permanent pool of low-cost capital, raised David Rubenstein, one of Carlyle’s three founders, expects that private-eq- from its shareholders, rather than from pension funds and other investors that uity fi rms will go public here soon—though he’s not saying Carlyle will be one want their money back in fi ve to ten years. As a result, Allied can nurture busi- of them. When the first real private-equity IPO is launched on an American nesses over a longer time. exchange, be careful. This is a risky business. Not all fi rms do as well as Carlyle Allied’s portfolio includes 100 companies that generate annual revenues and KKR, and there are no guarantees that the winning streaks of even the best of $10 billion and employ 85,000 people. It focuses on smaller businesses fi rms will continue. A study by two economists, Steven Kaplan and Antoinette than Carlyle, including Insight Pharmaceuticals, maker of Sucrets and Anacin; Schoar, found that after fees, the average returns produced by private-equity Mercury Air Centers, which operates private-aircraft terminals; and Meineke funds “approximately equal the S&P 500,” the benchmark for US stocks. Car Care Centers. In late March, Allied sold Advantage Sales & Marketing for a — J AMES K. GLASSMAN

WASHINGTONIANWASHINGTONIAN 138 15 JUNE JUNE 2006 2006 lion. “We paid a full price,” says Horbach, up value over the long term. Low acquisi- He was probably being a bit disingenu- who crafted the deal, but Carlyle—along tion prices remain the holy grail (“it’s hard ous, but if he was unhappy, he has not borne with two other private-equity partners, Lee to overcome overpaying,” says Rubenstein), a grudge. He’s still on the Kennedy Center and Bain, managed to borrow most of the and, to fi nd them, Carlyle often has to go board and has donated a good deal of mon- purchase price at a fi xed 6.5 percent for fi ve outside the United States. ey. He and Alice underwrote this season’s years. Horbach thinks the management The fi rm launched its fi rst European fund National Symphony Pops and, with Cathe- team of the chain of 6,100 shops is terrifi c, in 1998, its fi rst Asian fund in 1999, and a rine and Wayne Reynolds, served as cochairs and “it is a stable, predictable business” that, Japanese fund in 2004. “The idea of hav- for the Kennedy Center gala in May. And, she expects, will grow as the company takes ing a family of funds had never happened in in a Washington-goes-to-New-York switch, on Starbucks, currently trading at around the private-equity world,” says Rubenstein. he’s become vice chair of Lincoln Center, 18 times EBITDA. Now other firms have followed Carlyle’s where he’s leading a $500-million fundrais- More and more, private equity is becom- lead, and Carlyle itself has more than three ing campaign. ing a business not of fi nancial engineering dozen funds. but of strategic management. That’s why Europe has been especially fertile in recent In f o u r l o n g i n t e r v i e w s , R u - Carlyle’s chair is not a former secretary of years, but the competition is getting intense, benstein referred several times, with- Defense but a former architect of one of the and Carlyle is turning to places like Japan, out prompting, to his parents. So as we greatest turnarounds in corporate history. China, Taiwan, and Mexico. Today, nearly were winding up, I prompted him: “What “Gerstner understands the consumer,” two-fi fths of Carlyle’s buyout deals are out- do your parents think of your success?” says Horbach. “He looked at Dunkin’ side the country. The question is what this “My parents,” he answered, “think what before the purchase. He really liked the US-based fi rm can add in making wise ac- any Jewish parents would. I’m their only business.” quisitions and improving corporate perfor- child, so if you’re Jewish parents and your Critics of private equity say that buying mance in countries 10,000 miles away. child turns out to be semirespectable, they’re and selling existing companies—unlike ven- There’s another worry. Private equity going to make you into something greater ture capital, which aids start-ups—is a pro- has thrived in part because it’s been largely than you are. . . . Are your parents alive?” cess that adds nothing useful to society or unregulated. “At some point,” says Ruben- “Just my mother.” the economy. In a scathing March article stein, “all private-equity fi rms will have to “Mother. No matter what you do, your in Forbes headlined PRIVATE INEQUITY, Neil be registered by government. It is foolish mother’s still going to think you’re terrifi c, Weinberg and Nathan Vardi wrote that buy- to think this industry can continue to raise right?” out executives “do not make their fortunes tens of billions of dollars without the gov- “That’s true of my mom, anyway,” I say. by discovering new drugs, writing software ernment having a piece of it.” “Right,” he says. “My parents—sure, or creating retail chains. They are making all they’re happy, but they would be happy if this money by trading existing assets.” But Rubenstein is telling me that I were a shoe salesman or if I were in the that view is dated. two years ago, “I read somewhere that post office. It doesn’t make a difference. “The buyout world is radically trans- the average white male who was 54 will have And, you know, I don’t really think that formed,” says Darman. “So if you’re making a life expectancy that will get you to 81. So, I’ve achieved that much compared to all the an investment in this environment, you can’t doing the arithmetic, I realize that I had led people I keep reading about—people who say, ‘Well, I’ll just buy at the right price.’ on average probably two-thirds of my life. win Nobel Prizes for great discoveries that Almost everything goes to auction now, so I decided that, while I was very happy with change the face of humanity.” you’re probably going to get it pretty nearly what I had done in the fi rst two-thirds of my Rubenstein goes on: “I don’t have the at a fair price. Which means that if you’re go- life, there are some things I wanted to do ability to cure AIDS or cancer. The most I ing to get extraordinary returns . . . it has to before the other third was over. can do is something that’s reasonably mean- come from the value you add in the course of “I didn’t just want to make more money ingful in business and take the profi ts from owning the business. There’s a much heavier and help build Carlyle further. I like Carlyle it and maybe give it to people who can do burden on people in this business to actually a lot, and I will stay. But I wanted to spend something more signifi cant.” add that. Which is a good thing.” time with philanthropic things.” The Economist recently called private- He’s now a workaholic on the charity equity moguls like Rubenstein, D’Aniello, To s u c c e e d , a p r i v a t e - e q u i t y scene as well. Rubenstein sits on the boards and Conway “the new kings of capital- firm has to help a business get of Duke, Johns Hopkins, the Kennedy Cen- ism.” But these are not guys I would as- better—a task that buyout firms try to ter, Cold Spring Harbor Laboratory, Me- sociate with royalty. They’re not Masters accomplish through supporting the manage- morial Sloan-Kettering Cancer Center, the of the Universe in Tom Wolfe’s Bonfi re of ments of the companies they buy. “They ag- Council on Foreign Relations, the Dance the Vanities mode. They can’t quite be- gressively help make additional acquisitions, Theatre of Harlem, and many more. lieve they’re running a $39-billion busi- they help with refinancing, they will help I had heard from someone who knows him ness. But here it is—in the unlikely town open markets, they will help with customer that Rubenstein was miffed that he was not of Washington, DC. calls,” says Rubenstein. Carlyle places advis- chosen to succeed James Johnson, former ers like David Squier, the former CEO of CEO of Fannie Mae, as chair of the Ken- James K. Glassman is a resident fellow at the Howmet, or Tom Corcoran, the former head nedy Center. Instead, one of Rubenstein’s American Enterprise Institute and editor of its of Lockheed Martin’s electronics division, on private-equity rivals, Stephen Schwarzman monthly magazine. He is also host of the Web site TCSDaily.com and a columnist for Kiplinger’s the boards of companies it buys—“guys that of Blackstone in New York, got the job. Personal Finance. From 1993 to 2004, he wrote have operating experience, and these guys are Rubenstein gave me a long exegesis of the a column for the Washington Post on investing getting in the middle of companies.” process and then said that not getting the and two books on the subject. From 1979 to 1981 The problem for Carlyle is that it has to job “turned out well in the end.” It gave he was executive editor of The Washingtonian and then was publisher of the New Republic and return investors’ cash within fi ve years—sev- him time for lots of things he wouldn’t have Atlantic Monthly, executive vice president of en or eight at the outside—so it can’t build had time for. U.S. News, and editor in chief of Roll Call.

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