firm that employs many former high-ranking military officials received Pentagon contracts to the tune of more than $2.2 billion.
Veritas is the 41st ranked defense contractor.
Companies under the ownership of Vectura
Holding Co., another New York-based group, got deals to the tune of $1 billion, while companies controlled by Berkshire Hathaway,
led by billionaire investor Warren Buffett, won contracts worth $688 million. Companies owned by Green Equity Investors II
LP ($275 million) and Gores Technology Group ($153 million) also received substantial defense money.
Private equity firms did not have any significant
presence in the defense industry until the end of the Cold War. Traditionally, the Defense Department depended on mega contractors
such as Boeing Corp., Lockheed Martin and Raytheon for weapons and services. But since the 1990s, the military has increasingly
outsourced to private contractors a variety of jobs and services, ranging from planning of operations to the supply of linguistic
services. A U.S. government decision in the 1990s to encourage small-business participation in contracts also contributed
to the expansion of the market for smaller, privately-owned companies.
The Carlyle Group acquired controlling interests
in several underperforming defense contractors, installed its own management teams and revitalized the companies, in part
by landing big Pentagon contracts. Then, they sold the contractors to other investors for a large profit.
"There have always been [private equities]
that went in with management and bankrolled management," said Stuart McCutchan, editor of Defense Mergers & Acquisitions.
"What Carlyle has done differently is they have taken it to a new level both in terms of size and in terms of being committed
to an entire sector."
"Carlyle is the biggest single success in
Washington of a venture capital firm," Dr. Loren B. Thompson Jr., a national security expert at the libertarian Lexington
In 1997, for example, the group made a 650-percent
profit when it sold BDM International Inc., a McLean, Va., defense contractor. And in December 2001, Carlyle sold off the
majority of its holdings in United Defense Inc. Altogether, Carlyle earned $1 billion in profit from the United Defense investment.
A windfall of war
The group cashed out many of its investments
when the stock of defense companies rose dramatically in the aftermath of September 11 and the buildups to the Afghanistan
and Iraq wars.
"Defense properties are too expensive these
days," explained Carlyle spokesman Chris Ullman.
In 1997, Carlyle liked the price of United
Defense, and beat out General Dynamics and Alliant Techsystems, which also coveted the underperforming artillery firm. General
Dynamics bid more than Carlyle offered for the company, but potentially faced a lengthy, drawn out antitrust battle if it
acquired United Defense. Carlyle ended up winning the bid.
Carlyle finally sold its stakes in United
after taking it public in the aftermath of the September 11 attacks. The Washington Post called the hugely successful
public offering "one of the most successful single venture investments of recent years."
But United did not seem all that lucrative
before September 11.
"They [Carlyle] were really kind of in a
pickle with United Defense," McCutchan said. "They wanted to cash out on the equity. There wasn't much money to be made...
When 9/11 happened and the defense budget took off, suddenly they had a winner on their hands."
Even Carlyle, which typically does not disclose
its financial and operational details, crowed over the sale.
"It was one of Carlyle's best investments,"
Carlyle's Ullman told the Center. "We did make more than a billion dollars on that deal, and we are very pleased that we served
our investors quite well."
The reason Carlyle's defense portfolio is
lean at the moment is the high value of defense firms, thanks in part to the ongoing U.S. wars. "If there comes a time when
defense properties are priced in a way that we think makes sense for private equity investors, then we will certainly consider
investing more of our dollars in that sector," Ullman told the Center.
Carlyle has a diversified portfolio, focusing
its investments in sectors that have heavy government regulation and contracting—defense, telecommunications and banking.
Carlyle has matched its investments with the expertise of high ranking government officials, whom the firm has courted almost
from its inception.
It was under the leadership of former Defense
Secretary Frank Carlucci—first as a managing director, from 1989 to 1993, and as chairman from 1993 to 2003—that
Carlyle grew from a small private equity to a global investment giant, and became a major player among defense contractors.
Other former government officials who have
recent or current ties to the firm include former British Prime Minister John Major and former Philippines President Fidel
Ramos; former Office of Management and Budget director Richard Darman; former Clinton chief of staff Thomas F. "Mack" McLarty;
former Securities and Exchange Commission chairman Arthur Levitt and former Federal Communications Commission chairman William
E. Kennard. Former Secretary of State James Baker works for the firm, as did his former boss, President George H.W. Bush,
who was an adviser for the firm's Asian investment funds until he left Carlyle in 2003.
Critics have long denounced Carlyle's practice
of recruiting former high-ranking government officials at the same time as it invests in companies regulated by their former
agencies, dubbing it "access capitalism." For example, Kennard, who served as Bill Clinton's FCC chairman, is now managing
director for Carlyle's global telecommunications and media group, directing the firm's business investments in companies he
"Carlyle would never have gotten to the level
that it is at today had it not been for this premeditated commingling of business and politics," said Dan Briody, author of
The Iron Triangle: Inside the Secret World of the Carlyle Group, a book that takes a critical look at the rise of
One of Carlyle's most controversial hirings
was of former president Bush to serve as a senior adviser for its "Asia advisory board."
"The fact that George H.W. Bush was working
for them while his son was president, while his son, in fact, was dramatically increasing defense spending—that seems
to me one of the most blatant conflicts of interests in history," Briody said.
Bush—who joined Carlyle in 1998, before
his son, George W. Bush, became president—ended his relationship with the firm in October 2003, Ullman told the Center.
But that hasn't stopped the former president from continuing to give speeches for Carlyle, which he did at a Shanghai event
sponsored by the firm in April 2004.
Ullman refused to disclose the remuneration
Bush received for his services. "That's not information that we disclose," he said. "That's his personal business. You are
certainly welcome to ask him."
Bush's office did not respond to the Center's
request for an interview. Written questions faxed to the former president's Houston office, at an aide's request, did not
elicit any response.
Though none are placed as closely as the
president's father, Carlyle's other Washington insiders have ties to current Bush administration officials. Current Defense
Secretary Donald Rumsfeld and Carlucci went to college together, for example, and Secretary of State Colin Powell was Carlucci's
deputy on the National Security Council in the mid-1980s.
The continued presence of Baker and Carlucci
riles critics such as Briody. "If you look at the relationship that Frank Carlucci still maintains with Don Rumsfeld and Colin
Powell and the reach that he has to those folks—and he has in fact used that reach in the past and tried to influence
decisions those folks were making, decisions that could directly or indirectly affect Carlyle's fortune," Briody said.
Carlyle dismisses the notion that Carlucci
or any other former government or military leader on its payroll has any conflicts of interest. "Are you aware of any solicitations
from [Carlucci] to Secretary Rumsfeld to ask for any particular benefits to United Defense or any of our other portfolio companies?"
Ullman said. "All they [Carlyle critics] do is, they say: 'Oh, Carlucci used to work in the government and he went to college
with Donald Rumsfeld, and Carlyle has defense investments, and now Secretary Rumsfeld is secretary of defense. Therefore,
there is a conflict of interest.'"
Despite Ullman's assertions, media accounts
have noted occasions when former government officials working for Carlyle have approached the Pentagon brass. For example,
Fortune magazine reported in March 2002 that Carlucci had contacted at least two senior Pentagon officials, though Carlyle
claimed these contacts did not constitute lobbying.
Ullman added that all former government officials
working for Carlyle abide by "all of the conflict of interests rules related to lobbying former colleagues for a year." He
pointed out that the Pentagon had cancelled the Crusader artillery system, produced by United Defense, adding, "So if we are
as powerful as everyone thinks, why did they cancel it?"
Rumsfeld announced in May 2002 the termination
of the artillery system; until then, the Pentagon had paid United Defense some $2 billion to develop the Crusader.
Researcher Sheetal Doshi contributed
to this report.
The Center for Public Integrity