“It was a chance,” says Conway, 61, now a billionaire looking back on a day that transformed his life. “There was nothing sure about it.”
And so The Carlyle Group was born.
After meandering for a couple of years, they hit upon a game plan to build a showcase of Washington insiders who could find deals and draw investors. Former presidents and Cabinet secretaries signed up. Fat profits and growth followed. Pension funds and the governments of countries got in line to give Carlyle money.
Forged not on Wall Street but on Pennsylvania Avenue, Carlyle has grown into a financial powerhouse. It manages more than $100 billion that is invested in 270 companies and properties around the world with names like Hertz and Dunkin’ Donuts. Its companies have more than 500,000 employees, or five times those of ExxonMobil.
The rise of Carlyle embodies the evolution of American private equity, climbing from its niche as a boutique buyout firm to the height of global finance. Like the mutual funds industry before it, Carlyle helped revolutionize the financial sector by creating a new investment class — and then mass-producing it.
Now the intensely private firm is about to make its biggest deal yet: an initial public stock offering. About 10 days ago, Carlyle began contacting banks including Goldman Sachs, J.P. Morgan Chase, Credit Suisse and UBS, an effort led by managing director and partner Glenn Youngkin. It is likely to choose underwriters by the end of June. An inside team is working on the paperwork, but the timing of the IPO will depend on market conditions. The company is believed to be worth at least $10 billion.
Overnight, Carlyle’s 99 partners will become millionaires and billionaires, with stakes valued from $3 million to $2 billion. The firm’s innermost financial workings will be laid bare. The general public will be able to buy a piece and share in its profits.
Carlyle makes money three ways: First, it collects 2 percent of what it manages; second, private equity firms keep 20 percent of the profit they earn for investors; third, Carlyle invests alongside its investors in Carlyle funds.
The stock sale may propel Washington’s growing reputation as a finance hub. It’s three founders, David M. Rubenstein, Conway and Daniel D’Aniello (known as DBD), hope to eventually cash out and leave the firm with a battle-tested cadre of new leaders.
When Carlyle goes public, the upper management will be reorganized. D’Aniello will be chairman of Carlyle Group, while Rubenstein and Conway will be co-chief executives.
“They had a vision, a plan,” said Fred Malek, who worked as a senior adviser to Carlyle in the early 1990s. “And they kept true to their vision and grew the firm based on the principle of if you do well for your investors, you will do well.”
David Rubenstein sits at a conference table in a slightly disheveled office more fit for an Oxford don than a Master of the Universe. On the wall are reproductions of the Magna Carta and of an early map of the United States. Tucked alongside a credenza is a shipping tube that reads “Declaration of Independence.” It, too, is a reproduction.
The office’s chaos befits a man who travels the globe 265 days a year, flying to see Middle East potentates, wealthy South American families and European pension chiefs, all in the search for cash to feed the Carlyle deal machine.
Rubenstein, 61, dreamed up Carlyle. His relentless attention to fundraising (he once flew to Paraguay for $5 million) is part of Carlyle lore. With tortoise-shell glasses and a blue suit (coat on), he represents the buttoned-down face that Carlyle turns to the world outside — only slightly humanized by the raspberry Snapple he swigs.
“As shy as David may seem socially,” D’Aniello said, “he’s a python in business.”
Rubenstein’s distracted handshake reflects a mind off to the next subject. He has an organized, encyclopedic brain, which is currently recalling a moment 20 years ago that launched Carlyle from a breakfast conversation into a titan of finance.
Carlyle’s origins are as understated as the discreet New York hotel for which it is named. Pittsburgh’s Mellon family, who put up much of the original $5 million in seed money, preferred to meet with Rubenstein’s team at Madison Avenue’s fashionable Carlyle Hotel. The name stuck.
“Private-equity firms were always mom-and-pop operations,” Rubenstein said. Carlyle’s future was so tentative that its first lease didn’t contain a clause allowing expansion.
Back then, private-equity shops were small, family-run businesses that worked at a deliberate pace. They wrote contracts that stipulated they would manage one fund at a time, a five-to-seven-year process during which the firm focused on a single investment strategy: Raise money. Invest it in a company. Sell the company at a profit.
Former defense secretary Frank Carlucci delivered the first defining deal in 1990. Carlyle invested $43.4 million of its own money in BDM, a defense think tank, and sold it for $454 million three years later — 10 times the investment.
Carlyle repeated the play over the next few years, with Vought Aircraft, Magnavox and Federal Data. Conway’s investment prowess quietly drew attention in the world of private equity.
“We said, ‘Okay, we’re pretty good at this,’ ” Rubenstein said.
Around that time, Rubenstein had an idea. The firm had raised a $1.3 billion fund and an outsider suggested another fund in venture capital.
“A light bulb went off in my head,” Rubenstein recalled. “I said maybe we can have a venture fund. We can have two funds. Let’s get a real estate fund. And so we basically created the idea of having a series of funds. That had never been done in private equity before.”
Scaling the business
Carlyle has grown into a family of 84 funds around the world, employing a model similar to the one Vanguard and Fidelity brought to the mutual fund industry. “We absolutely scaled it,” Rubenstein said.
Carlyle owns Asian forests, a Brazilian lingerie firm called Scalina, Nielsen Co., a truck transmission manufacturer and a group of rest stops along Connecticut highways.
Carlyle became a one-stop shop for pensions, foundations and wealthy individuals. It serves 1,350 investors across 75 countries.
Rubenstein’s vision charted Carlyle’s vast expansion. The strategy created tension with Conway, the firm’s chief investment officer, who worried that growth, which relied on low borrowing costs, could compromise its ability to generate returns. D’Aniello, who ran the show day to day, often mediated.
“We’re like an equilateral triangle with David at the tip and Bill and me at the base,” said D’Aniello, who leads the firm’s energy and real estate deals. “Sometimes David’s visionary ideas push it into an isosceles triangle with him way out front. Then we’ll say ‘whoa!’ But these were the times we all came together.”
Steve Norris, another of the founders, left after a few years because of disagreements over strategy.
“David was the guy coming up with the ideas, and I needed to be sold on them,” Conway said. “Are we going to be able to invest this money in Asia? How are we going to build a team 8,000 miles away from Washington that can work with us?”
Dan Akerson, chief executive at General Motors who is Conway’s closest friend and a former Carlyle colleague, calls Rubenstein “the explorer, always pushing the limits.”
“Sometimes, he doesn’t know when he is over the edge,” said Akerson, who said the two co-founders are “like an old married couple.”
“At times, I’m sure they wish the other one wasn’t there,” Akerson said as he recounted one particularly tense exchange, after which Rubenstein asked: “Why is Bill mad at me? I’ve done worse things than that to him.”
A key regret
Rubenstein prevailed. By 2001, the firm had set its ambitions beyond the defense and aerospace sectors into telecommunications, real estate and other industries.
Carlyle and a partner bought Dex Media, the phone directory business of Qwest Communications, for a whopping $7.4 billion, then the third-largest buyout in history. Within four years they turned their $808 million in equity into $2.1 billion, a 260 percent return.
It got a boost in 2001 when the California Public Employees’ Retirement System (Calpers) bought a 5.5 percent stake in Carlyle for $175 million, which is now worth several times that.
There is one big idea that Rubenstein regrets. To boost Carlyle’s profile and help draw investors, he hired big-name political insiders such as former President George H.W. Bush, former British prime minister John Major and former secretary of state James A. Baker III.
“We had an image issue . . . due to my fault, principally,” he said. “I recruited all the those guys. I wanted to have those ex-government people. I thought these guys can open doors. Nobody ever heard of Rubenstein. Nobody ever heard of Conway.”
But Carlyle’s proximity to the Bushes, its Saudi investors and its defense deals stoked conspiracy theorists. After the Sept. 11, 2001, terrorist attacks, Carlyle returned money that members of the bin Laden family had invested with the firm, a connection that years later would fuel an unflattering portrayal in Michael Moore’s blockbuster documentary film “Fahrenheit 9/11.”
The founders had had enough. Carlyle hired its first public relations person, former SEC spokesman Christopher Ullman, and gave him one mission: Reverse the public perception.
Over the next several years, the firm filled its ranks with august business types like former Wall Street Journal editor Norman Pearlstein, General Electric’s David Calhoun, former SEC chairman Arthur Levitt and former IBM chief Louis V. Gerstner Jr., who would become Carlyle’s chairman.
“By sharing information, meeting with the media, answering the critics and explaining our business, we’ve changed our brand,” Ullman said. “We’re bringing glasnost to Carlyle.”
Between 2006 and 2008 — the heyday of private equity — the company made ever-larger acquisitions, including teaming with other firms, paying $17.6 billion for Freescale Semiconductor, which recently went public to disappointing results; Home Depot’s supply division for $8.5 billion; Booz Allen Hamilton’s U.S. government business for $2.54 billion; and on Christmas Eve 2007 it closed a $6.3 billion deal to buy Maryland-based Manor Care, a national nursing home chain.
By 2008, Carlyle had grown beyond what even its founders had imagined. It controlled $82.7 billion from clients in 68 countries and had posted its two best years, returning $10.2 billion to investors in 2006 and $8.9 billion in 2007.
Then came the Great Recession.
Knowing ‘when to pounce’
Before he talks about the biggest stain on Carlyle’s record, Conway sets a red-ringed spiral notebook on the table, filled with clippings, economic data, reminders. One minute he is referencing the Bible, and the next he launches into an exposition on the economic significance of cargo shipping patterns.
With a shock of gray hair, he frequently pauses as he thinks. His tone is more conversational than Rubenstein’s clipped cadence. His presence fills the conference room.
Described by some as fiery and focused, Conway is the investment genius who relies on Rubenstein’s billions to feed his deals. On the golf course, he plays with a cigar locked in his teeth. He is in strict contrast to Rubenstein, the vegetarian and teetotaler.
Conway often arrives at the office by 6, allowing him to leave early enough to fit in a round at Burning Tree, where he and Akerson go head to head.
Conway, who is notoriously risk-averse, is as ferocious when evaluating a deal as he is when driving off the tee.
“Bill is like a lion stalking its prey on the Serengeti,” Akerson said of investment meetings. “He knew when to inject himself and when to pounce.”
Former Carlyle employees speak of Conway with reverence — and fear. He is known to finish meetings with an exhortation to make money for investors.
“There are two things you don’t want to do in life,” one former Carlyle employee said. “Lie to your wife. And tell Bill Conway you lost money.”
The conservative Conway experienced the seesaw of taking companies public and knew the risks. Rubenstein has pushed the idea for years.
“David had never been public,” D’Aniello said. “He was much less sensitized to the risk.” After its rival Blackstone Group went public in 2008 and saw its stock decimated, Carlyle paused.
“I wasn’t sure I saw the advantages of being public,” Conway said. “And there are a lot of advantages to being private. We can do things in private.”
Lure of public capital
The financial crisis dealt blows to the firm’s near-mythic reputation. March 2008 saw the $900 million collapse of Carlyle Capital, an offshore public company that invested in highly leveraged securities backed by Fannie Mae and Freddie Mac. Carlyle’s founders and partners lost $300 million of their own money.
The “Triple-C implosion,” as it is known inside the firm, is Carlyle’s most embarrassing chapter.
“I just didn’t think that the world would believe . . . that maybe the United States won’t support Fannie Mae,” Conway said. “To me, it was unthinkable. It was gone” — snap — “like that.”
In May 2009, Carlyle paid $20 million to the state of New York to settle a pay-for-play scandal.
Rubenstein said those missteps had little bearing on the firm’s long-term health: “If we didn’t know how to invest, we would have imploded a long time ago.”
But in the downturn, Rubenstein’s fundraising slowed to a trickle, with investor commitments dropping 80 percent. Without money to invest, the entire private-equity model was threatened, along with Carlyle’s business.
Conway was swayed: “It became apparent that having access to public capital will enable us to commit even more money to Carlyle’s own deals.”
To get that capital to invest and have public stock to lure prized talent, Conway has accepted the downside on an initial public offering: The firm will undergo unprecedented scrutiny and will have to answer to shareholders and meet quarterly performance marks.
To hedge its bets against the end of easy money, Carlyle has expanded into lower-return, less-risky investments such as infrastructure, real assets like oil, forests and minerals, and pension management. To reflect that diversification, it rebranded itself as a “global alternative asset manager.”
Carlyle has come screaming back from the recession, closing several landmark deals and returning $6.4 billion in capital and profit to its investors in the first quarter of this year. Carlyle’s profits are a closely guarded secret that it will be required to divulge in government documents. Forbes reports that each of the founders is worth more than $2 billion.
They are globe-trotting plutocrats who visit popes and sheiks on Gulfstream jets. They have homes in the fabled communities of the ultra rich: Beaver Creek, Florida’s Gold Coast, Potomac. They give away millions to the causes that move them.
When Mubadala, the investment arm for the emirate of Abu Dhabi, bought a 7.5 percent stake in Carlyle for $1.35 billion in cash in 2007, Carlyle enjoyed a big payday, distributing a piece of the windfall to every employee. The deal valued Carlyle at $20 billion. The value is now believed to be well below that.
Rubenstein said none of the founders has plans to cash out his stock. The three founders and the rest of the 99 partners also eat their own cooking — they have $4 billion in Carlyle investments.
Rubenstein explains the IPO this way: “At some point in life you would like to get a reward for something you have done. We want to get the fruits of what we built. I intend to give away most of my money, and so I want to give it away. What I don’t want to do is have my executor give it away.”
Carlyle is leaving little to chance. It has government and regulatory strategists, speechwriters and more than a dozen public affairs professionals across the globe. A new chief financial officer is on board. Back-office operations have been fine-tuned. Management and operations committees are preparing to run the firm when the founders some day exit.
In the spirit of transparency, the firm issues glossy annual reports.
Rubenstein speaks at conferences from Davos to Aspen, chairs the Kennedy Center and makes splashy philanthropic gestures such as permanently lending a $21 million copy of the Magna Carta to the National Archives.
Even the reticent Conway is talking.
And Akerson’s departure last year was almost a prelude to Carlyle’s coming-out party. The head of Carlyle’s flagship buyout operation walked away from hundreds of millions to lead GM, the most public of American companies.
For all its glasnost, the genius of Carlyle may well yet rest with the unsettled dynamic among its leaders that has been there from the Marriott breakfast.
“At the end of the day,” Akerson said, “it wouldn’t be the firm anywhere close to where it is if they were alone. It’s a complicated, synergistic relationship.”
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