The deal that helped make Pete Clare's reputation lost the Carlyle Group a bunch of money.
It was in the early 1990s, and Clare was a confident newcomer in a nascent firm full of lawyers and government types that was trying to make a name in the world of leveraged buyouts.
A more senior colleague wanted to buy a software company. Clare opposed it, arguing that the company didn't actually make good software.
"It was too risky," said Clare, whose father and brothers had worked in software.
He voiced his opposition, first to his boss and then to other senior members of the firm.
Tensions quickly escalated.
Carlyle's top brass called a big meeting. Clare was replaced on the deal team.
"I thought I was done," said Clare, whose friendly personality belies a stubborn core.
Carlyle bought the company and lost all of its investment — $7 million — within two years. (The loss was significant for Carlyle back then but would be a rounding error today.)
"It was a formative experience," said Clare, now 52 and recently named Carlyle's co-chief investment officer, one of the most important jobs in finance.
"Knowing what deals not to do is the whole key to this business," he said, sitting in a crisp dress shirt and expensive-looking print tie in a Carlyle conference room at the firm's Pennsylvania Avenue headquarters. "If you make a mistake in this business, you want to err on the side of not doing things."
It's rare to get a look inside this world. To see how guys like Clare think. How they approach problems, how they look at companies, assess people and decide when and where to invest.
This is important stuff. Clare and his mentor, Carlyle co-founder and fellow co-chief investment officer William E. Conway Jr., direct tens of billions of dollars annually into investments upon which millions of pensioners, foundation employees and recipients, citizens in various countries, and wealthy individuals depend. With $174 billion of investors' money at Carlyle's disposal, their decisions ripple through the world of finance.
"Here is what I expect him to do: I expect him to work primarily on Carlyle's largest funds," Conway said. "That matches his skill set, and that's where the money is. If we are writing a check for over $1 billion, I want Pete Clare's judgment on whether or not we should do that transaction."
Private equity firms take other people's money, invest that money in companies, and hopefully fix them to make them more profitable and valuable, then sell them for a profit. Sounds simple, but it is a high-risk, hugely competitive business that requires a unique set of skills.
The investing is the engine that makes everything else at Carlyle go. The company has produced enviable returns of 18 percent annually after hefty fees, thanks to home runs such as the $4 billion profit it turned on consulting firm Booz Allen Hamilton.
Carlyle also has gotten its share of black eyes, including failed hedge funds and a recent bankruptcy at Philadelphia Energy Solutions, its highly touted $175 million investment in an oil refining business.
Returns on investments power the rarified existence — jets, philanthropy, acclaim — inhabited by the elite circle of private equity moguls.
Carlyle and other major private equity firms, once known as leveraged buyout shops, find themselves at a key inflection point as the next generation migrates into senior leadership positions, replacing industry pioneers such as Carlyle co-founder David M. Rubenstein, Stephen Schwarzman of Blackstone Group and Henry Kravis of KKR & Co.
"All the big firms are transitioning from the founders," said Colin Blaydon, former dean of Dartmouth's Tuck School of Business and the founder of its Center for Private Equity. "And the chief investment officer is really key. The limited partners really, really look at investment returns. That is all they care about."
One person who has a working relationship with Clare once asked him what he does for relaxation. Clare responded, in all seriousness: "I increase EBITDA multiples." (That's an industry term — earnings before interest, taxes, depreciation and amortization — and a key measure of a business's success.)
Calling him low key is an understatement.
"He is not a master-of-the-universe guy," Conway said. "He is a regular guy. Has a moral compass, a personal humility."
Clare and his wife, Teresa, "have been intentional about being low key despite how well they have done," said U.S. Rep. John Delaney (D-Md.), whose children have gone to school alongside Clare's. Delaney called Clare "unassuming and decent."
The software blow-up from early in his career offers a window into how Clare thinks and how that thinking fits into Carlyle's culture. The Georgetown and Wharton graduate said during a rare interview late in 2017 that managing risk is about listening, having clarity of thought and knowing your limitations.
One of the keys to successful investing is not doing dumb stuff such as throwing money at the high-flying stocks of the moment, investing in high-fee mutual funds or thinking you can make a quick buck on a friend's idea, a can't-miss real estate deal or, God forbid, a restaurant.
For regular Joes, it's this simple: Buy vanilla, low-cost mutual funds and wait for compounding interest to work its wonders.
Clare swims in deeper pools. He sees his mission this way:
"My job is to spot the places where there's a higher probability of bad outcomes here and make sure we don't do that deal," he said. "That is the key to investing: If I can make half the bad outcomes go away, then we're always going to have outperformance."
Clare grew up surrounded by business.
His father was a hit-and-miss entrepreneur who dabbled in areas including wood stoves and software.
"He was always doing something on the side," said Clare, one of five kids raised in the New York City suburbs. "He was always looking for the next big thing. Our whole garage was full of wood-burning stoves at one point."
He had an uncle who managed money at a bank. His grandfather was an accountant who loved cigars and scotch and taught young Pete how to fish. Clare loved the outdoors, but he also was intrigued by his grandfather's work.
Accounting also offered a path to financial security for a kid who earned extra money delivering auto parts, renovating homes and slapping sandwiches together at delicatessens.
"It was a blend of all that when I went to Georgetown," he said. The Clare family didn't have a lot of money, so a half-tuition scholarship, student loans and a campus bartending job (he eventually became manager) saw him through.
After graduating second in his class in 1987, Clare worked at Prudential Bache, then spent a year at a boutique family investment firm, learning the finance skills that would eventually put him where he is at Carlyle.
He was only 24 when he went to work for the Belzberg family, a Canadian-based financial dynasty then led by Sam Belzberg, one of the early corporate raiders.
"They were like today's activist firms," said Clare, who worked in the family's Park Avenue office. "They would take a 4 or 5 percent position, start a proxy fight and take over the company."
Clare was tasked with scrutinizing potential takeover targets — including La-Z-Boy, Converse and RJR Nabisco — and how they ran, what might be wrong. He looked at their debt, profits, losses, management, products — everything.
At one point, the Belzbergs dumped a folder with half a billion dollars of high-yield corporate bonds on his desk with a mission: "Figure out what we should do with these."
"It was how to look at a company, tear it down and into its component pieces," he said. "It was a lot of the basic training of really understanding what fundamentally represents value in the company and how to unlock it. It was fascinating."
Investing sounds scientific, but Clare breaks it down into being intellectually honest — and figuring out what you don't know.
"The thing that amazes me the most is that some of the smartest people in the world really don't make good investors," Clare said. "They're so smart that they have the answer to everything. Their opinion is right, and everybody else is wrong."
Clare sees humility as a business skill. He remembers interviewing a candidate for Carlyle's Hong Kong office who said he never made a bad investment decision and blamed any losses on his co-workers.
"That person was dead to me after that," he said. "There's nobody in the investment business that's not made a bad investment. He was arrogant. Not honest. Not a team player. It was just, ding, ding, ding, all the warnings signs going off."
Tom Rabaut, a Carlyle operating executive, said Clare has an expression for managers who don't measure up: "When we sell this, he certainly won't be able to go naked on the beach the rest of his life."
"There's no BS there," said real estate investor Esko Korhonen, who knows Clare from Carlyle and from social activities around St. Patrick's Episcopal Day School in the District.
Clare's training started at his family's kitchen table.
"I owe it to my mom, who was super, super smart," he said. "She would call you out if you made some statement that was not factually correct, not evidence-based. 'That's not true,' she would say. 'Who told you that?' She was rigorous. We would march off to the encyclopedia to look something up. That, for me, formed this intellectual honesty."
He also knew from the year with the Belzbergs that he did not want to be the enemy of management. He wanted to work with managers and fix the investments.
"Being the bad guy is just a bad personality fit for me," he said.
But how does someone get to the Carlyle level without an edge?
"Pete comes off as disarming and laid back, but he is anything but that," Rabaut said. "He is very intense."
Conway said Clare was made for investing.
After studying at the University of Pennsylvania's Wharton School, Clare joined Carlyle in 1992 as the first MBA it hired.
"He was an investor," Conway said. "He wanted to be an investor."
Clare credits Conway with refining his skills.
"You see it in the best CEOs we work with . . . tremendous clarity of thought: 'Here's the things we need to focus on and in this order. This is what I like about this deal. This is what I don't like,' " Clare said.
And when evaluating a company, he said, Conway would listen carefully, letting the managers do the talking.
"Bill would say, 'Wait a minute. Tell me more about that. Why did you say it that way? I don't understand why you used that phrase,' " Clare said. "Drilling deeper, you get a lot more information."
Clare said too many people "are just waiting to talk again."
It was the early 1990s, and Carlyle had decoded a key business opportunity in the defense industry, thanks in part to its hires such as former defense secretary Frank Carlucci.
"We hit onto this whole investment thesis of buying into cheap electronics firms that were going to produce everything from smart Navy ships to smart planes and eventually cyberwarfare," Clare said. "There were going to be fewer aircraft carriers, fewer jets and fewer tanks, but each one that does get made is going to be stuffed with four times as much electronics as they used to be."
Carlyle and its investors made tons on deals such as Magnavox, which returned $300 million on a $25 million investment. As the money flowed, Carlyle's founders and junior partners such as Clare put in their own cash alongside investors'. The personal wealth piled up. The three co-founders — Conway, Rubenstein and Daniel D'Aniello — are billionaires. Clare and other early hires who stayed for the ride are incredibly wealthy but have not joined the nine-zero club.
Clare said Carlyle's avoidance of risk has also caused the firm to occasionally miss out on a home run. They waited too long and talked too much as they debated whether to purchase a Boeing subsidiary that made fuselages. The company that bought the fuselage business capitalized on the growing aircraft demand in China and India.
Carlyle missed out on millions, but Clare recalled what a money manager told him long ago.
"He had given me two or three stocks to analyze," he said. "And I was overanalyzing and petrified about making the wrong decision."
His boss had some sage advice: "Listen, Pete, in our business, you don't have to be right every time. You just have to be right more often than you're wrong."