Peddling Power For Profit

The revolving door between Washington and Wall Street is nothing new. Cold war mandarins, such as Averell Harriman and Robert Lovett, shuttled back to their banks between stints of public service, and more recently such former officials as Peter Peterson, William Simon and Paul Volcker have become renowned in the investment world. But all these men were financiers by trade and training. Now a fledgling but fast-growing investment group has discovered that global dealmaking these days is as much about cashing in on connections as it is about cash calculations. Rather than seeking big names with proven financial acumen, it is hiring high-profile power players who are better known for their policy expertise and political clout. And unlike other investment banks, it is based in Washington.

The Carlyle Group scored its biggest political coup last week, when it signed James Baker as a partner. Baker is no banker, but as a former Secretary of State and George Bush’s veteran campaign handler, his Washington and worldwide connections are unsurpassed. The same is true of the firm’s chairman, Frank Carlucci, a former diplomat who was Ronald Reagan’s Defense Secretary. When teamed with managing director Richard Darman, who as Bush’s former Budget Director brings financial as well as political expertise, the group seems like a Republican Administration in exile. And its members hope to lure in another noted nonbanker, Colin Powell, when he steps down this fall as Chairman of the Joint Chiefs of Staff.

Baker was brought into the firm by its founding partner and top-ranking Democrat, David Rubenstein, a former domestic adviser to President Jimmy Carter. He met Baker after the election through their mutual friend Robert Strauss, the wheeling-dealing Democrat who had just finished serving as Bush’s Ambassador to Moscow. “Here I was with a man who helped throw me and other Democrats out of office 12 years ago,” recalls Rubenstein of his first meeting with Baker in the White House. “And we had been brought together by a prominent Democrat fresh from duty in a Republican Administration. It’s truly a tale of the way things work in today’s Washington.”

As a fixture in Washington for more than a decade, Baker hardly lacked opportunities, including a lucrative offer to write his memoirs and a chance to run a foundation that Rice University wants to name for him in Texas. But after three years as America’s jet-lagged senior diplomat and three months on the campaign trail managing Bush’s failed re-election drive, Baker wanted to spend more time at home.

So far the Washingtonians have proved adept at the money game. Starting with $5 million in capital in 1987, the company has parlayed that stake into control of 10 companies in 35 countries with about $5 billion in revenues a year. The firm’s holdings range from Caterair, America’s biggest airline catering concern, to a book distributor and the former aircraft division of military contractor LTV. According to Rubenstein, the firm’s well-heeled investors have raked in returns of up to 46% a year.

Carlyle’s success illustrates the value of good connections and powerful names when making deals these days. “We certainly don’t look at ourselves as a refuge for former government employees,” says Carlucci, who joined Carlyle in 1989 and sits on the board of a staggering 32 companies and nonprofit organizations. “But I’d be a fool to deny that having a number of high- profile officeholders does provide Carlyle with certain advantages.” Explains Samuel Hayes, a Harvard Business School professor: “The Carlyle Group has gone after former government officials whom top businessmen love to be seen with. Finding potential companies to acquire can be very tough, unless you’ve got some big names on your staff to help you get through the door.”

Prominent former custodians of public trust can also help defuse image problems that threaten to snarl deals. For example, Carlyle became the adviser to Saudi Prince al-Waleed bin Talal in his $590 million investment in Citicorp in 1991. The firm subsequently teamed with France’s state-owned Thomson-CSF to outbid U.S. defense giants for the missile and aircraft divisions of LTV last year. Such global connections can be controversial. “The one significant problem for Carlyle is that they’ve been on the foreign side of controversial transactions,” says a Washington lobbyist and rival dealmaker. But Carlyle has the political savvy to play different sides. When the Bush Administration overturned the French deal in order to keep LTV out of the hands of foreign interests, Carlyle teamed with Northrop to acquire LTV’s aircraft operations.

For now, Carlyle plans to advance full throttle on both the domestic and foreign fronts. Baker’s greatest value could lie in his international connections: while he cannot legally exploit his contacts in official Washington for at least a year, he faces no such restrictions abroad.