Politicos on the buyout bandwagon

Global Finance, May 1998 by Kosman, Josh

A passel of US political celebrities is trying to make post-government fortunes hawking private equity funds around the world.

When James A. Baker, former US secretary of state, traveled to Bangkok's Orient Hotel in mid-March to meet with Thai tycoons and the country's deputy prime minister, he wasn't offering advice on economic reforms. He was introducing his firm so it could more easily buy companies around Asia.

Baker is a partner of Carlyle Group-along with two colleagues from the Reagan and Bush administrations, former US defense secretary Frank Carlucci and Richard Darman, who was budget director. A Washington, DC, firm of inside-the-beltway politicians, lawyers, and investment professionals, Carlyle puts together private equity funds and has racked up returns of 33% a year this decade by acquiring and reselling US defense companies in the post-Cold War defense consolidation. Former President George Bush and general Colin Powell, who used to head America's armed forces (and who is periodically touted as a presidential candidate), are friends of the firm who sometimes, unofficially, help raise money.

Carlyle is now taking its skills abroad. In the process of launching a buyout fund with a target of $1 billion for Asia, it's in the final stages of raising $1.2 billion for a European fund. William Conway, who runs most of Carlyle's investments, says that Europe's defense industry looks remarkably similar to the US industry in the early 1990s-and that few European consolidators know what they're doing yet. "Airbus Industrie has got a long way to go," he says tartly. And after raising the Asia fund, Carlyle plans to start a new US fund that could raise more than $2 billion.

Baker and friends aren't the only US political celebrities shopping in the global marketplace. Nicholas Brady, Bush's treasury secretary, set up Darby Overseas Investments in the early 1990s with Daniel Marx, a former undersecretary of finance in Argentina, to exploit their connections during the Latin American debt crisis and buy Latin companies. Brady's friend George Shultz, a secretary of state in the Reagan years, consults with the group. Former secretary of state Henry Kissinger and Lloyd Bentsen, Clinton's first treasury secretary, both advise American International Group's private equity activities abroad, as do Moeen Qureshi, who was briefly prime minister of Pakistan, and his partner Donald C. Roth, former treasurer of the World Bank who is the financial brains behind Bill Bradley's political ambitions. And former Clinton strategist George Stephanopoulos, Indiana governor Evan Bayh, and Minnesota congressman Vin Weber joined the board of Chartwell Investments last year to help it find buyout targets.

In increasing numbers, US government officials are turning to the leveraged buyout game when they leave office, transforming themselves into corporate raiders of sorts by forming or joining private equity groups. More than 300 such groups in the United States alone raised $34.5 billion last year from institutional investors and wealthy individuals. Their funds seek large stakes in companies or acquire companies outright with the intent of selling to a strategic buyer or taking them public, usually within five years.

The politicos' fascination with buyout funds goes back to the mid-1980s, when William Simon, a treasury secretary in the Carter administration, made a killing after he left office by acquiring Gibson Greetings, sprucing it up, and taking it public again. Simon multiplied his equity more than 100-fold in barely three years. That coup ignited the 1980s leveraged buyout boom. It has also festered in the minds of out-of-work political figures: If Simon can do it, why can't they do it, too?

Bill Simon at least had a financial background. He had been a partner at Salomon Brothers. And Nick Brady long headed investment bank Dillon Read. The new crowd is not so expertbut they've got lots of connections. And their motive is the same. "I'm doing this to make money," says John Lehman, secretary of the US Navy in the Reagan-Bush years who now operates his own buyout shop, JFL Investors. Lehman says his interest in business grew out of his experience negotiating defense contracts for the Navy and trade agreements with the Chinese and Russians when he was an assistant to secretary of state Kissinger in the Nixon and Ford administrations.

According to a 1997 survey by KPMG Peat Marwick, a managing general partner at a US-based buyout firm earns, on average, $5,249,400 a year, including long-term benefits. Advisers to private equity groups can command more than $1 million a year. Carlyle last month rounded out the advisory board for its new European fund by adding former British Prime Minister John Major. He joins former British foreign secretary Geoffrey Howe and Karl Otto Pohl, the previous chief of Germany's Bundesbank, on the board. Such figures rarely find deals, but their presence adds credibility. Carlyle "will never hear about something first from those guys," says Lehman. "But once they find a company, they may get to the table first and will be taken seriously."