Re: Systems of innovation

["Charles Jannuzi" <jannuzi@xxxxxxxxxxxxxxxxxxxxxxxxx>]

> >I think there is a perception in Washington that US-based firms have a
> durable technological advantage in both financial and nonfinancial
services,
> and that any measure that increases their scope and market access is good
> national economic policy. <
>
> to what extent do our fearless leaders care about "good national economic
> policy"? I get the impression that everything is in terms of what's good
for
> the most influential businesses, what fits with the ideology du jour
> (neoliberalism), and what won't cause a big public relations stink.
> Jim Devine

This is a topic that definitely needs aired out with real world info.
brought in.
Like what is actually happening with certain high tech clusters right now
probably most likely depends on what the world's top ten private equity
groups are putting their money in.

 I don't think what certain US private equity groups are doing is really in
the national interest, but, despite talking the talk, it isn't about
laissez-faire actually. It's about influence peddling and revolving doors
that make your head spin and conflicts of interest that have no end. No one
yet, at least on the internet, has written a definitive piece about the most
interesting private equity entity, Carlyle Group. However, this one from Red
Herring has some interesting stuff. Notice I've put some interpolations in
brackets in the article. Also, it's interesting to track Carlyle's moves
into India to grab up software firms and into telecoms and interet in the US
and E. Asia. They seem to be in the middle of things with NextWave in a case
that has gone clear to the Supreme Court. Carlyle has just added the former
FCC director, William Kennard,  to its already loaded list of revolving door
figures. It also has hundreds of millions parked in a global energy fund
with top talent in charge, but very little invested--post-Enron problems
maybe?

Charles Jannuzi

---------------

http://www.redherring.com/vc/2002/0111/947.html


Carlyle's way Making a mint inside "the iron triangle" of defense,
government, and industry. By Dan Briody  January 8, 2002

Like everyone else in the United States, the group stood transfixed as the
events of September 11 unfolded. Present were former secretary of defense
Frank Carlucci, former secretary of state James Baker III, and
representatives of the bin Laden family. This was not some underground
presidential bunker or Central Intelligence Agency interrogation room. It
was the Ritz-Carlton in Washington, D.C., the plush setting for the annual
investor conference of one of the most powerful, well-connected, and
secretive companies in the world: the Carlyle Group. And since September 11,
this little-known company has become unexpectedly important.

That the Carlyle Group had its conference on America's darkest day was mere
coincidence, but there is nothing accidental about the cast of characters
that this private-equity powerhouse has assembled in the 14 years since its
founding. Among those associated with Carlyle are former U.S. president
George Bush Sr., former U.K. prime minister John Major, and former president
of the Philippines Fidel Ramos. And Carlyle has counted George Soros, Prince
Alwaleed bin Talal bin Abdul Aziz Alsaud of Saudi Arabia, and Osama bin
Laden's estranged family among its high-profile clientele. The group has
been able to parlay its political clout into a lucrative buyout practice (in
other words, purchasing struggling companies, turning them around, and
selling them for huge profits)--everything from defense contractors to
telecommunications and aerospace companies. It is a kind of ruthless
investing made popular by the movie Wall Street, and any industry that
relies heavily on government regulation is fair game for Carlyle's brand of
access capitalism. Carlyle has established itself as the gatekeeper between
private business interests and U.S. defense spending. And as the Carlyle
investors watched the World Trade towers go down, the group's prospects went
up.

In running what its own marketing literature spookily calls "a vast,
interlocking, global network of businesses and investment professionals"
that operates within the so-called iron triangle of industry, government,
and the military, the Carlyle Group leaves itself open to any number of
conflicts of interest and stunning ironies. For example, it is hard to
ignore the fact that Osama bin Laden's family members, who renounced their
son ten years ago, stood to gain financially from the war being waged
against him until late October, when public criticism of the relationship
forced them to liquidate their holdings in the firm. Or consider that U.S.
president George W. Bush is in a position to make budgetary decisions that
could pad his father's bank account. But for the Carlyle Group, walking that
narrow line is the art of doing business at the murky intersection of
Washington politics, national security, and private capital; mastering it
has enabled the group to amass $12 billion [Jannuzi: this figure is low] in
funds under management. But while successful in the traditional
private-equity avenue of corporate buyouts, Carlyle has recently set its
sites on venture capital with less success. The firm is finding that all the
politicians in the world won't help it identify an emerging technology or a
winning business model.

Surprisingly, Carlyle has avoided the fertile VC market in defense
technology [Jannuzi: the last I read, as of Dec. 2001, Carlyle was going to
take its biggest defense holding public , in an IPO supposed to be worth 400
million dollars; besides, Carlyle has made some big acquisitions in defense
globally] which now, more than ever, comes from smaller companies hoping to
cash in on what the defense establishment calls the revolution in military
affairs, or RMA.&nbsp; Thus far, Carlyle has passed up on these emerging
technologies [Jannuzi: this seems like disinformation here] in favor of some
truly awful Internet plays [Jannuzi: if they are so awful, why does Carlyle
have returns like 25-40% a year?]. And despite its unique qualifications for
early-stage funding of defense companies, the firm seems to have no appetite
for the sector [this also seems to be doubtful].

Despite its VC troubles, however, the Carlyle Group's core business is set
for some good times ahead. Though the group has raised eyebrows on Capitol
Hill in the past, the firm's close ties with the current administration and
its cozy relationship with several prominent Saudi government figures has
the watchdogs howling. And it's those same connections that will keep
Carlyle in the black for as long as the war against terrorism endures.

For the 11th-largest defense contractor in the United States, wartime is
boom time. No one knows that better than the Carlyle Group, which less than
a month after U.S. troops began bombing Afghanistan filed to take public its
crown jewel of defense, United Defense, a company it has owned for nearly a
decade. That this company is even able to go public is testament to the
Carlyle Group's pull in Washington.

United Defense makes the controversial Crusader, a 42-ton, self-propelled
howitzer that moves and operates much like a tank and can lob ten 155-mm
shells per minute as far as 40 kilometers. The Crusader has been in the
sights of Pentagon budget cutters since the Clinton administration, which
argued that it was a relic of the cold war era--too heavy and slow for
today's warfare. Even the Pentagon had recommended the program be
discontinued. But remarkably, the $11 billion contract for the Crusader is
still alive, thanks largely to the Carlyle Group.

"This is very much an example of a cold war-inspired weapon whose time has
passed," notes Steve Grundman, a consultant at Charles River Associates, a
defense and aerospace consultancy in Boston. "Its liabilities were uncovered
during the Kosovo campaign, when the Army was unable to deploy it in time.
It is exceedingly expensive, and it was a wake-up call to the Army that many
of its forces are no longer relevant."

But the Carlyle Group was having none of that. While it is impossible to say
what U.S. secretary of defense Donald Rumsfeld was thinking when he made the
decision to keep the Crusader program alive, people close to the situation
claim to have a pretty good idea. Mr. Carlucci and Mr. Rumsfeld are good
friends and former wrestling partners from their undergraduate days at
Princeton University. And while Carlyle executives are quick to reject any
accusations of them lobbying the current administration, others aren't so
sure. "In this particular effort, I felt that they were like any other
lobbying group, apart from the fact that they are not," said one Washington,
D.C., lobbyist with intimate knowledge of the Crusader negotiations, noting
the fine line between lobbying and having a drink with a old friend.

According to Greg McCarthy, a spokesperson for Representative J.C. Watts Jr.
(R: Oklahoma), whose district is home to one of the Crusader's assembly
plants, the Carlyle Group's influence was indeed felt at the Pentagon.
"Carlyle's strength was within the DoD, because as a rule someone like Frank
Carlucci is going to have access," says Mr. McCarthy. "But they have other
staff types that work behind the scenes, in the dark, that know everything
about the Army and Capitol Hill."

Perhaps even more disconcerting than Carlyle's ties to the Pentagon are its
connections within the White House itself. Aside from signing up George Bush
Sr. shortly after his presidential term ended, Carlyle gave George W. Bush a
job on the board of Texas-based airline food caterer Caterair International
back in 1991. Since Bush the younger took office this year, a number of
events have raised eyebrows.

Shortly after George W. Bush was sworn in as president, he broke off talks
with North Korea regarding long-range ballistic missiles, claiming there was
no way to ensure North Korea would comply with any guidelines that were
developed. The news came as a shock to South Korean officials, who had spent
years negotiating with the North, assisted by the Clinton administration. By
June, Mr. Bush had reopened negotiations with North Korea, but only at the
urging of his own father. According to reports, the former president sent
his son a memo persuasively arguing the need to work with the North Korean
government. It was the first time the nation had seen the influence of the
father on the son in office.

But what has been overlooked was Carlyle's business interest in Korea. The
senior Bush had spearheaded the group's successful entrance into the South
Korean market, paving the way for buyouts of Korea's KorAm Bank and Mercury,
a telecommunications equipment company [Jannuzi: they also just bought up a
large tire maker in Korea]. For the business to be successful, stability
[Jannuzi: stability means what? status quo!]between North and South Korea is
critical. And though there is no direct evidence linking the senior Bush's
business dealings in Korea with the change in policy, it is the appearance
of impropriety that excites the watchdogs. "We are clearly aware that former
President Bush has weighed in on policy toward South Korea and we note that
U.S. policy changed after those communications," says Peter Eisner, managing
director at the Center for Public Integrity, a watchdog group in Washington,
D.C., which has an active file on the Carlyle Group. "We know that former
President Bush receives remuneration for his work with Carlyle and that he
is capable of advising the current president, but how much further it goes,
we don't know."

While the Center for Public Integrity looks for its smoking gun, others in
Washington say hard evidence is unimportant. "Whether the decisions made by
the former president are a real or apparent conflict of interest doesn't
matter, because in the public's eye they're equally as damaging," says Larry
Noble, executive director and general counsel of the Center for Responsive
Politics. "Bush [Sr.] has to seriously consider the propriety of sitting on
the board of a group that is impacted by his son's decisions."

And the controversy is expected only to increase as Carlyle's investments in
Saudi Arabia are scrutinized during the war on terrorism. Mr. Eisner says
that very little is known about Carlyle's involvements in Saudi Arabia,
except that the firm has been making close to $50 million a year training
the Saudi Arabian National Guard, troops that are sworn to protect the
monarchy. Carlyle also advises the Saudi royal family on the Economic Offset
Program, a system that is designed to encourage foreign businesses to open
shop in Saudi Arabia and uses re-investment incentives to keep those
businesses' proceeds in the country.

But the money flowing out of Saudi Arabia and into the Carlyle Group is of
even more interest. Immediately after the September 11 attacks, reports
surfaced of Carlyle's involvement with the Saudi Binladin Group, the $5
billion construction business run by Osama's half-brother Bakr. The bin
Laden family invested $2 million in the Carlyle Partners II fund [Jannuzi:
other internet sources say $20 million], which includes in its portfolio
United Defense [Jannuzi: this is the company going to IPO.] and other
defense and aerospace companies. On October 26, the Carlyle Group severed
its relationship with the bin Laden family in what officials termed a mutual
decision. Mr. Bush Sr. and Mr. Major have been to Saudi Arabia on behalf of
Carlyle as recently as last year, and according to reports, the Federal
Bureau of Investigation is currently looking into the flow of money from the
bin Laden family. Carlyle officials declined to answer any questions
regarding their activities in Saudi Arabia.

But for all the questions, Carlyle has stayed clean in the eyes of the law.
Lobbying laws in Washington, D.C., are ambiguous at best, requiring only
that former politicians observe a one-year "cooling-off period" before they
reenter the lobbying scene on behalf of industry. It is playing within this
gray area that has given the Carlyle Group some of the best returns in the
business.

After David Rubenstein, a former aide in the Carter administration, and
William Conway Jr., former chief financial officer of MCI Communications,
hooked up at New York's Carlyle hotel in 1987 to form the company, the
Carlyle Group spent two lost years investing in a hodgepodge of companies.
It wasn't until 1989, when the company brought in Mr. Carlucci, fresh off
his two-year stint as U.S. secretary of defense, that Carlyle got serious in
government. In 1991 the company made a name for itself by facilitating a
$590 million purchase of Citicorp stock for Prince Alwaleed bin Talal.
Shortly thereafter, Carlyle snatched up defense contractors Harsco, BDM
International, and LTV, turning the companies around and selling them to the
likes of TRW, Boeing, and Lockheed Martin.

The Carlyle Group has diversified its holdings since then, investing in
everything from bottling companies to natural-food grocers. In the process,
it has become one of the biggest, most successful private-equity firms in
business, with annualized returns of 35 percent. (Judging by the early
numbers from some of their funds, however, like many other private-equity
funds, 2001 will be a considerably less profitable year for Carlyle.) "They
are the new breed of private equity, acting more like a large mutual fund of
private companies," says David Snow, editor of PrivateEquityCentral.net, a
Web site that tracks private-equity firms. The numbers are impressive:
Carlyle employs 240 people, as opposed to the 10 or 12 typical of most
private-equity firms. It has ownership stakes in 164 companies, which
collectively employ more than 70,000 people. George Soros invested $100
million in the group's funds; the California Public Employees' Retirement
System is in for $305 million [Jannuzi: This figure is low].

Carlyle has succeeded by raising money first, then finding the talent to
manage it. For instance, it raised a fund for buying out telecom companies
and hired William Kennard, the former U.S. Federal Communications Commission
chairman, to run it. Accused early on of being nothing more than a bunch of
Washington grip-and-grinners, Carlyle has proven its critics wrong. At a Sal
omon Smith Barney private-equity conference last March, a panel of
professional investment managers were asked who the best fund managers are.
Carlyle cofounder Mr. Conway was one of two managers chosen.

With its size and success, questions about the firm's ability to grow
revenue has arisen. Carlyle has placed its bets for future growth on the VC
markets, which it entered in 1996. But to date, it has found that venture
capital is a game with far different rules than that of corporate buyouts.
"They may be very established in private equity, but it seems to me that
they don't really know the venture capital business [Jannuzi: til they saw
Ripplewood Holdings' deal on Shinsei Bank in Japan and realized the
potential in having a large Japanese bank]," says one VC who has done deals
with Carlyle. "In buyouts, you take over a company and fight the management,
but in venture capital it's the opposite. You want to work with people."

Carlyle executives admit as much. As a result, the Carlyle Europe Venture
Partners fund has been slow to commit its capital. So far, it has spent just
more than 20 percent of its $660 million, and 3 of its original 17
investments have already folded. None has gone public or been acquired. As
Jack Biddle, cofounder of Novak Biddle Venture Partners, dryly puts it, "I
haven't been involved in a lot of venture deals where the participation of a
president mattered that much. In venture capital, it's all about the
technology."

For a firm that has made its money in highly regulated, politically charged
industries, picking business-to-business plays is hardly second nature.
While Carlyle has investments in highly regulated sectors like telecom and
banking, it has avoided defense entirely [Jannuzi: not true, they've made
acquisitions in Europe, expanded business in Australia, and set up a joint
venture in Turkey]  , instead focusing on tech industries that have already
gone flat. The firm's European fund alone boasts six B2B companies, two
optical-networking companies, and Riot-E, a wireless media play. Jacques
Garaialde, managing director of the Europe fund concedes that expectations
have been shifted. "Clearly, we can't make 100 times returns on B2B, but
there are some situations in which we can make 3 times."

But the struggles in its VC business may be offset, at least temporarily, by
the expected windfall from the war on terrorism. The federal government has
already approved a $40 billion supplemental aid package to the current
budget, $19 billion of which is headed straight to the Pentagon [Jannuzi:
Carlyle Group holdings are also companies that have FAA and other government
contracts.]. Some of the additional government spending is likely to find
its way into Carlyle's coffers.

The Bush administration isn't afraid to mix business and politics, and no
other firm embodies that penchant better than the Carlyle Group. Walking
that fine line is what Carlyle does best. We may not see Osama bin Laden's
brothers at Carlyle's investor conferences any more, but business will go on
as usual for the biggest old boys network around. As Mr. Snow puts it,
"Carlyle will always have to defend itself and will never be able to
convince certain people that they aren't capable of forging murky backroom
deals. George Bush's father does profit when the Carlyle Group profits, but
to make the leap that the president would base decisions on that is to say
that the president is corrupt."

Additional reporting by Lawrence Aragon, Mark Chediak, Julie Landry,
Christopher Locke, Eric Moskowitz, Mark Mowrey, and Michael Parsons.