DAVID LAZARUS Friday, May 24, 2002
---------------------------------------------------------------------------- ----
There was President Bush prodding Europeans on Thursday to widen the "war on terrorism" and thus, presumably, get in step for an eventual attack on Baghdad.
This got me thinking about the slugfest in Washington at the moment over the $11 billion Crusader artillery system, which Defense Secretary Donald Rumsfeld wants to scrap and the Army is fighting to keep.
And this got me thinking about the Carlyle Group, which owns United Defense Industries, maker of the Crusader system, and counts among its partners a who's who of political potentates (including the president's dad, George Sr.).
Finally, this got me thinking -- we're getting to the point now -- about the 1.2 million members of the California Public Employees' Retirement System, or CalPERS, the largest public pension fund in the country and a stakeholder in both the Carlyle Group and United Defense Industries.
So what happens to all those hard-working civil servants if the Crusader gets scrubbed?
Hardly a thing, it turns out.
"We've already tripled our money on that one investment," said Pat Macht, a CalPERS spokeswoman. "Anything from this point forward is on top of what we've already gained."
CalPERS has about $730 million invested in Carlyle itself and in various Carlyle funds, including $80 million in the $1.9 billion fund that controls United Defense Industries.
On top of that, CalPERS' 5.5 percent stake in Carlyle means the pension fund shares in the roughly 20 percent cut the Carlyle Group rakes in from returns on its various investments.
That take could significantly increase if CalPERS, as expected, exercises an option to double its Carlyle holding by the end of the year.
"Regardless of what happens with Crusader, California public employees will still have benefited from this investment," said Chris Ullman, a spokesman for the Carlyle Group in Washington.
That's putting it mildly. Carlyle has handled its investment in United Defense Industries brilliantly, making sure the group's well-heeled investors are protected no matter what happens to the Crusader system.
Carlyle purchased United Defense in 1997 for $173 million in cash and $700 million in borrowed funds. It has since earned more than $400 million in dividends and capital gains from the company.
Investors earned their money back -- and then some -- when Carlyle used United Defense as collateral for bank loans to pay off outstanding obligations before taking the company public in December.
The Crusader risk is thus now being borne by non-Carlyle investors who climbed aboard after the initial public offering.
"Our fiduciary duty to our investors is to return as much as possible to them," said Ullman. "We've already returned their principal and some gain."
Carlyle is not standing idly on the sidelines, though. It would see even greater returns if the Crusader contract goes through and long-term orders are placed for the gun intended to replace the 40-year-old Paladin howitzer.
Rumsfeld, for one, sees no need for such hardware, which he believes has no place in the sort of get-in-get-out-fast warfare America is waging in Afghanistan.
The Crusader weighs 40 tons, and only two could be placed inside the military's biggest transport aircraft. It's not a nimble system.
Nevertheless, Army Secretary Thomas White (a former Enron exec, by the way) and other top brass say they need the sophisticated weapon and are pushing Congress to ignore the defense secretary's decision and fund the program.
It's not yet clear how the chips will fall. But Sen. James Inhofe, a Republican from Oklahoma, where Crusader would be built, got some attention the other day when he warned that the Pentagon would have to pay a termination fee of up to $520 million if it scuttled the system.
Meanwhile, United Defense warned this week that as many as 800 employees could get the ax if Crusader tanks.
The company is said to be lobbying aggressively to save the program, while Carlyle's powerful chairman, former Defense Secretary Frank Carlucci, has written to members of Congress urging them to back the Crusader.
No matter how this whole thing turns out, one thing's for sure: America's growing military commitments are good news for Carlyle, which specializes in defense-industry investments and is now averaging a 33 percent return on the $13.5 billion it manages.
That, in turn, is good news for CalPERS, which calls Carlyle one of its five biggest private equity partners.
"When a Carlyle investment does well, California public employees do well," said Carlyle's Ullman.
State workers have already profited handsomely from the Crusader, and not a single gun has yet been built.
Imagine how they'd do if the president, so clearly eager to finish the job in Iraq his father started, decides he needs a bigger stick after all.