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Snowden throws spotlight on Carlyle Group's role in defence sector

Sophisticated asset manager has been trying to distance itself from extensive defence sector role

PUBLISHED : Saturday, 15 June, 2013, 12:00am
UPDATED : Saturday, 15 June, 2013, 8:23pm
 

The Carlyle Group has spent years attempting to shed its image as a well-connected private equity firm leveraging Washington heavyweights in the defence sector. Instead, it nurtured a reputation as a financially sophisticated asset manager that buys and sells everything from railways to oil refineries.

The recent disclosures involving National Security Agency surveillance on US citizens by Edward Snowden, an employee of Booz Allen Hamilton, a consulting firm majority-owned by Carlyle, has thrust two of Washington's most prominent corporate entities uncomfortably into the limelight, bound by the thread of turning government secrets into profits.

Everybody has a responsibility ... to bring in a certain amount of business
WILLIAM LOOMIS, STIFEL NICOLAUS

Snowden was fired on Tuesday after he confessed to being the source of the NSA reports. Federal investigators are examining how Snowden, who worked at an NSA facility in Hawaii and had also worked for the CIA, was able to gain access to sensitive information.

Carlyle declined to comment.

Booz Allen, has been a fixture in the Washington area for years, employing thousands and providing management and consulting services to the government, particularly the defence and intelligence agencies.

Those government contracts, and thousands more like them, in 2008 made Booz Allen a ripe acquisition target for Carlyle.

It paid US$2.54 billion for Booz as a deep recession took hold.

On the close of the deal, the less profitable international and commercial business, which has offices in Hong Kong and Shanghai, was spun off to become Booz & Co, leaving Carlyle with a government-only company.

The new Booz Allen Hamilton established an incentive-based compensation structure that gave the remaining partners a stake in the firm's success. In effect, said one person close to the deal who was not authorised to speak publicly, "you got to eat what you killed".

The incentives helped spur profits.

"Everybody has a responsibility, depending on your title, to bring in a certain amount of business," said William Loomis, managing director at financial services firm Stifel Nicolaus.

Booz Allen Hamilton, which employs 24,500, had a net profit of US$219 million on revenue of nearly US$5.8 billion for the fiscal year to March 31. During the same period in 2010, the year the company went public, it earned US$25 million on US$5.1 billion in revenue.

Carlyle has cashed in on the increased demand of Booz's services. As profits and revenue have grown, Booz Allen has borrowed money to pay dividends to shareholders, including Carlyle.

Carlyle collected nearly US$550 million in dividends in 2009 alone.

Last year, Booz Allen issued another special shareholder dividend valued at US$765 million.

Booz Allen went public in 2010, and Carlyle now owns around 69 per cent of the total shares outstanding, valued at about US$1.66 billion.

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