CNBC Business | OIL-FIRED EQUITY

OIL-FIRED EQUITY

Everyone is riveted by the boom in private equity, but few are asking where the money is coming from, say Fredrik Richter and James Exelby

According to its own PR, the US-based firm formerly known as Texas Pacific Group “manages one of the world’s largest private investment companies with more than $30bn of assets under management.” Just five years ago, however, the figure was closer to $8bn (€5.9bn). Stripping out organic growth, it doesn’t take a financial genius to calculate that private equity firms are sucking up vast sums of investment from somewhere else.

“Somewhere else” means the rest of the world, of course – but the Middle East features disproportionately. This is due to an oil boom that, according to the Institute of International Finance, generated a combined current account surplus of €358bn between 2004 and 2006 among member states of the Gulf Cooperation Council – Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman.

That money is being invested in highly secretive private equity funds, to the consternation of politicians and trade unions in the West who understandably feel the industry has something to hide. Now that household consumer brands – rather than just unloved conglomerates – are being snapped up, the whole question of private equity and public interest is up for grabs.

But whereas the debate so far has centred around job losses, asset stripping, alleged tax advantages and the risk of burdening companies with unsustainable debt levels, there is also the broader question of where the money is coming from. In short, is private equity the ultimate form of money laundering, exchanging dirty oil dollars for cleanly pressed high street brands?

Washington DC-based Carlyle Group has for several years been a target for the detractors of private equity, owing to its high-profile involvement in defence companies including the mouth-wateringly successful QinetiQ in the UK. In 2003, Carlyle paid €61.7m for a 34% stake in the former Ministry of Defence technology arm; it sold the same stake three years later on the company’s flotation for a cool €350m profit.

The Carlyle Group has also been notable for its employment of large numbers of senior former and future politicians, including ex-president George H.W. Bush and his secretary of state James Baker, ex-US secretary of state for defence Frank Carlucci, former UK prime minister John Major and, briefly in the early 1990s, the 43-year-old, future, 43rd president, George W. Bush. All the above have now left the firm, and Carlyle, to its credit, publishes a complete list of partners and senior employees.

According to a 2006 Washingtonian article by James K. Glassman, Middle East money “represents roughly the same proportion of Carlyle’s investments as it always did: 3%.” That 3% no longer contains the contribution of Shafiq bin Laden, half-brother of Osama, who was (now famously) present at the Carlyle annual investor conference at the Ritz Carlton hotel in New York on 11 September 2001. Shafiq had invested €1.47m in a €1.54bn US buyout fund but severed all ties with Carlyle “about a month afterwards”, according to the Glassman article. There is absolutely no suggestion that he was involved in terrorism.

Furthermore, claimed Glassman, the Carlyle funds included “virtually no money from Saudi Arabia; almost all of it comes from small Gulf states like Kuwait and Qatar and from Arabs who live in New York or London.” All this information has to be taken on trust, however; there is absolutely no way to verify it under current disclosure requirements. All we know is that the minimum investment for an individual in one of Carlyle’s funds is $5m.