Peter Clare Helps Lead Carlyle’s Next Generation – Corrected

Back in the late 1990s and early 2000s, United Defense Industries Inc., a defense contractor that The Carlyle Group had bought in 1997 for $850 million, faced serious challenges.

How the 46-year-old Peter Clare, the Carlyle investment professional who helped lead the deal, dealt with the crisis would help propel him to the leadership of that firm’s aerospace and defense group in 2004 and, this March, to co-head of its U.S. buyout group. Clare is among a select group of rising stars at Carlyle expected to take the reins of the Washington D.C.-based firm as its first generation steps back in the years to come.

Soon after Carlyle’s acquisition of United Defense, the government, which had been cutting back on military spending, sliced how it much it would reimburse contractors’ expenses to roughly 75 percent from 85 percent. These so-called “progress payments” were the main way contractors got paid. Clare responded by challenging the firm’s executives to find ways to replace the critical revenue stream.

“‘We’ve got to find a solution, a different way to get paid,'” Tom Rabaut, a senior adviser at Carlyle and the former CEO of United Defense, recalled Clare saying. “That led us to go after milestone payments.”

Relatively little used in defense contracting at the time, “milestone payments” allowed United Defense to seek payments from the government faster based on achievements it reached on its contracts. This was risky, Rabaut explained, because if the company didn’t reach its milestones it wouldn’t get paid. But by meeting its milestones, United Defense got paid sooner and was thus less dependent on financing for working capital, saving it about $50 million, Rabaut said.

“Pete was saying, ‘Negotiate the milestone, take on more risk to perform well because we think you can,'” Rabaut said.

Then, in another blow to the company, Defense Secretary Donald Rumsfeld in 2002 announced he was scrapping an $11 billion artillery program called Crusader, a 50-ton, tank-like artillery system United Defense was developing, as part of his campaign to transform the military into a lighter, sleeker force. This was a major contract, comprising about 20 percent of the company’s business, Rabaut said.

Rather than turning on management for not preparing for such an existential threat, Rabaut said Clare doubled-down on his support of the team, encouraging them to somehow supplement the business. With Clare’s help, United Defense won a contract to provide an alternate artillery system that was about 30 tons. “He worked with us to salvage the business, to keep the wheels on the wagon,” Rabaut said. “A lot of owners won’t do that. Instead of looking at what went wrong, he looked at what was possible.”

In Carlyle’s ownership of United Defense, Clare also helped engineer the complex acquisition of Bofors Weapons Systems, a Swedish maker of naval guns and the company’s first international acquisition. Ultimately, the investment would generate a return of 7.5x Carlyle’s invested capital.

The Transition

In the shake-up in March, Clare joined Allan Holt, 59, as co-head of U.S. Buyouts. Adam Palmer, who had been with the aerospace and defense team since 1996, replaced Clare as the head of that group.

Carlyle’s aerospace and defense group, with about seven investment professionals, would be a formidable buyout shop in its own right. As leader of that group, Clare helped invest approximately $4 billion and led some of Carlyle’s most storied deals, including its $2.54 billion buyout of government consulting business Booz Allen Hamilton Inc. in 2008. Carlyle took the company public two years later, and made more than 2x its equity investment.

“The financial crisis was really upon us,” said Bill Conway, a Carlyle co-founder who hired Clare in 1992, recalled of the deal. “Dan [Akerson] and Allan [Holt] were lukewarm on the deal. But Pete really fought for it and got it done.”

But aerospace and defense still only accounts for a small slice of the deals done at Carlyle, which has evolved from a pure buyout shop to a global asset manager of $153 billion today, with real estate and debt financing businesses alongside buyouts operating out of 34 offices around the world.

As co-head of U.S. buyouts, Clare oversees more than 60 investment professionals charged with deploying Carlyle’s $13.7 billion fifth buyout fund across six sectors: aerospace and defense, industrial, health care, consumer and retail, technology and business services, and telecommunications and media.

Since his promotion, the magna cum laude grad of Georgetown University with an MBA from the University of Pennsylvania’s Wharton School has embarked on yet another education, seeking a better understanding of the sectors in which Carlyle invests. Clare has spent much of his 12-hour days listening to executives like Sandra Horbach and Karen Bechtel, who help lead the consumer and health care teams, respectively.

“The first challenge for me is becoming a lot smarter in a broader set of industries than I was before,” Clare said of his new role, six months in. “The health care team and consumer team will always know more about those sectors than I should. I’m relying on them to be the experts.”

Carlyle executives from around the world are also helping Clare gain a better understanding of macro-economic trends, the better for him to understand the global forces affecting the buyout market.

“I speak a lot more these days with our partners in Europe and Asia than I did previously, when I had a more narrow industry focus,” Clare said. “Now I want to find out, ‘What does our real estate team think about the state of world? What does our debt team think about state of the world?'”

Rabaut, the former United Defense CEO, said Clare’s innate curiosity has helped him grasp the broader base of knowledge necessary for his new position. He recalled an inquisitive Clare barraging him with questions while touring the company’s plant in the early days of Carlyle’s investment.

“His ability to take in huge amounts of data and distill it down to understandable concepts is incredible,” Rabaut said.

The Graduate

As he looks ahead, Clare is particularly bullish on wireless communications, talking enthusiastically about advances in voice and video communications. Carlyle made two big investments involved in the sector this year, buying CommScope Inc. for $3.7 billion and Syniverse Technologies for $2.6 billion.

“Even if you’re not sure about the pace of economic recovery in the U.S., you know these businesses will have strong demand,” Clare said, adding that revenues at Syniverse were up 20 percent in the first six months of 2011 versus the first six months of 2010.

Clare’s outlook on the economy has also evolved. Earlier in the year, Clare seemed sure the United States was on pace for a strong recovery, citing low interest rates, government stimuli, growth in emerging markets, and record corporate profits thanks in part to Great Recession-inspired cost reductions. Today, Clare remains optimistic, if not as enthusiastically so.

“Clearly our view is not as optimistic as it was six months ago,” said Clare, who expects 0 percent to 2 percent gross domestic product growth over the next few years. “But personally, I still am more optimistic about the U.S. economy than what I think the consensus is now.”

As co-head of U.S. buyouts, Clare is among what is widely seen as Carlyle’s next generation of leaders. Others include Mike Arpey, head of LP relations; Adena Friedman, CFO; Dave Marchick, global head of external affairs; Michael Petrick, head of global market strategies; X.D. Yang, co-head of Asia buyouts; and COO Glenn Youngkin (See accompanying table more info).

Clare and these executives are expected to take over the firm when founders Conway, David Rubenstein and Daniel D’Aniello, who are all in their early to mid-60s, eventually retire, though that is not expected any time soon. (“I’m not going anywhere,” Conway said, when asked when he might retire.)

Conway said Clare’s success as co-head of U.S. buyouts is critical.

“I don’t think failure was an option, for him, for me or for our investors,” Conway said. “And frankly, I didn’t have a ‘plan B.'”

Correction: Carlyle co-founder Bill Conway replaced Dan Akerson as head of global buyouts after Akerson left the firm to become CEO of General Motors in 2010. An earlier version of this story stated that Peter Clare replaced Akerson as co-head of U.S. buyouts when Akerson went to GM. The earlier version also misspelled Akerson as Ackerson. An earlier version of the story suggested Clare was the sole Carlyle investment professional leading the United Defense investment.