Carlyle Group In The Money Again

The privately held Carlyle Group has an uncanny knack for making good investments.

When British government officials decided to spin off the country's secret Ministry of Defense lab, their aim was to make the resulting company, Qinetiq PLC, into a lean-and-mean player in the commercial technology world.

But that was before District-based investment firm Carlyle Group hitched Qinetiq's wagon to the exploding U.S. defense market two years ago, turning a group of former British civil servants into the latest defense technology darling. Qinetiq went public on Friday in Britain, and the initial results indicate that Carlyle earned more than half a billion dollars from an initial investment of about $73 million, an eightfold return in three years that further cements its reputation as a savvy trader in the defense world...

Carlyle has deep roots in the defense sector, dating to the days when former president George H.W. Bush, former British prime minister John Major and former U.S. defense secretary Frank Carlucci held senior advisory or executive positions. But in recent years, Carlyle has been mostly selling its defense assets and expanding into telecommunications, media, real estate and, with the recent purchase of Dunkin' Donuts Inc., the consumer retail trade...

Until 2001, Qinetiq was part of the Ministry of Defense, in essence the main research laboratory for Britain's defense establishment. The Qs in its name are a cheeky reference to the fictional character who created high-tech and often lethal spy gadgets for James Bond. Agency scientists were behind inventions as varied as the liquid crystal display and the vertical takeoff-and-landing gear on modern jet fighters. One of its chief specialties was radar technology...

More than 40 private equity firms initially bid for a minority stake in Qinetiq in an auction run by the Swiss banking firm UBS AG. Carlyle, according to public securities filings in Britain, made the most attractive financial offer for the smallest share of equity in the company: It paid $73 million for a one-third ownership stake in Qinetiq in January 2003, leaving the rest in the hands of the Ministry of Defense.

But, more significant, Carlyle secured a 51 percent voting interest in the company, giving it control.

What followed was a classic private equity growth story, one that the government contracting industry in Washington knows well.

Carlyle Managing Director Glenn A. Youngkin, who put together the Qinetiq deal and has sat on the company board since 2003, convinced Qinetiq's managers that the real opportunity was not in the private sector, but in the U.S. government market, where federal agencies were spending hundreds of billions on new technologies for homeland defense and high-tech warfare.

So Qinetiq went on a shopping spree, buying four U.S. companies in three years that do business with defense, intelligence and civilian government agencies here...

About $600 million of Qinetiq's $1.5 billion in 2005 revenue came from the U.S. defense market. Carlyle and Qinetiq executives say that the company's U.S. growth, and the growing profitability of its British and European operations, account for what has been a quick and large rise in Qinetiq's value -- from an estimated $870 million when Carlyle acquired its interest three years ago, to around $2.3 billion when shares began trading on Friday.

"The growth story for Qinetiq is a U.S. growth story," Knop said.

Nice.