New York (CNN/Money) - "The What Group?"

That was the reaction of most people on Thursday when they heard the news that Lou Gerstner, the long-time chief executive of IBM (IBM: Research, Estimates), was accepting a position as the chairman of The Carlyle Group.

But the average investor, and indeed the average American, would do well to get better acquainted with this massive private equity firm. You might even be invested in them, and not know it.

Founded in 1987 by Stephen Norris, a former Marriott executive, and David Rubenstein, a former White House aide to President Carter, the Carlyle Group has grown into one of the largest private equity firms in the world, with 550 investors and $13.9 billion under management.

A private equity firm operates much like a mutual fund, only instead of investing in stocks, it invests in private companies. Carlyle manages more than a dozen different funds, from venture capital to leveraged buy outs.

Many of the worlds largest pension funds are heavily invested with Carlyle, including CalPERS (California Public Employees' Retirement System) and the Connecticut state pension fund. The company made its name in the defense buy-out business, picking up undervalued defense and aerospace companies following the end of the Cold War in the early 1990s, and turning them around for a profit. But since then, Carlyle has built up a portfolio that includes everything from howitzers to healthcare companies.

Gerstner is not the biggest name at the Carlyle Group. Not even close. George Bush Sr. is an advisor. James Baker III is a senior counselor. John Major is Chairman of Carlyle Europe. The company also employs former S.E.C. chairman Arthur Levitt, and former F.C.C. chairman William Kennard. And that's just for starters.

The Carlyle Group, which fought off early accusations of peddling power for profit, has leveraged its stable of high-profile ex-politicos to build one of the most wide-ranging and successful investment companies in the world. Some of their funds average an annual rate of return of 36 percent.

"They have a strategy that targets every conceivable private opportunity in the world," says David Snow, editor at Private Equity Central, an online magazine that covers the private equity industry. "What they're doing has never been done before on this scale. They are the pioneers."

In hiring Lou Gerstner, the company is taking a large and very public step towards shedding its image as a defense industry buyout boutique. Gerstner assumes the chairman responsibilities from Frank C. Carlucci, a former secretary of Defense under President Reagan, and the man most responsible for Carlyle's success in the defense industry.

"They have gone from being very focused on the defense industry and in a very short time turned themselves into a more diverse institution," says Bob Dunn, associate editor at The Private Equity Analyst, a market research firm. "In addition to Gerstner's skills and contacts, this sends a signal that Carlyle's world is a lot bigger than defense and aerospace."

Gerstner has agreed to spend 20 percent of his time working with Carlyle, overseeing one buyout fund and one venture capital fund. And his impeccable business pedigree will be a welcome addition to the firm, since, as Snow points out, "Lou Gerstner knows how to do a deal, and George Bush Sr., less so."

The focus on business will be a welcome respite for Carlyle, which has spent much of its time lately fighting off cries of conspiracy and conflict of interest. Weeks after the September 11th attacks, reports that the company counted Osama bin Laden's estranged family among its investors gave Carlyle a black eye. Enterprising journalists noted the irony of the fact that bin Laden's family was in a position to benefit financially from the war being waged against their half-brother. As a result, Carlyle ended the relationship with the bin Laden family.

With Gerstner, the company hopes to restore its credibility and add a financial juggernaut all in one deft move. "It's clear they are trying to button up some of their previous problems with PR and to deflect criticism about all of their purchasing of former U.S. officials," says Charles Lewis, founder of the Center for Public Integrity, a non-profit public advocacy organization. "It's a move that is clearly designed to make them look like a regular company."

Of course, with a host of ex-politicians, world leaders, and now one of the world's most revered business leaders, the Carlyle Group is anything but a regular company.