(FORTUNE Magazine) – For most investors, there's just General Electric, arguably the world's most successful company--a maker of refrigerators, light bulbs, and more sophisticated industrial equipment. At another level, a small crowd of professional GE watchers know that CEO Jack Welch owes a surprising amount of his success to a profit dynamo called GE Capital Services. What only a handful of people understand--given GE Capital's reclusive nature--is how important this secret weapon has become to GE's continued prosperity, and what a model it is for managers trying to grow in any business.

Capital, as it's known inside GE, is less a business than an energy source, radiating growth through a mature--some might say lackluster--conglomerate. You can see it in GE's third-quarter results, where Capital comfortably outgrew its parent. But not until you break down GE's performance in recent years are you struck by the glow of its nuclear core. Nicholas Heymann, an analyst at Prudential Securities, calculates that from 1991 to 1996, GE's revenues would have increased just 4% a year were it not for Capital, which more than doubled the growth rate to 9.1%. And its 27 businesses, ranging from credit cards to computer programming to satellite leasing, now generate 39% of GE's earnings, up from 29% in 1990. As some analysts see it, Wall Street's confidence in Capital is the main reason GE stock is rising at a rate that makes the overall market advance look modest, up 123% in two years, vs. 63% for the S&P 500.

This is no upstart business posting outsize stats: If Capital were an independent company, its $32.7 billion in annual revenues would make it No. 20 on the Fortune 500--ahead of Citicorp. It began life ever so humbly in the 1930s as a captive finance subsidiary formed to bankroll GE's washing machines and other household appliances. Through a chain reaction of acquisitions, startups, and business extensions, it mutated into something else entirely. Consider:

Capital is the world's biggest equipment lessor, with over 900 airplanes (more than any airline), 188,000 railcars (more than any railroad), 750,000 cars, 120,000 trucks, and 11 satellites (that comes to about $2 billion in annual depreciation--quite a deduction). It owns the third-largest reinsurer in the country, Employers Re, which also ranks as the third-largest business within GE. Do you have a commercial loan or a residential mortgage? Capital is not a bank, but it may be handling both of these. Need an intranet designed for your company? Call Capital. If you're using a store-sponsored credit card, whether it's from Home Depot or Harrods, you're paying interest to Capital. Here's a real mind-bender: Until recently, if you called Kodak to get financing on one of its copiers, the guy who answered the phone would be a Capital employee.

Think you're surrounded? You are. And Capital's reinforcements just keep coming. In the past two years it has moved aggressively into computer services and life insurance, and invested billions of dollars overseas. In Europe alone it has made 76 acquisitions over the past three years, enveloping a region from which it expects to earn $1 billion by the year 2000 (it currently earns half that).

Capital's success represents much more than the achievements of its CEO, who is not Jack Welch. Under the direction of Gary Wendt, 55, Capital is emerging as a new growth paradigm for companies trying to prosper in a world where price increases are a fading memory. European businesses see Capital as a model for restructuring, and even parent GE is borrowing some of its strategies. Of course, the companies watching most closely are the nation's banks. Because the easy availability of money from securities markets has eroded the profitability of traditional commercial lending, banks are desperately seeking new ways to grow. Capital provides an example--not to mention a possible bonus: enabling the banks to shed their poor-boy P/E multiples.

Rapid growth in a financial company is never without risk. But Capital is no Westinghouse Credit, another captive finance company that set out on the fast track but wound up a wreck in 1992, after billions of dollars in loan losses. There's another difference between GE and Westinghouse: GE's stock has risen 400% since 1990, while Westinghouse sells for 30% below its 1990 high. Capital has taken some hits in recent years--the fall of Kidder Peabody and the bankruptcy of Montgomery Ward, to name two. But nothing has ever jeopardized the feat Wendt is proudest of: Capital's 18% average annual profit growth of the past five years. Wendt even shows off a chart revealing that while half his businesses missed their three-year growth targets in 1996, Capital still beat its overall three-year $750 million target by $1.1 billion, bringing total 1996 profits to $2.8 billion.

Capital powers its growth with a combination of management and financial skills that would become the business bible if they were ever publicly codified. The model is complex, but what makes it succeed is not: a cultlike obsession with growth, groundbreaking ways to control risk, and market intelligence the CIA would kill for. Of course, it helps to be the offspring of America's most successful parent, with all the attendant privileges, including a triple-A credit rating.

But it's not the low borrowing rates that come with a golden credit rating that give Capital an advantage in today's flush capital markets. Instead, Wendt cites the more crucial but less tangible benefits of Capital's links to GE: "The most important part of the GE value to us is its management structure. Jack Welch is not only a heroic form of CEO, there's also a long history of building management practices here." That's not standard Welch worship: These two men don't get along very well, and Wendt has talked openly of quitting (see "An Unhappy Marriage"). Even so, he readily acknowledges the benefits Welch has brought to every corner of GE: a low-cost culture and the free flow of information among GE's divisions, which gives Capital access to the best practices of some of the world's best industrial businesses.

No one is better at capitalizing on this boundaryless environment than Wendt. Welch calls him "a brilliant entrepreneur" who can take a morsel of ingenuity from anywhere in GE and turn it into a mound of money. Wendt also happens to be one of the shrewdest people at the company, with an eye for spotting trends and an ability to move fast. He's a "planned opportunist," says Noel Tichy, a management consultant who co-authored a book on GE and who profiles Wendt in a new book on leadership. Yet compared with his predecessors at Capital--a sainted crew including AlliedSignal's Larry Bossidy, NBC's Bob Wright, and even Jack Welch in an oversight capacity--Wendt is the odd fellow, a quirky man who tends to become so preoccupied that he forgets he's in the presence of others. He may absent-mindedly chew up a Styrofoam coffee cup during a meeting or take the discussion off in a strange direction or just abruptly walk out.

Wendt could be excused for blaming some of his personal foibles on the stress of his home life. (To be fair, his very estranged wife feels she has a lot to blame him for, too.) Lorna and Gary Wendt are in the midst of a megamoney divorce battle, one that embarrassed Jack Welch's company in the Wall Street Journal and that has become a landmark court case. A friend attributes the blowup of Wendt's personal life to a flaw that's not uncommon among high-powered executives: applying office skills--he's a relentless negotiator--to personal affairs, like his divorce. In the understated words of Wendt's friend, this strategy "backfired." And now Lorna Wendt doesn't just want a hefty alimony; she is demanding precisely half of what the court thinks her husband is worth.

Life was a lot simpler in 1967, when Wendt graduated from Harvard Business School. Back then, he kissed off the corporate world to sell undeveloped land parcels for a Texas auto dealer. "He promised to make me a millionaire...and give me a brand-new Cadillac if I took the job," says Wendt. He got the car, but the million disappeared when the auto dealer went bust. Even today, after more than two decades at GE, Wendt is still in many ways an outsider. Says a former GE executive: "Wendt is the only top executive at a GE function who won't be kissing Jack's ass."

Instead he does something far more seductive: delivers consistent high-powered growth. Moreover, he has convinced Wall Street that Capital can keep growing, no matter which way the economy swings. Says analyst Heymann, a former GE auditor: "The old idea was that you shouldn't pay a premium multiple for GE stock because nearly 40% of earnings comes from financial services, a low P/E business. But the market is learning that Capital is different from cyclical financial-service firms, that its better-than-15% growth rate is practically guaranteed." With GE shares selling at a P/E of 28, virtually the entire financial-services discount is gone.

That P/E represents the payoff from a vision Jack Welch has been pursuing for years. Out of one eye, he sees good ol' GE, full of slower-growing moneymakers like plastics, lighting, and aircraft engines. Together they throw off most of what's needed to pay dividends, buy back shares, and fetch that triple-A credit rating. Out of the other eye, Welch sees GE Capital: opportunistic, entrepreneurial, fast growing. Management theory has long talked of how a company's "rising star" growth business can be nourished by its slower-growing "cash cow." But never has the theory been implemented so dynamically, or with such impressive results, as at GE. And never has it been applied to such a diverse entity as Capital, which is more like a constellation than a single star. So successful is this relationship that Capital has become something of a cash cow itself--it recently raised the percentage of profits it pays to GE from 35% to 40%.

To some Capital employees, Welch's vision may seem like a hallucination, particularly the fever line showing Capital's profit targets, which Wendt raises yet again--this year it's close to $3.3 billion. "You know how it goes," says Wendt. "Jack gives me targets, I raise them 15%, and the people I talk to raise them to 25%."


The short answer to how Capital meets such aggressive goals is this: It constantly defies its size. Wendt runs a $33 billion empire as a string of niche businesses. He operates with a lean headquarters staff in a nondescript building in Stamford, Conn., 20 miles from GE's executive offices in Fairfield. His first team consists of Capital's president, Denis Nayden; three executive vice presidents; plus a financial manager and a chief risk manager (the equivalent of a safety chief at a nuclear plant). Though some of the 27 business leaders operate out of Stamford, none work at headquarters. "I don't want them with me," says Wendt. "I want them with their customers." The business leaders stay close to their markets and concentrate only on what they know. When a new opportunity arises, Capital launches a new business, which grows to become a "bubble" once earnings reach $25 million. Thus, retailer financial services, which provides revolving credit for 75 million cardholders, begets a bubble, consumer financial services, a stand-alone venture offering GE's own cards.

This narrow focus enables Capital's components to operate with a clear idea of profit and loss. That may sound basic, but countless companies can't create true income statements for their different lines of business. Banks, in particular, rely on accounting fuzziness, say, by making commercial loans at artificially low rates (a hidden loss) in order to lure customers to whom they can then sell other services. Says Scott Winslow, who recently coordinated a confidential study for the Banking Board, an industry strategy group: "Most banks continue to manage their enterprises as one large business with a number of sub-businesses, whereas GE Capital actually operates as a series of separate, independent subsidiaries. That way, you don't end up with a lot of the cross-subsidization that you get in a lot of bank holding companies."

From Stamford, the small management crew adds its potent ingredients to Capital's mix: funding (at GE's low borrowing rates) and frequent performance reviews (at GE's high intensity). There's something else, too, that's harder to measure: a careful blend of personalities and talents. Wendt provides broad direction and stays atop Capital's dealmaking. Nayden, tough, intense, and generally not well liked (he's sometimes referred to as "Wendt's pit bull"), is highly effective at focusing the staff on the Welch/Wendt vision, especially that steep line at the center. Welch sees Wendt and Nayden as a "wonderful combination" of visionary and taskmaster. Nayden agrees: "Gary is more strategic; I'm good at execution."

All five of Capital's top people are longtime GE employees. Wendt and Nayden have spent their entire GE careers at Capital (22 years for Wendt, 20 for Nayden); EVPs Michael Neal, Nigel Andrews, and Edward Stewart come from GE's industrial side (Neal and Andrews ran businesses, Stewart was a financial analyst). This unusual combination of dealmaking skill and operations expertise is one of the keys to Capital's success. In other words, Capital not only buys, sells, and lends to companies but also, unlike love 'em and leave 'em Wall Street, excels at running them. Says Welch: "It is what differentiates GE Capital Services from a pure financial house."

Capital's ability to actually manage a business often saves it from writing off a bad loan or swallowing a leasing loss. When loans to Tiger International, parent of North American Railcar Corp., went sour in 1983, Capital stepped in and became a railcar leasing company, now a profitable business. When some of its passenger planes came off lease into a soft market, Capital converted the planes to cargo carriers, threw in some seed capital, and launched Polar Air, an independent cargo line. And get this: After loans to the Houston Astrodome consortium went bad in the 1980s, the banks involved took big write-offs. Capital said, "Play ball!" It co-ran the Astros for nearly two years rather than write down its loans. The Astros kept losing, but Capital ultimately made a good return, in part by introducing crowd-pleasing promotions. Today banks like First Union and Mellon Bank are moving aggressively into leasing railcars and aircraft. The question is whether the banks will be able to improvise when trouble strikes.


The culture at Capital isn't just entrepreneurial, it's aggressively so. "You don't work there unless you're very self-confident," says an executive recruiter. "They can smell weakness and indecision." The growth anxiety is pervasive. "They're all afraid of not making their numbers," says a consultant who works with Capital. That includes CFO Jim Parke, who oversees more than $1.5 trillion of commercial paper issuance each year, not to mention $100 billion of derivative "hedging" contracts. What worries him most? "Growth," he says simply.

Within the niches, the nudges to grow faster are endless. Says Wendt: "I tell people it's their responsibility to be looking for the next opportunity. Where is their customer moving? What are their needs?" That's what's known as the "loose" half of a loose-tight development process. It yields an endless stream of ideas at Wendt's weekly Monday meeting, where the environment is nurturing and forgiving. The gentle handling of egos and ideas lasts only as long as there's no money on the table. If an idea has the potential to generate $50 million in profits within five years, then funding becomes a possibility, and the "tight" phase begins. Wendt, Nayden, and their inner circle unleash a merciless interrogation about expected margins, potential customers, regulatory issues, prospects for competitive advantage. Most ideas die under that barrage. But the few that survive have access to Capital's deep pockets and the vast resources of GE.

Capital's growth comes in many forms, but nothing equals the bottom-line boost of a big acquisition. Says Michael Neal: "I spend probably half my time looking at deals, as do people like me, as do the business leaders." Over the past three years Capital has spent $11.8 billion on dozens of acquisitions. But it sized up hundreds more, keeping the top team forever on the move. Stephen Berger, now a general partner at Odyssey Partners, a New York investment firm, was an executive vice president at Capital for 2 1/2 years. "The reason I left," he says, "is that I never saw my kids."

Going forward, acquisitions will contribute less to Capital's growth because the price of assets around the globe has risen too far too fast. That may not slow some companies, but it's anathema to Capital. "They don't put money on the table except to get a very high return," says a banker who has worked with the company. Last year, when a major financial company put some of its businesses up for sale, Capital was interested in one. Yet even using the most generous assumptions about cost savings and other efficiencies, Capital's analysts couldn't justify much more than a $200 million bid. It lost out to another bidder who reportedly paid $350 million.

Fewer takeovers will make it harder for Capital to reach its ambitious growth targets, but Wendt does not seem too worried. He is repositioning his money machine toward internal growth driven by value-added services. Acquisitions took advantage of GE's low cost of funds, but service growth, which doesn't require much investment, offers something better: higher returns. In the leasing business, for example, all those trains, planes, and automobiles generate countless repair jobs. By becoming the fixer-upper for its clients, Capital can save them time and money, and possibly charge more for doing it. And by keeping the equipment in tiptop shape, Capital can lease it out for longer, raising profits. The company will now maintain and refurbish its Penske trucks so they are available 24 hours a day, seven days a week.

In Capital's lending businesses, service is the new calling card as well. Capital will not only finance state-of-the-art semiconductor equipment for a high-tech company, it will buy back the equipment after a few years, refurbish it, and find a lower-tech user for it, say some manufacturer that wants to stamp out chips for musical birthday cards. Yet another boost to growth should come from a quality-improvement drive now under way throughout GE. Called Six Sigma, it is based on a customer-driven grading system originally developed at Motorola. Capital, the first financial-services company to try Six Sigma, will use it to raise customer satisfaction through such improvements as reduced response time.


Advance intelligence on a new market isn't an advantage for Capital, it's a requirement. That's why most of its growth occurs incrementally and why acquisitions tend to be in industries where Capital already has a stake. "I call it the steppingstone strategy," says David Bechhofer of Bain & Co. "You rarely see them take big leaps."

The company's foray into subprime lending--making auto loans to people who are poor credit risks--demonstrates its style. The subprime business has been rocked by the bankruptcy of Jayhawk Acceptance and the default of Mercury Finance. With delinquencies on the rise, the risks have become too great for many banks. As the banks exit, Capital is entering. It has already made one small acquisition and is looking for more. What that response belies is six years of planning. Capital got its first exposure to the subprime market in 1991, by arranging financing for the big players in the industry. By last year, Capital's team felt it knew enough to begin building a small ($600 million) portfolio of its own loans. Now, with the industry in turmoil, it is actively looking to buy.

Similar plotting preceded Capital's move into insurance. Over the past 18 months, it has spent billions taking advantage of the rapid consolidation sweeping this field. It bought three life companies in 1996, at a cost of $3.2 billion, including $1.8 billion for First Colony of Lynchburg, Va., a leader in term life insurance. Here, too, Capital made an intelligence sweep before striking. It got firsthand knowledge of insurance from an annuity business purchased from Weyerhauser in 1993, as well as from a slew of smaller acquisitions since then. Beyond that, Capital joined forces with the most aggressive acquirer in the industry, Conseco, back in 1993. First it made a small investment in a limited partnership that Conseco had set up to buy companies; a bit later, Conseco says, Capital became one of its lenders. Through these deals and its smaller acquisitions, Capital drew itself ever closer to the dynamics of the business.

Market intelligence pours into Capital from throughout GE as part of a rich reciprocal relationship. For instance, GE Power Systems builds power plants and therefore knows the utility industry cold. From those sources, Capital's managers learned firsthand of the utilities' feeble efforts at customer service--billing, collections, the touchie-feelie stuff that has nothing to do with the heavy-metal business of power generation. Preoccupied by utility deregulation, many power companies are eager to shed ancillary activities like billing. This information found its way to Capital's Retailer Financial Services group, which does billing and collections for 75 million store-brand credit card holders. A new business was born.

GE's intelligence network points out hazards too. The same skinny on utilities fed through to FGIC, Capital's municipal bond insurance business. Over the years, utility revenue bonds have been one of the bread-and-butter sectors of the muni market for insurers. As the name implies, these bonds are backed not by taxpayers but by the revenues utilities produce. From GE's internal sources, FGIC head Ann Stern got an inside take on the disarray in that rapidly deregulating industry. Based on what Stern found out, she says, "we decided that we didn't want to be making 30-year guarantees in industries that were going through such radical change." Startling its peers, Capital pulled away from insuring utility bonds and for similar reasons, backed away from insuring health-care bonds as well.

And what does Capital give GE? Valuable customers, for one thing: Capital provides financing for the customers of GE divisions like Aircraft, Power Systems, and Automotive, which helps smooth the way for those divisions to land large contracts. One of the more notable instances of a possible link came when Continental Airlines was struggling in bankruptcy in 1993. Loans from GE Capital helped put Continental back in the air. Next came a big order from Continental for new planes--most with GE engines. Says consultant Tichy: "Capital is part of the arsenal for GE's industrial side to beat the competition."


Competitors have a hard time understanding Capital's unusual approach to business risk. Put simply, Capital seeks to eliminate--or at least reduce--all risks that do not carry a big potential payoff (like insuring utility bonds) and to save its risk-taking for the few that do. It also minimizes the risks posed by any one venture by owning a broad mix of businesses. That strategy is not unlike the way savvy investors manage their portfolios. Says Vince Breitenbach, a fixed-income analyst at Lehman Brothers: "The way I've come to analyze GE Capital Services goes back to the basics of finance and portfolio theory."

Think of mutual funds. Investors buy them to diversify their money over many companies, thus reducing their risks. With 27 businesses, Capital has enough diversification to offset a slump in one with a surge in another. Good investors may try to be like Capital, but business leaders rarely do. Corporate diversification got a bad name in the 1970s and early 1980s, when lumbering conglomerates became synonymous with mediocrity. The difference between them and Capital is that the conglomerates grew dull through diversification while Capital uses it to hone an already sharp edge.

Capital's penchant to protect itself goes well beyond diversification. Whether it is lending or leasing, it always has plenty of collateral to fall back on, and it employs a squad of "asset managers" whose job is to know exactly what the collateral is worth. With that protection it will eagerly make investments other companies might find too dicey. In the early 1990s, for example, it was among the largest buyer of problem loans and properties from the Resolution Trust Corp. That looked like a risky investment at the time, but not now: Capital has reaped a mountain of capital gains from the RTC assets it bought.

Where Capital gets timid is with the risks that don't carry a big reward. Take interest rates. Each of its businesses aligns the maturity of all credits and debits to make for a "matched book," one that is generally unaffected by interest-rate swings. Currency risks are hedged away whenever possible. Where it can't get rid of risks altogether, Capital shares them through joint ventures. In its private-label credit card business, it normally makes the sponsoring retailer share any losses.

The major risk in the leasing business is predicting the residual value of assets under lease. If a company foresees a high residual value on a car or a plane, it can price the lease cheaply and still make a good profit. But if the car or plane is worth less than forecast when it comes off lease, the company can end up losing money. Capital takes several steps to reduce this risk. In its car-fleet leasing business, it typically sticks customers with the risk of what the cars will be worth coming off lease. When Capital accepts the risk, say, with airplanes, it makes conservative assumptions about what the plane will be worth and factors that into the price of the lease. It's an effective strategy: Capital has a pile of gains from its assets under lease (capital gains furnish 15% to 20% of its earnings every year).

Capital incorporates risk management directly into its culture by deploying risk managers alongside business leaders at each of the 27 bubbles. These folks check out customers, run probabilities, and advise business leaders on every move. Banks have risk managers too, but in many cases the relationship with business managers is distant because the risk-management process is highly centralized. Capital's chief risk manager Jim Colica sees no sense in running his business that way. "Part of the assessment our business leaders make on a new piece of business is whether or not we'll get paid. That's why we put risk managers down in trenches with them."

Capital also uses quantitatively triggered danger signals, called smoke detectors, to alert it to trouble. In each business, the risk manager identifies the four or five main factors contributing to potential profitability. Says Colica: "This is not done by a bunch of people sitting around a table talking. We study the history to understand how we make money in that product." Once the profit drivers have been determined, businesses leaders set the smoke detectors to alert them to any significant change.

It's impossible to wring all the risk out of anything, of course. But Capital takes extra steps with a proprietary software tool called Globalnet, which keeps worldwide track of GE's exposure to every client across all lines of business. The potency of that cross-checking is hard to appreciate, so imagine American Express doing a similar thing with you. It would calculate what you had recently charged to your Amex card, then add on any fees you might owe to Amex's financial planners, as well as the outstanding balance with American Express Travel for your last holiday. Before you could spend beyond a preset credit limit, a team of analysts would review your financial health, your career path, maybe even the state of your marriage. GE Capital takes the same sort of financial X-ray, not of people, but of every company with which it has business.

Finally, Capital establishes a credit ceiling for its customers, typically $50 million. Any new credit beyond that amount, however small, requires the signature of Nayden or Wendt. "John Reed [CEO of Citicorp] isn't signing off on credit reports," says Nayden. "We are." A credit extension beyond $100 million, no matter who's getting it, goes to Capital's board, where Welch weighs in. The limits don't hinder growth, but they do make it more thoughtful and greatly reduce the odds of a nasty surprise.

How then, you might ask, did Capital get hit with one of the business world's nastiest surprises: the collapse of Kidder Peabody, a debacle that swept $1.2 billion from Capital's 1994 earnings? The short answer from the people at Capital is that it was not their fault. Yes, Kidder's assets were on Capital's balance sheet, and yes, its profits--while they lasted--came into Capital's coffers. But Capital did not manage Kidder. Strangely, the reason involved personalities. Michael Carpenter, Kidder's head and a good friend of Jack Welch, did not get along with Gary Wendt. So Welch allowed Carpenter to report directly to him. That kept Kidder under intense pressure to grow, but effectively removed it from Capital's sophisticated financial controls.


Despite the Kidder fiasco, Capital has not abandoned Wall Street: At the end of last year it launched the Capital Markets Group, with a mandate to address the financing needs of its customers. Shortly thereafter, it launched a merchant banking business--that's on top of the service extensions, the moves into insurance, infotech, subprime lending, you name it. Capital even bought a Mexican bank recently, in anticipation of an RTC-style privatization of troubled Mexican assets.

Interestingly, the major concern about Capital's future has nothing to do with measuring risk or goosing growth. Instead it's a people question. Five years ago, Capital had 30,000 employees; today it has 53,000, ranging from Mexican bankers to Chinese satellite engineers. Will its creed on growth, risk reduction, and all the rest make sense to them? Nayden calls that "our biggest cultural challenge."

Nowhere do Capital's money, market intelligence, and obsession to grow combine better than in Europe. Foreign markets are usually cheaper than those in the U.S., and their businesses are ripe for GE-brand improvements. Capital has become a binge buyer of European companies that are just beginning to impose the efficiencies GE mandated a decade ago. It purchases a company that fits well with one of its domestic niche businesses, say truck leasing, and then injects all of its accumulated expertise to give that business an edge. Says Christopher Mackenzie, the British national commanding Capital's European offensive: "Customers say our niche approach is what helps us win market share."

Big challenges, big plans, big resources--and day by day, a bigger reputation. But ultimately, what's most interesting about Capital is that the risks it confronts are so different from those of the businesses it competes with. Most companies are terrified of a recession. At Capital, many people hope for one. A recession would bring down asset values, they say, letting Capital do more of what it does best--pounce on trouble.

How many other companies dare hold that view?

REPORTER ASSOCIATES Bethany McLean, Lixandra Urresta