Jonathan D. Salant Bloomberg News, International Herald Tribune

September 24, 2007

Blackstone Group and other private equity firms are learning that money does not always buy love in the U.S. Congress.

In trying to block legislative proposals that could more than double their taxes, the buyout firms have failed to build a broad-based coalition, attacked powerful lawmakers and been disavowed by minority groups and pension funds they claimed as allies.

"The principal sin in politics is overreaching," said Representative John Linder, a Georgia Republican who serves on the tax-writing Ways and Means Committee, who added that he was undecided on the issue. "When they start talking about women and children, they're overreaching."

While the outcome of the tax battle is far from certain, these early missteps have hindered private equity's first large-scale foray into lobbying. That effort cost the firms at least $5.5 million during the first six months of 2007, almost four times as much as they spent in all of 2006.

Lawmakers cite as one example of overreaching the effort by allies of the Private Equity Council - a Washington lobbying group established last year by 11 buyout firms including Blackstone, Carlyle Group, Apollo Management, Bain Capital and KKR - to justify the lower tax rate as a boon to poor communities.

The council helped finance a coalition of minority and female investors including Robert Johnson, a billionaire who founded Black Entertainment Television, to lobby against the tax increase on Capitol Hill.

One lawmaker the industry sought to sway was Stephanie Tubbs Jones, a black Democrat from Ohio who serves on the Ways and Means Committee. She is a co-sponsor of a House proposal that would tax the share of profits fund managers receive for investment services, known as carried interest, at rates as high as 37.9 percent instead of the 15 percent capital gains rate.

Tubbs Jones said that a visit by black investors who told her that the lower tax rate was needed to encourage development in depressed communities had not changed her position. The legislation "was not the vehicle in which to be successful with the argument," she said during an interview.

The private equity industry also has criticized the chairman of the Senate Finance Committee, Max Baucus, a Montana Democrat, and the panel's top Republican, Charles Grassley of Iowa, who are the authors of the legislation to raise taxes on publicly traded hedge funds and private equity firms like Blackstone.

In a letter in August to John Kerry, a Democrat who also serves on the Finance Committee, Blackstone suggested that Baucus and Grassley had unfairly singled out private equity firms while preserving a similar tax break for their states' ethanol producers.

"The only explanation for this glaring inconsistency is that the ethanol and energy industries are important to the states of Iowa and Montana and the financial-services industries based on the east and west coasts and in other large cities are not," the firm said.

Jill Gerber, a spokeswoman for Grassley, said Blackstone was "wrong to presume that an elected official can't treat an industry fairly unless it's based in his home state."

The industry's lobbying effort has met with setbacks on other fronts, including pension funds, which have rejected the arguments of private equity firms that higher taxes would cut into workers' retirement savings.

But Robert Stewart, a spokesman for the Private Equity Council, said the group had made "significant progress."

"Just a few months ago, conventional wisdom was that a tax hike on carried interest in 2007 was inevitable," he said. "Today, that is no longer the case."