The buyout kings who gathered in a 42nd-floor conference room in Manhattan last year knew they had an image problem.
There was Henry Kravis, the legendary investor whose takeover of RJR Nabisco was immortalized in the movie "Barbarians at the Gate." Next to him sat Stephen Schwarzman, whose lavish 60th-birthday bash featuring Rod Stewart and Patti LaBelle would soon make headlines around the globe.
David Rubenstein, co-founder of Washington's politically connected Carlyle Group, and David Bonderman, the Texas-based magnate who once led a takeover of Continental Airlines, were hooked up by phone.
As heads of private equity firms, the four men specialize in buying troubled companies, fixing their bottom lines and reselling them for big profits. But a growing chorus of critics was painting them as financial predators whose primary talent lay in slashing jobs and chopping up companies.
Meeting at Kohlberg Kravis Roberts & Co.'s New York headquarters, the group laid plans to counter its adversaries with a message of its own: that takeover firms help society by saving jobs and strengthening companies in distress. Thus was born the industry's first trade association, the Private Equity Council.
"Private equity has never been very good at explaining what it does," Rubenstein declared in a recent speech. "We have to retool how we explain ourselves."
Yet for all the group's financial firepower, the joint effort is off to a rocky start.
This month House members voted to more than double the tax rate charged many investment managers, a shift that would cost masters of the buyout universe millions of dollars if it ever became law.
"They're in for a long, hard fight," said Sam Geduldig, a lobbyist for financial companies and a former Republican House staffer.
Private equity firms have been around for decades, but they've begun to attract more attention because of increasingly bigger deals and high-profile acquisitions of prominent companies including Burger King, Hertz, Dunkin' Donuts and Toys R Us.
Their activities have also drawn attention outside the U.S. In 2005, the leader of Germany's Social Democratic Party compared foreign investment firms to "a swarm of locusts," reminding some of Nazi-era imagery used against Jews. A British union official described the industry as "a global vacuum cleaner." Japan, China and South Korea imposed tax hikes on foreign investment firms.
For a publicity-shy industry, the overseas backlash was a wake-up call. When Blackstone Group President Tony James pitched Rubenstein on the idea of a trade group, the Carlyle executive agreed, and leaders of the private equity firms were soon sitting around the conference table at KKR.
"It was increasingly clear to the founders of these companies that it was just a matter of time" before harsher scrutiny emerged in the U.S., said Harry W. Clark, a veteran public policy consultant who was asked by buyout leaders to draw up the initial plans.
To head the Private Equity Council, Clark recruited Douglas Lowenstein, a onetime newspaper reporter and congressional aide who founded a trade association in 1994 for the video game industry, which has had image troubles of its own because of the graphic violence depicted in many of its products.
Lowenstein, nephew of the late social activist Allard K. Lowenstein, said private equity helped foster economic growth, which was "an important part of creating a more just society."
Asked if his current role dovetailed with the social activism of his uncle, he replied: "It's not whether it's consistent with my uncle's personal beliefs. It's about my own view of the world. . . . I'm guided by my own principles and values."
The Private Equity Council opened its doors Feb. 22 with 11 of the world's biggest buyout funds as charter members and a professional staff of just one, reflecting the "lean and mean" ethos of private equity firms. Lowenstein has since added a lobbyist and a communications strategist.
But any plan to mount a gradual effort to educate the political world was quickly overtaken by crisis, as private equity soon became emblematic of spectacular wealth.
In March, lawmakers seized on news reports about the riches of leading buyout managers, such as Blackstone Group's Schwarzman, whose fortune was estimated at $7.5 billion when the company went public in June.
Right before Blackstone's initial public offering, Senate Finance Committee Chairman Max Baucus (D-Mont.) and the panel's ranking Republican, Charles E. Grassley of Iowa, proposed what became known as "the Blackstone bill," which would hike taxes paid by investment firms that go public.
On June 22, the day of the offering, Rep. Sander M. Levin (D-Mich.) broadened the battle. Levin, joined by several House Democrats, urged that managers of private investment partnerships pay ordinary tax rates on much more of their income, rather than a cheaper capital-gains rate.
For many, that would mean paying 35% of their earnings on taxes, instead of 15%.
