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It’s hard to call an industry that seems to manufacture billionaires an underdog, but private equity investors faced a challenging year on Capitol Hill. When congressional Democrats sought to slap higher taxes on the record profits of the private equity industry, it looked like they had a sure winner. After all the industry’s presence in Washington was fairly minuscule, and it was closely identified with the Republicans. What a difference a year makes. At the close of 2007, the campaign by private equity to stave off new taxes stood out as one of the year’s most notable � and successful � lobbying blitzkriegs. Private equity companies started a trade association, hired a phalanx of the city’s most prominent influence brokers, paid them millions, stepped up donations to Democratic candidates, and beat back efforts that would have more than doubled the effective tax rate for the industry’s best-compensated managers. In a sense, private equity pulled off its biggest takeover job yet: Capitol Hill. GETTING TARGETED The takeover attempt actually started about a year ago. That’s when private equity firms announced they were hiring veteran lobbyist Doug Lowenstein, the founding president of the Entertainment Standards Association, to run the newly formed Private Equity Council. The move came barely ahead of the legislation targeting private equity’s record profits. The growing financial clout of private equity companies � who in the last year have mounted successful acquisitions of iconic brands such as the Chrysler Group and Dunkin’ Donuts’ parent company, Dunkin’ Brands � was drawing scrutiny from lawmakers, many of whom seemed shocked to learn that managers’ earnings were taxed as capital gains, not earned income. In short order, Rep. Sander Levin (D-Mich.) filed a bill to change that. In the Senate, Chuck Grassley (R-Iowa) and Max Baucus (D- Mont.) also proposed changing the way financial partnerships that go public are taxed. Democrats were looking for sources of revenue to offset the reform of the alternative minimum tax, among other things, and private equity millionaires were hardly sympathetic targets.
Private Equity Spreads Cash on K Street
Firms Mid-Year Revenue/Client(s)
Akin Gump Strauss Hauer & Feld $120,000/Kohlberg Kravis Roberts & Co.
Brownstein Hyatt Farber Schreck $100,000/Private Equity Council
Capitol Tax Partners $100,000/Private Equity Council
Covington & Burling $360,000/Kohlberg Kravis Roberts & Co.
Ogilvy Government Relations $4 million/Blackstone Group and Carlyle Group
Source: Legal Times reporting and lobbying disclosure statements.

By the time the Private Equity Council hired a few staff members and rented temporary offices, the issue had taken off. The nascent organization turned to K Street, hiring powerhouses such as Akin Gump Strauss Hauer & Feld (paying them $100,000 as of the firm’s midyear report), Capitol Tax Partners ($100,000 as of midyear), and Brownstein Hyatt Farber Schreck ($100,000 by midyear). The individual firms were hiring, too. The Carlyle Group and Blackstone Group paid Ogilvy Government Relations more than $4 million during the first half of the year. Apollo Investment Management has long worked with Brownstein Hyatt. Kohlberg Kravis Roberts & Co. chose Akin Gump ($120,000 by midyear). Eventually, more than a dozen firms registered on behalf of private equity companies, the council, or a combination of both. And some of the lobbyists working on the issue were high-profile, including former Republican Party Chairman Ken Mehlman, now at Akin Gump, and Ogilvy Government Relations’ Wayne Berman, a former assistant secretary of commerce and transition adviser for the Bush administration. Lowenstein says private equity companies quickly decided it made sense to coordinate efforts through the council, which staged a weekly conference call with roughly a dozen people working on the lobbying campaign. Most of the lobbyists involved in the intensive effort declined to comment on the record about the strategy behind the campaign, but said that in addition to the calls, many spoke with each other repeatedly throughout the day, comparing notes about who they were speaking to on the Hill and honing arguments. Defeating the tax proposals “was going to be directly tied not to who we hired but how well we told the story of what private equity is and how important it was to the economy and the kind of concerns and consequences that might flow from these two proposals if enacted,” Lowenstein says. “If they don’t have a good story to tell, I don’t think it much matters who you hire.” Republicans and some Democrats, including prominent Sen. Chuck Schumer of New York, started voicing doubts about the legislation over the summer. Over months, the lobbyists also met with members of the Senate Finance Committee and the House Ways and Means Committee, which held public hearings on the proposed legislation. “We were particularly focused on trying to get in and talk to members and their staff before those public hearings,” says Robert Leonard, an Akin Gump lobbyist who worked on the issue on behalf of Kohlberg Kravis Roberts and the council. In October, Senate Majority Leader Harry Reid (D-Nev.) said the carried interest proposal likely wouldn’t make it to the Senate floor in 2007 because of a crush of complicated proposals competing for floor time. But private equity’s lobbyists say they aren’t yet ready to offer up toasts on their success. “I think this issue is over for 2007, but I in no way, shape, or form am sitting back with a big grin on my face, feeling as if the job is done,” Lowenstein says. “I think this issue will be around with us next year, and perhaps beyond.” Looks like private equity is not going to be looking to unload its stake in K Street anytime soon.

Carrie Levine can be contacted at [email protected].

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