Aug. 31 (Bloomberg) -- Blackstone Group LP and Kohlberg Kravis Roberts & Co. are gaining support in Congress in their battle against a tax increase on private-equity firms and are looking to the heartland to win the war, the industry's chief Washington spokesman said.

``Things look better now than they did two or three months ago,'' said Doug Lowenstein, president of the Private Equity Council, of which Blackstone and KKR are founding members. ``We've stabilized the situation.''

Lowenstein said at least four ``moderate, centrist'' Senate Democrats -- John Kerry of Massachusetts, Ken Salazar of Colorado, Charles Schumer of New York and Ron Wyden of Oregon -- have expressed skepticism about the plans to tax fund managers' share of profits at the top 35 percent rate, rather than the 15 percent capital-gains rate. He said opposition to the tax is growing among House Democrats, without identifying anyone.

Lowenstein said his group has spent the last six weeks mobilizing middle-market firms such as New York-based Riverside Co. to broaden opposition to the tax increase. The council wants to deflect attention from the huge sums paid to titans such as Blackstone co-founder Stephen Schwarzman, who earned about $684 million when the firm sold shares to the public in June. Schwarzman's 234 million remaining shares are worth about $5.38 billion.

``We need to have these people surface and say, `We're private equity, too,''' Lowenstein said in an interview. Stopping a tax increase is ``hard to sell when the impression is that the people we are advocating for are wealthy beyond imagination.''

`Carried Interest'

The council calls it a ``grasstops'' approach, relying on industry leaders rather than grassroots voters to influence lawmakers. Lowenstein said it's the newest prong in a strategy to counter legislation that would more than double tax rates for managers of private-equity firms, many hedge funds, and partnerships that pay general managers with a share of profits known as ``carried interest.''

KKR spokesman Mark Semer and Blackstone spokeswoman Heather Lucania declined to comment. Kerry, Schumer, Salazar and Wyden haven't said which way they would vote on the tax proposal.

The Private Equity Council already has retained Washington lobbyists, including Johnson, Madigan, Peck, Boland & Stewart Inc.; Capitol Tax Partners; Akin Gump Strauss Hauer & Feld LLP; and Brownstein Hyatt Farber Schreck to press its case.

The council has funded research to buttress its argument that higher taxes would hurt the economy, and encouraged the industry to more than quintuple its donations to lawmakers' re- election campaigns, including $1 million to Senate Democrats in June.

Middle-Market Firms

Now, Lowenstein is enlisting firms that typically manage funds of about $500 million to $2 billion and often buy small, closely held companies in industries including manufacturing and distribution. Their task: lobby members of Congress against a tax increase.

``This is private equity going back to its roots,'' said Ilan Nissan, a partner with O'Melveny & Myers in New York who works with middle-market private-equity firms. ``They are looking at companies far outside the big cities that make unexciting, non-sexy products. It's a smart strategy to say, `You don't want to discourage that activity.'''

Stewart Kohl, co-chief executive officer of Riverside, which has $2 billion in assets under management, said his firm hasn't yet lobbied on the issue. Still, he said he agrees with the Private Equity Council that it's important to make sure legislators see smaller firms as a source of capital.

`Thousands of Deals'

``It's easy to think in terms of one high-profile deal,'' Kohl said. ``There are thousands of deals done every year and most are smaller businesses.''

Including more firms and voices is pushing private-equity firms into new, more collegial territory, Lowenstein said. While firms occasionally invest together, they more often compete to buy controlling interests in companies with the goal of changing the business to improve sales and profit, and selling them three to five years later.

``It's not an industry that has a tradition of cooperating'' on public policy, and that hurt early lobbying efforts, Lowenstein said.

Eleven buyout firms, among them Blackstone, KKR, the Carlyle Group, Apollo Management LP, Bain Capital LLC, and Madison Dearborn Partners LLC, created the council in December.

The council was quickly confronted with legislation by Senate Finance Committee Chairman Max Baucus and Senator Charles Grassley of Iowa that would force New York-based Blackstone and other publicly traded buyout and hedge-fund firms to pay taxes at the 35 percent corporate rate instead of as partnerships, which allow investors to pay capital-gains taxes of 15 percent.

Five-Year Break

The Baucus-Grassley measure would give Blackstone and Fortress Investment Group LLC five years before requiring them to pay the higher tax rate. Firms such as KKR and Och-Ziff Capital Management Group LLC that have since filed to sell shares to the public would face the higher burden immediately.

A broader Democratic bill proposed in the House by Representative Sander Levin of Michigan and backed by Ways and Means Committee Chairman Charles Rangel would more than double taxes on carried interest.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: August 31, 2007 07:21 EDT