Feb. 28 (Bloomberg) -- Blackstone Group LP's Steve Schwarzman and Doughty Hanson & Co.'s co-founder Nigel Doughty said private-equity firms must talk to politicians, regulators and the media to head off government interference in their industry.

The two executives spoke as almost a dozen trade unionists picketed the industry's annual Super Return conference in Frankfurt yesterday. The demonstrators held placards calling the event ``conference of the locusts'' to protest job cuts at companies owned by buyout firms.

``I really worry about the political stuff going on,'' Blackstone co-founder Schwarzman told conference delegates. ``There are people who are trying to, at a minimum, interfere with what's going on in the private-equity business.''

The threat of political scrutiny and an end of favorable tax rules that underpin leveraged buyouts is roiling an industry that led an unprecedented $234 billion of takeovers in Europe last year. Britain's GMB trade union is pressing Tony Blair's ruling Labour party to force LBO firms to disclose more about their activities.

Doughty, who donated 250,000 pounds ($492,000) to the Labour party in the fourth quarter, said private-equity firms like his have to ``reach out more'' to trade unions.

Private equity-backed companies now employ more than 3 million people in Britain, fueling concerns at unions such as the GMB about job cuts and asset stripping.

Criticism `Not Unfair'

``We have to sit down with government leaders, labor leaders and regulators and explain what we do,'' Providence Equity Partners Inc. founder Jonathan Nelson said in an interview at the conference. Criticism ``is not unfair, if we're not willing to sit down,'' he said.

Firms should disclose who their investors are and how much of their own equity they invest in each company they buy, Carlyle Group co-founder David Rubenstein said.

``We need to have as much transparency and as much openness and deal with the public as a public company would,'' Rubenstein said on the sidelines of the conference today. ``We are so large and have such a large public responsibility we need to appear as though we are public companies.''

Most buyout firms' communications plans are ``naïve,'' said Wanching Ang, co-head of private equity at Munich-based Allianz SE, Europe's largest insurer.

`On the Defensive'

``The industry is on the defensive,'' she said. ``It's not enough for the best investor to rise up and be the new head of a firm. They have to be good at communicating.''

By failing to act, buyout firms risk a government clampdown similar to the U.S. Sarbanes-Oxley Act of 2002, which required company executives to boost disclosure and personally sign off on company accounts.

``Something like Sarbanes-Oxley could happen in our industry and that's a problem,'' said Steven Puccinelli, head of European private equity at Bahrain-based buyout firm Investcorp.

Britain's GMB union wrote to Labour party lawmakers this month urging them to punish the industry by ending tax relief on interest payments for debt that the firms use to fund takeovers. The government may find that tricky, according to Alchemy Partners LLP managing partner Jon Moulton.

``It's very difficult to disallow interest unless you change the whole basis of the tax system,'' Moulton said in an interview. ``I don't really expect any change at all and I don't think the U.K. government is looking at doing it.''

While Chancellor of the Exchequer Gordon Brown has stayed silent on the debate, Blair himself backed the industry yesterday, saying the firms bring economic benefits to the U.K.

``You have to be careful or you end up in circumstances where concerns about a minority of specific cases end up tarring the whole sector,'' Blair said at his monthly press conference in London. ``I don't think that would be fair at all.''

To contact the reporter on this story: Edward Evans in London at at eevans3@bloomberg.net

Last Updated: February 28, 2007 04:54 EST