Representatives of private equity firms, hedge funds and other types of investment firms fought back against proposals to raise taxes on their incomes, telling the Senate Finance Committee that critics have misconceptions about their industry.

"Some have a perception that private equity investment is an esoteric form of 'black box' finance practiced by a small cadre of sophisticated investors," said Bruce Rosenblum, managing director of the Carlyle Group and chairman of the board of the Private Equity Council. "The truth is that private equity investment is about numerous entrepreneurial firms, large and small, located in all parts of the United States, that are integral to capital formation and liquidity in this country."

He disputed the notion that partners in private equity firms were exploiting a tax loophole to avoid higher taxes on their compensation. Rosenblum contended that only part of the managers' compensation was taxed as capital gains, but pointed out that other components such as rent and interest were taxed as ordinary income.

Another investment firm executive told the Senate that the proposed tax hikes would hurt investors. "We believe passing the [publicly traded partnership] legislation will discourage the salutary trend of alternative investment firms going public, will increase the relative attractiveness of non-U.S. capital markets and will target unfairly a single industry," said John B. Frank, managing principal of Oaktree Capital Management in Los Angeles.

But Sen. Max Baucus, D-Mont., who chaired the hearing and is co-sponsoring the proposed legislation, expressed his skepticism about the industry. "I hope that we can have an honest discussion," he said. "And I hope that the many lobbyists employed by hedge funds and private equity will not make the glass even darker than it already is."

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