Mr Hodges—I am pleased to be here and to make this contribution. I am currently Bradken’s managing director and have run this particular manufacturing company now for 10 years. I have submitted to the committee a presentation that I gave to an AVCAL conference here in February. It is a public document and is on the Bradken website. It might be useful both for me to refer to a couple of slides in it and for you later on.

I have had the unique experience of running a business unit for a major public company that needed to dispose of that business unit; it sold it to private equity. I lived through that experience and I am still normal. For three years now, I have been running a public company that is growing and expanding quite rapidly. Today it is at about 160 or 165 on the ASX. I think there are some learnings there that might not be revolutionary but might be useful to the group and I was keen to come and present them to this committee. That is my opening. It is in that area that I can probably contribute rather than in some of the other more technical or financial areas that others have presented on.

Senator JOYCE—Can you explain briefly what you mean when, at page 22, you say that from 2004 onwards more time has been spent on reporting and on non-value-added activities?

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Mr Hodges—From 2004 onwards we became a public company again. A lot of my work is external—spending time with customers, bankers and so on. Now 30 per cent of my time would be spent dealing with analysts and on reporting and the management of those issues.

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Senator JOYCE—So your statement compares your time in private equity to now.

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Mr Hodges—It is a matter of being properly geared up to do that. I think that for our company the private equity time was valuable. It brought the things that I have put in this presentation. I am certainly enjoying my time now as well.

Senator JOYCE—My colleagues have asked most of the questions, but there are a couple that I would like to drill down on. Both of you, John and Brian, have something in common. I think this is right. I will put this statement to you: the capital nature, the intrinsic nature, of your business at the start and the intrinsic nature of your business at the end of the process was the same. It was the same business. There was not a break-up of it into businesses of a different nature. Would that be a fair statement: the nature of your business at the start and at the end was the same?

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Mr Hodges—Correct.

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Mr Porter—There was one exception for us. Where we were recapitalising during CHAMP’s initial participation we exited a telecommunications piece of our business in New Zealand. We sold our half of TelstraClear to Telstra at that time. That was a minor change; it represented about 10 per cent of the business.

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Senator JOYCE—So it is inherently different to the process of someone buying a business and then breaking it up into its many component parts, selling it and saying, ‘That is our business: to buy it and break it up.’

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Mr Porter—Yes.

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Senator JOYCE—What I am looking at, obviously, is that there is a differentiation in private equity between those who have a bona fide purpose for wanting to be part of a process of making an organisation better as opposed to those whose prima facie process is to break the organisation up and make money from the break-up. What was Foxtel’s ownership through the process with Austar—at the beginning, during the process and at the end—and their say in what was going on?

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Mr Porter—Foxtel never owned any equity in Austar, and still does not to this day. We have key contractual relationships with them for sharing of the satellite platform and we distribute some channels to them, and they to us. Certainly I think that, if anything, CHAMP’s participation strengthened that relationship. But in terms of equity I think there was some speculation that CHAMP was ultimately there just to sell their piece of it back to Foxtel or whatever—but that was never the case. CHAMP was acting in its own interest and not Foxtel’s.

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Senator JOYCE—John, the transparency that you talk about would solve so many of our problems in that there is the ability for the market to understand. Without being rude, if something had gone tragically wrong with your organisations—and I am glad that it did not; they are both good news stories and obviously have the runs on the board—if either of them had fallen over the world would have kept turning, as opposed to other organisations where, if private equity had been involved, there may have been a completely different effect. How did you encourage a company that was—and this follows on from Senator Stephens’ question—

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CHAIR—I think we will take that last comment as a statement of opinion as supposed to a statement of fact in relation to the relativities of the companies.

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Senator JOYCE—Okay. You had an organisation which bought into you when there was risk, the organisation turned around and is making a profit. They obviously have shareholders whose view it is to continue making a profit. What would have happened if they had said: ‘No, we don’t want to get out. This is a great deal. We are going to stick with you.’

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Mr Porter—I think the fundamental nature of private equity is that they are accountable to their investors. They cannot just continue to have unrealised gains; they have to realise their gains at some point in time. In fact most of their structures, I think virtually all of them, have a mandate in that the equity has to be returned to shareholders within a specific period of time. I know that in the case of funds invested in Austar that was seven years. I think it was the same with Bradken. So they are under a mandate to realise gains and to return capital to shareholders, which in many cases are insurance companies.

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Senator JOYCE—They are in the business of buying and selling companies. Did you have anything in your debt instrument to say, ‘Once these KPIs are reached we have the right to ask you to roll it back off into the market?’ How do you come to the point in time where you want to be rid of them and you want to go back to your own way?

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Mr Hodges—I come back to the fundamental principle: management’s job is to work for the owner, not to dictate to the owner whether he buys or sells the business ultimately. I think the private equity company has its own shareholders that are telling it how long it should hold businesses for ultimately and how long its funds should be opened and that sort of thing. But the role of management in my mind is very clear here. It is about creating wealth within all the legal and other cultural and value bases but, in essence, to create wealth for the owner.

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Senator JOYCE—In your view of how private equity works in the economy do you believe that there are issues with regulation? John has shown that he could deal with regulation—and obviously you had a different view—but you obviously have a problem with that. You have found the reporting issues onerous and that was one of the reasons you went towards it, and you have also stated that it was an issue after it was finished.

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Mr Hodges—No, I have just said that it is less onerous within private equity. It is quite manageable on either side, and companies do manage it and they manage