Lead Manager

BABCOCK & BROWN PROSPECTUS
In analysing an investment or a new area of business activity, Babcock & Brown seeks to segment the risks
involved and, where possible and cost-effective, to allocate these risks to the parties best able to manage them.
For instance, the Group may contract with an experienced maintenance provider to ensure that an asset is well
serviced rather than take the risk that higher than projected maintenance expenses could compromise the value
or cash flows of an asset.
4.9.5 Principal risks
The principal risks that Babcock & Brown assumes in its activities include market, business, credit, regulatory,
compliance, operational and reputational risks.
4.9.5.1 Market risks
Market risk refers to the potential for changes in the market value of the Group’s investment positions or revenue
streams.There are various types of market risks including exposures associated with interest rates, equity market
prices, currency rates and the general market values of asset classes in which the Group invests or which it manages.
Interest rate risk
Babcock & Brown finances the majority of its investments with significant amounts of debt. If the debt has a
floating interest rate, an increase in interest rates could impact the value of an equity investment and also increase
the cost of debt service.To reduce or eliminate this risk, the Group typically diversifies its business activities and
investments and either employs fixed rate debt, or uses interest rate swaps and other hedging techniques to fix
interest rates over the life of the investment.The Group is willing to forgo the potential economic benefit that
could result in a falling interest rate environment to protect its downside risks and the predictability of cash flows
from an asset by fixing rates.
Equity market risk
Babcock & Brown has investments in a number of listed securities and receives management and other fees that
are directly or indirectly related to the equity market value of a security, either in absolute terms or relative to
benchmark indices.These investments and fee streams could be adversely affected if general equity market values
were to decline.The Group does not actively hedge its exposure to the risk of a general decline in equity market
values, believing that such strategies are not cost-effective. Instead, the Group prefers to actively manage the
underlying business or asset to ensure that its fundamental value is preserved. Many of the Group’s investments in
listed securities are also in “event-driven” situations where value is more correlated with the outcome of a certain
event or series of actions than with general equity market values.
Currency risk
The majority of Babcock & Brown’s revenue is derived in currencies other than the Australian dollar, and thus
exposed to a decline in the values of those currencies relative to the Australian dollar. Since the majority of the
Group’s expenses are denominated in the same currencies as the associated revenues, only the net income after
total compensation is exposed to currency fluctuations. Babcock & Brown also expects to reinvest a significant
portion of revenues in the jurisdictions in which the revenue is generated. Babcock & Brown therefore does
not believe that it is cost-effective to hedge the Group’s revenue flows. Consistent with the focus on capital
preservation, Babcock & Brown plans to use various hedging techniques to protect the value, in Australian dollar
terms, of investments made in non-Australian markets.
General market values of selected asset classes
The value of Babcock & Brown’s investment positions and revenue streams may be adversely affected by the
deterioration of the general market values of asset classes in which it invests, manages assets or conducts other
activities. Examples of such asset classes include property, infrastructure, aircraft, railcars and semiconductor
manufacturing equipment. As was the case for general equity market value risk, Babcock & Brown does not
actively hedge its risk to general declines in the market values of such asset classes, preferring to actively manage
the fundamental value of the asset and diversify its business mix and investment portfolio, although risk is often
mitigated by the use of limited or non-recourse debt to finance investments as described in Section 4.9.4.
4.9.5.2 Business risks
As Babcock & Brown increasingly invests in operating businesses it exposes itself to general business risks
associated with operating businesses. Employee issues, competitive pressures, economic and political conditions
and cycles, as well as extraordinary event risks will all impact on these types of businesses.
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