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Views | An argument for pragmatic realism in deal making

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Socially conscious investing and impact investing tend to sustainability – for the planet, for society, and for the investor. There is a general recognition of the fact that maximizing return to an investor at any cost is sub-optimal, self-defeating, and may actualize adverse outcomes in the medium term.

Views | An argument for pragmatic realism in deal making
The ideal, the end goal, of any transaction is making money. The narrative may be that the transaction, the ‘deal’, is strategic or tactical or defensive or for sustainability or, increasingly, an impact investment; but the bottom line is ensuring a return in money terms on the amount invested. To lose sight of this is to miss the bus and the party.
There is clearly space and need for philanthropy but that is not ‘deal’ oriented.
I suggest that investment generally is now socially conscious and that this social consciousness is borne of a pragmatic acceptance that any lesser standard will be self-defeating. Deal making follows this paradigm.
Socially conscious investing and impact investing tend to sustainability – for the planet, for society, and for the investor. There is a general recognition of the fact that maximizing return to an investor at any cost is sub-optimal, self-defeating, and may actualize adverse outcomes in the medium term.
Working to an optimal return while bearing the costs of enforcement of principles designed to achieve normative good leads to consistent returns in the medium term and minimizes the risk of adverse consequence. The increasing prevalence of pools of professionally managed capital are driving this paradigm shift (failures to adhere to this paradigm are more common where investments are effected by proprietary pools of capital with limited professional management irrespective of regulatory oversight).
ESG investing’, ‘impact investing’, and ‘socially conscious investing’, point to investors’ having internalized the need to accept the costs of meaningful and effective compliance. Receiving investment so categorized allows the recipient to signal its adherence to governance and sustainability which in turn allows for better positioning, growth, and brings larger society into the scope of ‘businesses.
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The pragmatic idealist paradigm requires rigorous diligence review and warranties from the seller-target as part of the investment process with equal focus on monitoring compliance and impact over the course of the investment with the intention of receiving sustainable returns. These positions are manifest and generally applied by the investor community today. Target-sellers have recognized this and there is increased focus on ‘pre-deal’ preparation to better position the entity which is to receive the investment. The costs of compliance with normative standards and societal impact are internalized, leading to the investment being more easily made available, and establishing a virtuous cycle of sorts.
The point is that doing good follows from being able to afford to do good. The average homo sapiens is not a saint and as Sarojini Naidu asked the Mahatma (sic) – in the best of humour and with little cognizance of the weight which history would attach to her words: Do you know how much it costs every day to keep you in poverty?
Consequently, investors will continue to seek returns on capital. That is a fact. What will continue to manifest is the established trend of holding recipients of that investment to normative standards of improved transparency and governance with the intent of ensuring compliance with generally accepted ‘good actor’ behaviour.
Bad actors will continue to exist as a function of human interaction and economic activity. Equally, as a consequence of those forces, the investor community will continue to work to the rapidly crystallizing paradigm of pragmatic idealism although this paradigm is presently fluid and is not codified in a single text.
There is a desperate need for genuine idealism and philanthropy. The growing concentration of wealth and growing income disparity is the challenge of our time. Data tells us that we have not fully accepted the fact of, leave aside the gravity of, the problem. In this, change – if at all change is effected with the rule of law – must be top-down. Time will tell whether this change if at all effected, will be a flood or a trickle.
The author is Mr Justin M Bharucha, Managing Partner, Bharucha & Partners. The views expressed here are personal.
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