Key takeaways from our Compass Investors fall summit

Fair wages: On the precipice of historic change

Restaurant workers who have suffered for decades under the federal subminimum wage of $2.13 per hour may be about to get some relief. Saru Jayaraman, president of One Fair Wage, told summit attendees that “we’re on the precipice of historic change” when it comes to eliminating the unequal treatment of restaurant workers in the economy. President Joe Biden has spoken out in favor of paying restaurant workers more, and support is growing in both the House and Senate to eliminate the subminimum wage for restaurant workers and to replace it with a full minimum wage, with tips on top. The practice of paying restaurant workers very little and forcing them to rely on tips is a legacy of slavery. After the Civil War, as formerly enslaved people entered the workforce, restaurants paid them nothing, so they had to rely on tips. That approach was codified in 1938, when the Fair Labor Standards Act allowed restaurant owners to pay their workers less than the federal minimum wage. During the pandemic, restaurant workers have been resigning en masse, fueling momentum for change. As one waitress testified during our summit, she simply had nothing to gain from showing up to work at her restaurant job: “Not only am I being treated rudely, I am not being paid adequately, and you’re probably not going to tip, just for me to risk to get COVID to go home to my children that I’m already struggling to take care of. Nothing about that scenario is appealing.”

Diversity and inclusion: More needs to be done

While it’s encouraging to see progress on the issue of fair wages, a lot more work needs to be done to promote diversity and inclusion, especially in the asset management industry. A recent report by the Knight Foundation underscored the problem: A commissioned study found that only 1.4% of total U.S.-based assets under management are managed by firms owned by women or people of color, a dramatic underrepresentation considering that nonwhite people make up about 40% of the U.S. population, and women make up about 50%. Fall summit participants discussed why they allocate funds to diverse-owned managers. One common reason is the need to make data-driven decisions. The National Association of Investment Companies reported in March 2020 that diverse-owned private equity firms continue to outperform their benchmarks, and followed up with the headline, “New Study Shows Diverse Private Equity Managers Beat Performance Benchmarks, Again!” in November 2021. It’s why one institutional investor at our summit said he views diversity as a fiduciary duty. By acting on that duty and proactively seeking out more diverse managers, Knight Foundation reported that today 42% of its assets are managed by diverse-owned firms, up from 0.35% about a decade ago. It may take time, but asset allocators can get there if they commit to promoting more diversity in their portfolios.

Advice for emerging managers

Emerging manager programs have helped many institutional investors increase diversity within their portfolios over the last 20 years. But new funds looking to win an allocation via such programs often have a hard time getting on investors’ radars. Institutional investors at our fall summit offered some practical advice to help emerging managers sharpen their pitches and get noticed:

  • Take feedback seriously. If you hear the same comments from more than two people, you should change your marketing and your approach.

  • Make a realistic budget and figure out the right size for your first-time fund so that you know how much capital you’ll need to raise in order to be viable.

  • Be ready to explain how you will build out your team—it’s a question that is sure to come up—and practice answers to this and other key questions before your meeting.

  • Remember that the goal of that first meeting is to get another meeting. Be prepared to stay the course and not give up. It may take time, but if you’re determined and you follow these steps, you will eventually find the right institutional investors to back your fund.

Time to get real about infrastructure

Institutional investors have been steadily boosting their allocations to infrastructure over the last 20 years, but this may be the real moment for the asset class to shine. Because infrastructure assets—ports, toll roads, bridges, power lines, and the like—are crucial to the functioning of the economy, their operations are more resilient in economic downturns and offer protection against inflation. Inflation recently hit 30-year highs amid supply-chain bottlenecks, and the U.S. is preparing to invest $1.2 trillion over the next decade under the newly enacted Infrastructure Investment and Jobs Act. That has made it more attractive to allocate some portion of investors’ real asset portfolios (which usually include real estate, timberlands, infrastructure, and other long-lived physical assets) to infrastructure. Speakers at our fall summit agreed that real assets are here to stay as a feature of diversified institutional portfolios and that infrastructure will continue to get more attention. So, too, will some of the classic debates that have long accompanied this nascent asset class: What, exactly, counts as infrastructure? How do you define it? What sorts of returns should you expect? Institutional investors have always approached these questions in different ways, with some favoring private equity-style investments that may offer higher returns, while others stick with traditional public-private partnerships that may offer less risk and lower returns.

Time to rethink capitalism?

Climate change. Economic inequality. Political instability. Policymakers need to address these pervasive problems by offering big solutions They can do that more effectively by rethinking businesses’ role in the economy, Ed Miliband, shadow secretary of state of climate change and net zero for the UK, told our summit attendees. The private sector can be harnessed as a force for good when companies move away from the Friedman doctrine that says increasing profits for shareholders is businesses’ sole social responsibility. By integrating other stakeholders and social goals into their decision-making, companies will be better positioned to drive innovation and change that will help tackle the world’s biggest challenges. “We need to re-engineer our capitalism,” Miliband said. To help make that happen, Miliband said he favors enactment of the Better Business Act, which would amend the UK’s Companies Act to state that the duty of a company director is to promote the purpose of the company and operate the company in a manner that benefits the members, wider society, and the environment. The change would empower company directors to take the interests of all stakeholders into account when making decisions, making it easier for companies to help tackle social and environmental problems. Miliband said companies seeking to improve society need help from the government, and this is one concrete step that could help them do so.