Anthony R. Contrucci leads the family office for the Schrage family, owners of First Bancshares Inc. and Centier Bank, headquartered in Merrillville, Ind. Contrucci, a married-in member of the fifth generation of the family, is also the founder and managing partner of 119th Street Capital, the family’s direct investment company, which they started in 2022. He discusses the family’s direct investing journey:
How did the family get started with direct investing?
Our family has a long history of entrepreneurship that spans five-plus generations, and 119th Street is the latest iteration of that spirit. Investing as a family has taken many forms over the generations. At our core, we are a family that believes that, in the right hands, capital formation and allocation can create value far beyond that of financial value. Since the mid-1800s we have found success in aligning our entrepreneurial spirit with our aptitude for capital allocation, all overlaid with our deep desire to create meaningful positive impact for all our stakeholders, including our communities. From our early direct investments in land and real estate to our first operating business, which was a general store, to then the opening of Centier Bank — all during the 19th century — our primary goal has been to deploy capital with a people-first philosophy. I am proud to share that this legacy has only evolved over the 20th and 21st centuries.
Over the past 130 years, capital allocation has taken the form of investing in our legacy business, capital expenditures and other strategic and direct investments. However, I and the rest of the fifth generation felt that there was an opportunity to accelerate and formalize our diversification further through a new era of direct investments. To that end, we have leaned even further into direct investing and see it as one of the many contributions our generation hopes to make which will serve as a mark that we leave on our family legacy.
Direct investments happen at various levels throughout our family enterprise. Given our decentralized wealth ownership model, individual family branches source and fund their own investments, at times co-investing together. We also collectively deploy capital through our family’s family investment company and, since 2022, through our new private investment company, 119th Street Capital.
Although direct investing is in vogue right now, I would be remiss if I didn’t share how we got here. It took years and generations of focus and discipline to achieve the appropriate level of capital formation to allow us to reach our most recent phase of direct investment. Along the way, it was important for us to not just be entrepreneurial, but also to strive to lean into intrapreneurship. We utilized all our family’s forms of capital on our ‘family balance sheet,’ which includes financial, intellectual, spiritual, social and human capital to grow our legacy operating business. As many know, commercial banking is a capital-intensive business — therefore, we are always reinvesting in the bank so that we can achieve our long-term strategic growth goals. This strategic growth has and continues to include the expansion of and diversification of the organization. Over the years, this has manifested in business unit expansion as we have created new lines of business via lift-outs.
Today, we maintain the same level of focus and discipline. Within direct investing and private equity, our mandate primarily includes investments within financial services and real estate.
What did starting 119th Street Capital involve?
The road to starting 119th Street Capital included many years of informal conversation as a generation and as a broader family at our family meetings. Finally, after countless conversations, at one of our family meetings a few years back, the family finally asked me to take the concept and put it on paper. After reviewing the preliminary business plan at a subsequent family meeting, there was consensus to give me the green light to start the journey of building what today is known as 119th Street Capital.
119th was a startup in every sense of the word, further reinforcing our fervor for entrepreneurship. And although it is a wholly owned subsidiary of our financial holding company, First Bancshares Inc., at the time all that truly existed was the vision of what it could be. My first order of business ran two parallel processes. The first was to identify and recruit a senior leader from either private equity or the investment banking world. Second, and simultaneously, I started my search for new board members that had the specific experience and competencies that could aid us in both the creation of this new business and the governance of it.
Once I identified and onboarded our director, Ethan White, we together began the real work. We kicked off this next chapter of the journey with stakeholder interviews. These interviews included 15 individuals that were a mix of family and our current First Bancshares management and independent directors. These interviews were essential in ensuring that what we were building strategically would receive support and, ultimately, receive the resources we needed to be successful. A great example of how important it is to ‘go slow to go fast’ in a multigenerational family enterprise.
The next order of business included the hiring of the rest of the 119th deal team and the selection and onboarding of our new competency-based directors.
We spent the next several months standing up the new entity. This includes: legal, our brand identity including all of our collateral, creating our transaction evaluation procedures, our long-term staffing plan, our operating budget, capital allocation plan, sourcing strategy, building of our technology stack, our requisite board and management committees along with their charters, our investment policy statement including our clearly defined mandate, our communication strategy for various bodies of stakeholders including what they receive and the frequency of this information, etc.
One could argue that I overengineered the infrastructure that we created day one. However, I fervently felt that I was building the infrastructure that we needed over the long term. I preferred to be more methodical and intentional in the beginning, ensuring that all of our stakeholders were on the journey with us so that we could, over the long term, scale faster and deploy even greater levels of capital.
What do you look for when evaluating potential investments?
First and foremost, we are looking for true alignment and long-term partnerships. Our profile is that of family office capital in every sense of the word. We are patient and permanent capital that is both creative and flexible investing from our balance sheet. We respect the legacies of our partners and believe in supporting people-first, servant leadership cultures.
When reviewing an investment or partnership opportunity, the first question we ask ourselves is: Are we the right partners? Candidly, financial capital is in abundance today. Therefore, we ask ourselves: Where and how can we add strategic value to our potential partners? How can we be part of the value creation mechanism? Is it our expertise within financial services more broadly? Our track record of successfully operating and scaling businesses? Our corporate governance experience? Our ability to add strategic value? Does our potential partners’ strategic plan include an inorganic growth narrative and are they looking for us to serve as their outsourced M&A function, etc.? Therefore, for us to commence with formal diligence on an opportunity there needs to be clarity in how we can support them on the achievement of their goals and objectives. This process is essential; however, it takes time and requires a certain level of intimacy and genuine curiosity about the business, its people and culture.
Do you focus your investments in specific sectors?
119th is looking for partner businesses in sectors that have a contra profile to our family’s legacy operating business, Centier Bank. Banking is capital intensive, ‘risk on’ and cyclical. Therefore, we proactively source within sectors that provide capital efficiency, drive ‘risk off’ revenue and are non- or countercyclical. However, once again, what we find most compelling is when we fundamentally understand how we can be part of the value creation process. It is also important to note that we intentionally do not get in the way of management. However, both parties have made a collective decision to work together because we feel that the sum is greater than the individual parts. We add value where we can and then get out of the way so that management can run their business. We do not integrate these partners — they remain standalone businesses with their legacies, brand and teams intact. However, we do afford them opportunities for cost synergies where and when appropriate and create value through revenue synergies when appropriate and possible.
Our core sectors of focus include accounting and tax, investment banking, non-bank lending, specialty finance, wealth management, asset management and insurance distribution.
119th’s investment criteria also includes specific EBITDA and enterprise value target ranges. We are also disciplined about check size to include minimums and maximums. We manage the upper bounds by maintaining relationships with other like-minded peer families for co-investments on larger opportunities. Lastly, we are investment horizon agnostic. Based on the goals of our partners, we are comfortable with more traditional private equity investment horizons in the 5-7+/- year range. However, given that we are deploying balance sheet capital (versus through a fund vehicle which contains limited partner capital), we are also open to longer-term holds that can span years or generations when appropriate.
Who is involved in your investment decisions?
We have a robust structure. However, our goal across our broader family enterprise is to keep things as flat as possible, affording quick and dynamic decision making and allowing us to be nimble. I believe this is a true differentiator and competitive dynamic of many family-owned businesses and family enterprises.
We have three levels that are involved in our investment decisions. These include the 119th deal team, investment committee and the board of directors.
I’m the only family member who is a full-time member of the 119th deal team, serving as its managing partner. However, my brother-in-law (also married in) and my father-in-law also serve as partners.
At the investment committee level, I serve as chair. My brother-in-law also sits on the committee. In the past, my sister-in-law served on the committee as well.
At the board level, we have four family members (me, my brother-in-law, sister-in-law and father-in-law) with the balance of the nine directors being independent (non-family and non-management).
Decision making is methodically allocated across these three bodies, with clearly defined approval thresholds. In addition, we annually review and adjust all our policies and procedures.
How do you source deals?
Sourcing is the life blood of our business. This is another area that constantly evolves. We are always striving to identify where we should be increasing our focus as the channel demonstrates increasing relevance. For example, our broader sourcing strategy includes various online marketplaces, investment banks, centers of influence throughout our family’s broader enterprise including our personal rolodexes, institutional investors including other family offices, in-person events, centers of influence (i.e. attorneys, accountants, wealth advisors, etc.) and targeted outreach. The respective performance of these individual channels will dictate where we focus our time, energy and resources.
Why use direct investment as a diversification strategy rather than, for example, investing in mutual funds?
Throughout our family enterprise there is exposure to public equities to include mutual funds. That being said, through our broader direct investing strategy, it boils down to a core belief that we can leverage our generations of experience, learning and knowledge to, over time, create outsized returns for all of our stakeholders.
A direct equity stake obviously provides enhanced influence and transparency compared to a mutual fund, for example. However, what really motivates us is our ability to perpetuate our family’s true legacy of culture. We have demonstrated that putting people before profit is not just a tagline. Rather, it is a mantra that we live and prove every day. We believe that putting people first — in particular, your partners, employees and clients — is how you build long-term sustainable value. By investing directly, we have the ability to share from our experiences and various forms of capital, add value as appropriate and learn alongside our partners.
Lastly, I personally feel that wealth creation stems from concentration rather than diversification in the traditional sense of the word. That is why we focus on only making about two direct platform investments per year, ensuring that we have the ability to partner in a manner that is accretive to the value creation process to include add-on investments for portfolio company partners when or if that is part of the strategic plan and growth narrative. For me, public equities absolutely serve their purpose on our balance sheet — however, they often serve as more of an inflation hedge and liquidity management tool than a source of wealth creation or alpha generation.
What other advantages do you see in direct investing?
Given our experience with and continued focus on privately held financial services firms, I feel we are uniquely positioned to be able to create meaningful partnerships with our partners because we have and continue to walk in their shoes. We ourselves are entrepreneurs, intrapreneurs, owners, governors and operators. Our ability to share our experience with our partners is robust and rich because we have learned a lot over the generations, made several of our own mistakes and have had our share of successes.
What also makes us unique is that we can provide cost synergies when appropriate and drive revenue synergies when possible. These are foundational elements of our thesis.
However, it is paramount to note that all of this is possible only if we intimately understand the goals and objectives of our potential partners and if we are the right partners to support them in the realization of their dreams.
Do you see direct investing more as a tool to keep the family engaged or more as a way to help the family diversify and grow its investments?
For me, personally, it is both. I do feel it is a tool that will continue to keep the family engaged. However, it is also a foundational tactical element within our family strategy as we seek to drive durable and scalable family cohesion across generations.
As I shared in a prior interview with FO Pro, family cohesion dynamics include both financial and emotional elements across the family and business. The four components are: family financial, business financial, family emotional and business emotional.
Our direct investing strategy is a tactical component that I believe will aid us in the achievement of our goal: ensuring that that we are still a united and thriving family 100 years from now.
As many of your readers know, some of the challenges that family enterprises face that prevent them from successfully perpetuating for generations include meaningful dilution across generations, zero sum dynamics and the failure of the family for a variety of reasons. Direct investing is by no means a silver bullet that will address or solve the above. However, it is an essential element within our family strategy — and the thesis behind our ‘why’ extends beyond mere engagement or diversification and growth.
