Investing in Capitolis

Capitolis makes banks, and more importantly, their balance sheets, more efficient—yielding higher Return on Equity (ROE), which is the #1 KPI for most financial services companies. Banks are heavily regulated, more so in the wake of the 2008 global financial crisis, and have to reserve a bunch of their own capital against different products (primarily loans or various derivatives) they sell…so the government won’t have to bail them out again! There’s only so much risk that they can take relative to their own capital, and this constrains the opportunities that they can pursue and their ROE. Capitolis has three main products: Tear Ups/Compressions, Novations, and Ionic, which you can think of as “Eliminate Positions, Move Positions, and Create Positions” that exist on a bank’s balance sheet. 

I’m very excited about this business because in the future I believe “capital” and “relationships” and “products” (the three things banks do, bundled together: I am a Citi customer [relationship] with a double-cashback Mastercard [product] with a balance [capital]) will be unbundled, and Capitolis is effectively the platform/marketplace that can power this in compliance with risk frameworks. Uber and Lyft are the biggest taxi companies without owning any taxis, and Airbnb is the biggest hotel “chain” without owning any land; Capitolis is on a path to being the Lyft/Airbnb of banks and capital.

Let me give you a metaphor. Let’s say I have a Bank of America credit card with a $15,000 limit because that is all Bank of America is allowed to offer me. (More credit to “an Alex” would be considered by a regulator to be too much counterparty risk, even though I have great credit.) I have maxed out my limit, but want to spend an extra $5,000. Bank of America has the best rate on the new $5,000, so I want to go with them. What if Bank of America transfers my old $15,000 to Chase, and can thus loan me $5,000? I am better off, Bank of America is better off, and Chase is better off!

Capitolis does this in the real world (for very large institutions) through its three products:

  • Novations = Changing the counterparty on an old contract, like the above 
  • Compressions/Tear Ups = I owe you $400, you owe me $500, we both have to reserve capital against this, which we can’t use elsewhere (lower ROE!), let’s change that to me owing you $0 and you owing me $100!
  • Ionic = Let me add more banks/other sources of capital to this product (e.g., loan) I’m providing to you, so you don’t try to “replace” me.

Capitolis has already signed up some of the biggest financial institutions in the world—a who’s who of some of the biggest banks in the world—who have provided their balance sheets to Capitolis in order to optimize their ROE.

Capitolis was started by Gil Mandelzis, a repeat-entrepreneur who had created a very successful capital markets platform (Traiana, which focused on post-trade processing and pre-trade risk) and sold it about 13 years ago, and Tom Glocer, the former Thomson Reuters CEO who’s also on the Morgan Stanley board. I first met Gil about 3 years ago and was incredibly impressed with his vision and determination to build this business, and as often happens in venture capital, something that started off small really started accelerating and becoming a “thing.” It’s such a unique opportunity, and such an incredible team; we are privileged and honored to partner with Capitolis for the next step of their journey.


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