Pagaya Technologies Ltd. (PGY) Earnings Call Transcript & Summary

Good afternoon. My name is Peter Christiansen here with a Gal Krubiner, CEO and Cofounder of Pagaya, which has been a fascinating story in 2025 and has been our top pick in our lending, [indiscernible] coverage of [indiscernible]. I think at one point, means before we -- this market hit some of this more recent turmoil Pagaya was the performing out of all [ fintech ] we said in our screening. So it's just been an amazing year for the company. Obviously, not just from the stock price moving in the right direction. But just what has gone on, and we're going to dig into that right now.

I think we want to start off with first is last quarter, how I think you and EP and [ Sanjiv ] talked about building sustainable growth -- sustainable network growth and focusing on sustainable expansion there. Not something you hear from a [indiscernible] company that often would be great that you could elaborate on how you're creating sustainability for Pagaya [indiscernible]. So definitely, we'll go into that.

Thank you so much for having me and thank you for your support. I think we had very few [indiscernible] many of the conferences that people are digging in, wants to learn more [indiscernible] long only looking for that. What is [indiscernible] over [indiscernible] market, not market what you're trying to build and when the company is doing. So I appreciate the [indiscernible] here, and the interest from everyone. And what we try to do today is to get a little bit more regular [indiscernible] in the big process and how we are performing [indiscernible] your point how we take the in fundamental. And to your question, which is what your sales [indiscernible] or take on sustainable growth. And why this is sometimes different than the lending peers? I would say, putting very simply, our B2B strategy [indiscernible] it is by design. So when we are thinking about how we grow, we are thinking about how we are lending more [indiscernible]. We are thinking about how do we perfect our products, to be more value driven to these customers and the lenders that we already have, and how we are focusing our efforts to be in areas where once we get that growth, [indiscernible] growth and not something that is moving before the market has [indiscernible]. And there are many different [indiscernible] on the [ VC ] side of the houses that they are very much driven by marketing spend, opening the credit box and then when market goes against you, type of marketing spend. Type of playing the cycle. It's over the cycle, right? And when we went into this, and I think this is the most -- the thing that I'm most excited about, like actually 2026 because I think we managed to bring the products [indiscernible] to a place where -- when we talk about a decent markets and asset classes. But like we started the year and we were going to listen to our [indiscernible] we're like, okay, what are you think the [indiscernible] very obvious product that you have is a big line monetization products, but then we heard, actually, we are looking on the [ PM ] side [indiscernible] We are looking to be more with the [indiscernible], the credit [ pharma ] and the [indiscernible] activate and the [indiscernible] because we're trying to bring more customers to outdoor. And at the same time, we're trying to open a lot credit to our approach. So we did that when we mutually created the marketing affiliate products that is helping these type of [indiscernible] to be very effective in [indiscernible] very effective in these places and the combination of being able to take a partner and move it from the deeply monetization product to [indiscernible] and to add that as additional [indiscernible] you in the credit [ pharma ] and in these different premier channels have been driving a lot of the [ proliferation ] that we see. And in the same vein, just [indiscernible] one of the biggest questions that we have in [indiscernible] and especially on the dealerships, or people that are coming to the dealership, they have 2 types of nonprime lending or approval. You can have your [indiscernible] for the loan but you need to show me your income, and therefore, you need a verification. Or you have the ability to say you are fully approved, and that's what's mainly happening on the high FICO [indiscernible] When you're asking the question of what is the biggest motivation and ability to start from a balance perspective, the product that suits for the dealership, it's the highest ability to say you are approved [indiscernible]. So subject to [indiscernible] not subject to the manual [indiscernible]. And what's happening is the dealership when I see that in his topline, he would say, okay, no, I'm going to give you a different [indiscernible] So we took that capability [indiscernible] pass, we develop [indiscernible] that technology of the ability to predict what's going to be your income that's going to be our predictability and accuracy of the order income. And for this population that we see that we have a very strong handle, or we're giving them a bypass of this [indiscernible] line and actually being able to give them the fast part and increase massively the verification and performance and all the other side, not just working the same, but sometimes don't work in better because we get better [indiscernible] So all of that to say that the product suite and trying to solve [indiscernible] for them, and I'm trying to deliver the message that the way we want to [indiscernible] have for the progress [indiscernible] clients. We have an 18-month road map of each client each product. And what we should expect to see for us more in 2026 is how they [indiscernible] for products are driving more value with existing [indiscernible]. But more interestingly, how they're pushing the queue and the [indiscernible] to be more robust and more relevant because there is no [indiscernible] today. We have [indiscernible] in our lowest ever view of going onboarding is because it is [indiscernible]. So now we are sitting with a PL partner, and we're telling them, hey, we're not just going to do [indiscernible] volume with you for a deep line, but we can have been picking the [indiscernible], and we can actually direct [indiscernible] another [ 300 ] [indiscernible] $1 billion volume [indiscernible]. And therefore, you see these organizations of [indiscernible]

Well, because you're becoming a mission-critical value proposition. And you're ranking your partners up higher from the marketplaces and things like [indiscernible] is enhanced. And you also will be a diverse selection of those sorts of entire quality. So it's almost like you're becoming a mission-critical component for your [indiscernible]

And another way to think about it is a lot of the knowledge and capabilities and things that we're developing on [indiscernible], and we're not delivering that more today encumbered [indiscernible] high is really taking a bigger [indiscernible] and a bigger performance and actually funny enough, the government becoming more [indiscernible] for business is allow this [indiscernible] to actually say, we're going to do the extra mile. We're going to invest in the technology. We're going to partner with Pagaya or others and becoming an easier thing to do, and that has been fascinating to see how the [indiscernible] of mine when the SIs like [indiscernible] is like point of sale, right, we are going to [ land ]. So we are helping people to improve their lending in the point where people are coming to us for that spending, and it's been fascinating to see how the FIs are focusing on the same type of [indiscernible], which is how do we grow more, how we become more [indiscernible] dealership to next year, and we are passing on these challenges, creating products and increasing our growth.

You see [indiscernible] partners [indiscernible] That sounds great. I mean you still do have -- any one that [indiscernible] been credit cycle and now I'm getting through them. But -- and there's been a lot of noise, I think, on the credit picture this year and how things are kind of evolving on the last call. I think you illustrated well on how your structures are performing versus [indiscernible] materially better there. And delinquency still looks like they're fine. They are at healthy levels. Just curious on your sentiment read on the capital markets side, also from your partners on where conditions are right now?

Yes, I would say, as we said on the call, the performance is in line with what [indiscernible] see the performance to our [indiscernible] because [indiscernible] are coming at the right level. And there are a lot of [indiscernible] of how you think about that and what does it mean. And I think the biggest driver that is happening across the U.S., and you would see that more forming [indiscernible], and we don't talk about that [indiscernible] the reduction in the corporate [indiscernible] If you look on the management rates, '25 vs '24, you saw [ 150 ] basis points of [indiscernible] from the benchmarks, both steady spreads that 80% of your capital structure, which is tied to the IT, et cetera, is very, very, very efficient [indiscernible] and macro efficient. So the [indiscernible] are thinking about that, and I think that's the [indiscernible] is even stronger in [indiscernible] You are computing to another way at it. What's the asset return that they need to be? When you're asking the question of what you're expecting the threshold to be the return of the asset that you are [indiscernible] is the part of the pieces of capital and the [indiscernible] and the recoveries, and the different [ pace ] Than I said in auto, you have given the recoveries, which is much bigger than more important, right. It's [indiscernible] the end of the car that you're projecting is 40% or 55% changing completely the [ service region ]. This cost of capital is 150 basis points lower. So you saw for something which is a 9.5 hour way, but now you're [indiscernible] to an 8. And what do we see [indiscernible] this is coming into the [indiscernible] or the [indiscernible].You should not see on the 2024, 2023, which was the tightest credit days in the U.S. environment [indiscernible] to be exactly the same as what we expect in [indiscernible] So when we are speaking on the call and we are talking to investors and we are trying to [indiscernible] all of that to an actual our way on a portfolio management and risk management meeting that's happening on a weekly basis. And this is definitely consumer credit and [indiscernible] side of the house. We are asking the question, with all the different things that have changed since last quarter reception. And I told them for the right away, and we are asking that from the question of what's the unit economy that is less for me? The unit economy has never been a strong because the cost of capital is [indiscernible] was still going down and [indiscernible] are not still going high, that actually, the percentage you are keeping to yourself from a property perspective, is very high. And that gives them sometimes those with a little bit higher delinquencies as you are entering to the [indiscernible]

Sure. You have more degrees of freedom, more [indiscernible] room to do different things, infrastructure things in certain ways. You don't have to be as creative [indiscernible] as in prior years, prior vintages. But is that unit economic bucket that you're talking about, is that a toggle that I want to manage so that it's still conducive to driving growth?

I think that when we are solving for the sustainability of growth and the point where we do not need to [indiscernible] or increase massively is keeping that margin very, very healthy. And that you can see in the [ FLLP ] and that we've seen the different part of lowering the [indiscernible]. And you see that in the cost of capital that you have into what we are pointed unit and what has been written on our balance sheet. And we are managing that very carefully. And that's why you didn't see us increasing and opening the [indiscernible] less support, like the growth of Pagaya was [ 22% ], and that's is, not looking for [indiscernible] because we don't like the volatility [indiscernible]. So we all come back to the fact that as of now, the consumer is in a very [indiscernible] It is when it's coming from. We are seeing some questions about the private credit side, or AI and on the corporate. And that's definitely a question that is happening around the discussions. The consumer hasn't been written yet. We are definitely on the watch. We are definitely watching if something will go the other side, when we tax and will reduce even the conversion will become more from [indiscernible], we have [indiscernible] that we started the year very conservative on that side. So again open the [indiscernible] against investors of marketing dollars because it's not our business. So [indiscernible] following, healthy situation, ready [indiscernible] whatever.

And you don't need to open up the credit box to improve your partner [indiscernible]?

Yes, because the reality is that let's talk about what's going to drive the growth [indiscernible] is going on experience [indiscernible], which is another aggregator like credit pharma, and you do with [indiscernible] partners and here, you have another $500 million of growth, and not by opening the credit box because now you need the approval of the [indiscernible] system.

Because now you're at the top of [indiscernible]

Exactly. And now you're [indiscernible] against that at [indiscernible] that's powerful.

And you did talk about things that you're watching it seems like [indiscernible] growth, that kind of stuff. Those are like your -- where your eyes are focused in on [indiscernible]

And our two other bases, how competitive the area of personal [indiscernible] varies that [indiscernible] underused. So it's a very big [indiscernible] what we saw in '21, out of it was people became too aggressive, too quickly, and then it was hard to keep hopping getting the right population to the right places. So that's definitely something we're watching. For us, this [indiscernible] good. The other piece is the actual delinquencies of how many people are [indiscernible] actual MOBs data that are coming, and they are very much more implant. The point is all in the right context and into the what we are [indiscernible], which is ROA, which is the margin and that business are moving as we go through the site, but you still keep the same spread to make sure you have enough [ market ]. The last point I want to make is another example on the [indiscernible] is very interesting. One of the pieces that as we think about going down the [indiscernible] if something will happen in people or not, we are moving to much younger [ cars ]. So you will see the average age of the [ cars ] that we are approving on a total loan for them [indiscernible] assets. So by definition, you would see higher recoveries of cars if people are going to different when they're [indiscernible] But requiring potentially a little bit higher [indiscernible] to produce service on the same order. So there are a lot of different nuggets that you are trying to [indiscernible] for the different parts that all in all is getting us to be very comfortable in managing.

That's interesting. I do want to look at the capital market side, equally an important conversation that investors are talking about right now. And -- and it is interesting. It does seem like we're seeing more [indiscernible] demand in the ABS market, structure markets seem to be operating quite healthy. I'm just curious on your views. Where are some areas that you're seeing strength? Where are some areas where you'd like to see a little bit more support? Maybe there's a little bit of weakness there, or there's just noise that you think equity investors on this [indiscernible]

So I think -- let's savor that to the [indiscernible] impact on the financial. And I think that's something we've been doing this morning and to other folks to get the right your point of the business. The capital market and a healthy of -- the health of the funding market is actually a very big focus the [indiscernible] of Pagaya in 2024. We did a lot of changes and progression into the unit economy and the cash and the cash flow when we were happy [indiscernible] that we are [indiscernible] positive and we [indiscernible] and hard to appreciate the power of that. I think in a very small [indiscernible], the credit -- sorry, the cash profile of the business that we have seen is starting to be accretive. And I want to walk through the pieces of that which are very much correlated to the question you've asked about how the ABS has been functioning there, and what [indiscernible] when I look in the future. So think about the fact that we are today originating the [ $10 billion ] and is being done in 3 [indiscernible] and the [ POS ]. And the real big question that we ask ourself on a capital profile perspective is what is the required [indiscernible] retention that we need to do inside the different types of the market? Let's say the [indiscernible] long-term discounts, big push to go to forward flow, it is only to supply as an [indiscernible] Today, 40%, 50% our production is through that talent. And then that is actually with a 5% of retention. But the reality is that the structure and ability to take value from the ABS words, we have designed it in a way that wins we put 5%, you are getting after 2, 3 months that deserve that you needed to hold to the [indiscernible] period and other places, that is selling that at [indiscernible]. So the actual net risk retention only 2, 3 months after we begin the next [indiscernible] All in all, it brings PL 50%, [ 0 ], 50% [indiscernible] to be at a 1.5% on a net basis.

And you take that 2% back to put into the next year?

So the next data we'll talk about this in a second [indiscernible] Then on the auto loan side, actually, you have a higher leverage, so you're getting to a 98% leverage. So you need to put up for 2 points of cash and other 3 points for the value dated from the value, the spreads [indiscernible] the bottom line effect. And the other pieces, we announced with [indiscernible] recently another [indiscernible] $500 million. [indiscernible] collect 20% is already on the forward flow. We have 2% and 8%, 0% and the 20%, again, [ 1.5 ]

A little quick sidebar. For a sale though, you can, I think, be a little bit more aggressive, right? Because the different lending model. POS the most?

POS, we went out and that's the third one [indiscernible] with the structure that is evolved. You put [indiscernible] retention on a $300 million, that is $15 million. But the power capacity of that [indiscernible] to buy over the next 24 months is [indiscernible] So $50 million on $1 billion is $1.5 billion. So you've got to [indiscernible] I got your point. 1.5 points [indiscernible] And then you go back and you look on Pagaya and you say, okay, that's not NPC for the half [indiscernible] is 1.5 that we just spoke about, which is a blended and what you need to put the investment, you left with [indiscernible], right? That [indiscernible] cost of the business in how much for that cost? Employees, [indiscernible] left with half point. That's the free [indiscernible] [indiscernible] your question. But we are doing it, and we stay with this because this is a lot of the power of how we're [indiscernible] mortgages. And we use our cost of capital over the time. We are starting to be able to retain the business, which is the place where capital market has been [indiscernible] And you can sell a bit on that 15% or 17%.

And that's not top charges? That's not your residuals, it's [indiscernible] between?

How many [indiscernible] have ever lost [ fun ] into that? Never. Okay. And we are already on the risk because we are holding the [indiscernible]. So it's below already on the hook for the risk, right? And the point is -- so you're holding something that is 15%, 17%, the potentially season it 1 year and then sell it, to potentially [indiscernible]. But when it [indiscernible] and the risk to materialize, you sell it at 10%, the compression of the spread is actually taking an to [indiscernible] ROE. So it's very as exciting [indiscernible] as equal to 0.25% or 50% [indiscernible] Pagaya was a smaller company that didn't have the $1.5 billion to [ $3 billion ] on the balance sheet, wouldn't retain. When you look on the one [indiscernible] or they're firm of the [ world ], all of them are selling [ EBITDA ]. The point being is -- and I will hand it over to you, [indiscernible]. On the investment grade, the word is [indiscernible] Every insurance company in the world is growing a lot of money on it, never been any issues you are talking about a spread of 150 basis points to 200 basis points over the [indiscernible], very, very efficient. On the [indiscernible],but our [indiscernible] And we are [indiscernible] the process of funding of one main firm and many [indiscernible] It actually having a much more robust [indiscernible] to be able to propel [indiscernible] higher asset income, very [indiscernible] than people can. And number two, [indiscernible] of capital, allowing you to be more competitive and therefore to get the best of investments. That [indiscernible] utilizing this cash is actually going to invest in a special part of the capital stack that is not exactly [indiscernible],and you are creating a much more stable company for the long-term vision and the ability to compare them over time over and over and the high on the part [indiscernible]

And you're also improving the overall structure that's been strengthened in the [ ABS ] market, making that asset more liquid, more fungible and more than [indiscernible]

And the last [indiscernible], I would say the people, again, [indiscernible]. A lot of the positions that we have put on the balance sheet in [indiscernible] After 2 years, you can resecuritize it and spend the risk retention, or we securitize. It's not there to do that already in the market, and that's starting to get our cash. Next year, there is another source of [indiscernible], but [indiscernible] from good performance leading indicators that are coming and being moved from acquisition on the balance sheet. That cash too is going to be invested into reducing the [indiscernible].

The things that were challenging from a fair value mark in previous -- once that starts coming to mature, there's got to be recoveries that [indiscernible] that's the [indiscernible] So you expect at some point in the future, maybe in the next 12 to 24 months?

3 months in Q1, we'll start seeing because the vintage of the '24 they're going to mature from the risk securitization time [indiscernible] So in '26, we're going to start seeing cash that we can take out of the residuals and part that are moving to cash are going to still keep on the balance sheet as they [indiscernible]

That doesn't go into the normal [indiscernible]

It's on that [indiscernible] accounting. It's not [indiscernible]

Right. So your cash flow will be just as important story going forward. I mean [indiscernible] cash more...

We are now already, if you look on all the required [indiscernible] said before, we are [indiscernible] We're generating cash. [indiscernible] taking this additional cash, we need to focus capital on the balance sheet by holding more of the base and things that never have been [indiscernible].

Let's talk a little bit. I know we talked about earlier in the year. Obviously, you guys got this great post screening solution, maybe [indiscernible] right? And now you have the opportunity to move it to be in front of the street for a lot of your partners. What's driving the motivation there? When do you think the opportunity?

So if you think about for every [ legacy ] business in lending, what are the biggest driver of value [indiscernible] someone an loans, performing well, and then you want to go to the either second [indiscernible] refinance of the [indiscernible] in a different set. The [indiscernible] engine for us is the way for us to help the members, to prevent more lifetime value from the customers, the ones that were being give customers in the past, or they went to their website and was almost economy customer. Which means the marketing cost is already done. And now when you do a targeted approach to them -- and it's a different type of [indiscernible]. The fact is, how do I give you the right offer that you want to expedite and how I know pricing well that you're not going to go to somewhere else, and that may cost you money, or through the app or whatever, I need to do it as expected as [indiscernible]. So what we're starting to do, and rather effective, is the screen all the historical customers that [indiscernible] had on [indiscernible] whatever and say there is actually 100,000 customers when you want to name them and you make the loan. [indiscernible] it's powered on, and we do the split, it's good for them. More client interaction. More customer. More [indiscernible] time value and more good determined customers to us. The end zone is that will become 25% of our production because the normal B2C 25% to 30% [indiscernible] we need to solve whether they're coming in to the partner and what's there and what's there. But the beauty is that the reason why we [indiscernible] opportunity because we saw many customers.

You have a referral base there.

You can't run [indiscernible]. So you're like, okay, they are looking to doing it, and they're looking to do it in [indiscernible] speaking about time. But now we have a group product. You come in and [indiscernible] you come in, you come in and then you have 5 [indiscernible] that product. The vision of this in the future is, okay, now we have [indiscernible] Actually, the over [indiscernible] actively the [indiscernible] persoal loan. More likely than not, I'm not speaking on the [indiscernible] they have been dying to do a person along for a [indiscernible], but they say don't in the investment [indiscernible] models and stuff, but we can be a plug and play, not [indiscernible] that is happening today and unity to drive that value rather quickly, taking on the service only to take. [indiscernible] We're going to do it, increase the lifetime by increasing engagement with the customers. So -- and that is a little bit our strategy. So we are developing these [indiscernible]. The [indiscernible] becomes a very [indiscernible] Think about the credit metrics for all the products. Auto, PL, creditors [indiscernible]. And then the credit spectrum, 800 to [indiscernible] A perfect organization in lending is the one that has all of this, all of the set calls or actually they're not getting more than all [indiscernible]

Thank you.

[indiscernible] you're asking the question of what the organization doesn't have and how you [indiscernible] to that and you help [indiscernible] And because it has [indiscernible], they don't [indiscernible], but [indiscernible] with. So pointing is super regional or different parts. And if you think [indiscernible], by the way, the [indiscernible] has been, right, the state with a [indiscernible] they do the steps. We are taking that capability. I think.

And you can drive that externally in a partnership kind of framework rather than having build be responsible for the whole [indiscernible]

[indiscernible] partner on [indiscernible]

Are the unit economics any different [indiscernible] stores

Good [indiscernible] but just giving you a valid proposition to the partner, if you just become a whole lot [indiscernible] That's the cost of the bigger business.

I got it. I got it. That is fascinating. Let's -- I think we have to address this. Obviously, you had a successful bond raise this year. Just curious if you could talk a little bit about the guys on funding needs, on capital allocation, how should investors think about the company's strategy in front of the mix going forward?

Yes. So I think you should expect for us to increase the [indiscernible], but not more than 50%. The market is not [indiscernible] that. We don't have that many [indiscernible] you have good, big names, but you don't want to be overly levered to one brand. So 40%, 50% is a good mix. So we have to do that in the POS. We need to move in [indiscernible] more to auto in the [indiscernible], and that's part of the planning session expect to yield more than that. Not more on that than us. And then the two other [indiscernible] while it was in -- we were very successful in opening every [indiscernible] capital market [indiscernible] and from a funding perspective and equity and converts no need for free cash. So for a new [indiscernible], so we're not going to raise any need instruments later that's out of the picture [indiscernible] has been the days of building that, but it's not in the cards anymore, and we are trying to build the value. So that's part of the [indiscernible]. On the other pieces of creating much more efficient funding on the high [ end ], we will look to increase the rating over time. How did that net income explain into that and the to hold more on your balance sheet, it is part of the game. How you keep the cash profile to be as [indiscernible] that you're building that, point number one. Point number two is on the [ ABS ] is how we continue to propel more and more partnerships, to be more efficient than on that because. We don't have a major rating agency yet, like the [indiscernible] and the S&P. That's the next step on the ABS side. It's now on the corporate side, which is a very big jump, very helpful, de-rated, strong [indiscernible] is understanding, but the next level of that will be how we take it to the asset side to continue to compress the spreads to continue to be more big [indiscernible]

And by the way, we [indiscernible] S&P's Analyst Day, and they're talking -- they're coming to [indiscernible]

All the way. Right. And it's an interesting conversion end as well [indiscernible] I think the bottom line is, like I said about the [ metric ] before on the lending side, the metrics of IG, non IG, private public is all corporate, noncorporate, on balance sheet of balance sheet is all open for us. And we are trying to optimize in between this business. IG, the most optimal cases from the ABS side, the [indiscernible] corporate to the [indiscernible] flows on the other [indiscernible]

Where you can make a difference.

[indiscernible] control. Right.

We have 1 minute and 51 seconds left. What's Pagaya's [indiscernible]

[indiscernible] is the leading technology company [indiscernible] lenders for hard problems, labeling [indiscernible] the best version of the spend, their customers any [indiscernible] spectrum in market as a [indiscernible] and [indiscernible]

Can Pagaya be replicated?

[indiscernible] It helps [indiscernible] fill [indiscernible] going to be very tough and [indiscernible] them the one in there.

And at the same time, it sounds like you're more on mission [indiscernible]

[indiscernible] to the enterprise level, the going deep giving our customers, the active [indiscernible]. They're our lifeline, [indiscernible] them. We love them. We learn so much from the every way, and we are enjoying [indiscernible]

What the pipeline looks like over the next 12 months? Do you feel like you're getting more bandwidth from the biggest gain prospect, [indiscernible]

[indiscernible] market treatment [indiscernible] first, first focus we up and running, and then we have a [indiscernible] we do see [indiscernible].

Do you feel like you have the full suite right now. You can go full force into to [indiscernible] or the partner very [indiscernible] It is [indiscernible].

And you sell into for any [indiscernible]

Yes. Well, thank you so much, Gal. That was super insightful. Great summary of what's going on. Very exciting time for the [indiscernible]. Thank you so much. Thank you. Thanks, everyone.