Pagaya Technologies Ltd. ($PGY)

All right. Good afternoon, everybody. For our last session from my end today, we are delighted to welcome Chief Financial Officer of Pagaya, Evangelos Perros. Welcome, EP.

Thank you for having me. Appreciate it.

No problem. Yes, happy to have you. And I guess maybe just to get started with our conversation here, for those of you tuning in who aren't as familiar with Pagaya, can you maybe give those investors the 60-second elevator pitch on what your business does exactly?

Sure. So think of Pagaya as a tech-enabled company that connects consumer lenders and originators on one side with investors on the other side across different types of consumer products like personal loans, auto and point of sale. And through that connection, we integrate basically our technology into the consumer lenders, banks, nonbanks, fintechs, BNPL providers. And through that, basically, we make fees, majority of which is coming from the consumer lending side as a result of using our technology and allowing them to approve more loans. We're not an originator ourselves. So we're basically providing a pure white-label solution to them to expand their capabilities and overall underwriting.

Great. I think you went over 60 seconds definitely, but you tried your best. Maybe just explain the problem, the value proposition you bring, the problem that Pagaya solves for your loan originator partners and how it differs across the asset classes you support?

Sure. So I think every lending partners, so today, we work with more than 30 lending partners across, as I said, banks and nonbanks and fintechs. Every partner is solving for something else. If you think about banks or within, let's say, the personal loan space, they're actually using our product to, call it, "protect" the relationship with their consumers and the deposits that come with them and expand effectively the lifetime value of that relationship. If you think about banks that are offering auto loans, they ultimately are looking to expand their dealership network or offer higher satisfaction rates and different options to their consumers through the dealers at the point of lend. If you think about BNPL, which, as we all know, is becoming increasingly much more of a mainstream credit product, consumer lenders, our partners are looking to expand their merchant network, offer more solutions at that point of lend. So every partner is doing something else. Fintechs, in many ways, they're basically trying to improve their economics because we can come in. We're a very -- the largest personal loan issuer in the country. We can come in, provide the funding alternative to them and share fees along the way. So every single lender is actually solving for something else. We see ourselves at the end of the day as a utility, and our goal is to be embedded in every single lending institution out there when it comes to the consumer lending. The business is highly scalable. The model is highly scalable. So that's how to think about it. And then we'll adjust our product offering with the needs of our lending partners.

Great. And maybe related to the different asset class question, the funding environment, I think, has come a little bit more in question more recently. Any color you can add on loan buyer demand that you're seeing? Hasn't there been a little bit of slowing or weakness in that, in particular, in the personal loan space? Or is that not accurate?

The funding markets have gone through a change over the last 12 months. But fundamentally, I think what people forget is like when you think about the source of capital that deploys into the type of asset classes, primarily comes from 2 or 3 sources. It's either like insurance capital or pension capital or sort of bank capital, and that has not changed even in the last 12 months. In fact, the demand continues to be robust. And if you think about why that is, it's for 2 reasons. One is the consumer, the U.S. consumer, is still resilient. And the consumer credit performance is still stable and actually quite attractive, particularly relative to some of the corporate alternatives out there. Now having said that, how they deploy capital, channels like private credit providers, ABS and all of that, that has shifted quite a bit. So for example, when you look at ABS or public markets, broadly speaking, they are as robust as they have -- we have seen them over the last multiple years. And as this capital is finding its way through, call it, private credit alternative asset managers, there we actually see a repricing. We came in -- came out from a very strong 2025 where you could argue there was a little bit of an exuberance and a lot of competition in deploying capital through these types of alternative asset managers, and now there is a repricing happening there. And obviously, that's driving a little bit of -- a lot of the headlines that you see there. But fundamentally, like when you think about the secular trends in funding, we continue to see very strong demand for these types of asset classes.

Okay. Great. And maybe just high level, how are you thinking about growth and the drivers, levers you can pull to either toggle this up and down? And are there any specific channels or asset classes or new areas that you're more interested in today?

Yes. So the way we go to market, when you think about our growth strategy, it comes through different ways. One is land and expand, right? We onboard new lending partners, new consumer lenders as our partners. We get access to their flow. We usually start with what we call the decline monetization program with a second-look program. And then over time, we try to ramp them up and also introduce new products to them. On top of that is, obviously, every time, add new partners to the mix. When you now pivot a little bit to the asset class, what I would say is you should expect to think about personal loans being at the point of level of maturity where you should see some growth, but not like very high double digits. That you would expect to see much more so on the auto vertical, where the market size is obviously much bigger. Our evolution -- auto, in our evolution as a company, is still a few years behind personal loans. And while on the unit economics is very similar, there is a lot more partners out there that we're continuing to sort of tap into. But, look, it's part of the evolution. Like if you look at Pagaya 3 years ago, 4 years ago, pretty much all of our volume was coming from what we call the second-look. Today, it's actually evenly split between traditional sort of second-look and all the other products that we have with the partners. Over the cycle, what I would say is our goal is to continue to grow at that, call it, 20% annually. But obviously, based on credit changes, risk appetite and all of that, sometimes it will be 10%, 15% and sometimes it will be 30%. I think one key thing for us and for investors to appreciate is we do not have a lever to really grow 30% in a single quarter. We don't have marketing dollars. We don't go directly to the consumer. We actually have to partner with the lending partners. And therefore, it's a much -- it's like a more traditional B2B business. So you should generally see more stable growth through the cycle relative to some of the other players in the marketplace.

And just as we think about the forward look there, and you talked a little bit about the growth, you did recently raise the low end of your network volume guide and you increased the total net income guide as well. Can you talk about what drove that decision and how you're thinking about it?

Yes. If you step back a little bit, I have to take you back to Q4 of last year. We decided to -- as a result of the uncertainty in the marketplace, broadly speaking, we decided to cut our production of our higher-risk tiers. Overall, that translated to about 10%, 15% cut. And we kept that credit posture, and we're very happy, obviously, with the decision given what's happening in the marketplace. However, we are in position to offset that cut -- more than offset that cut by -- through new product -- through new partner growth as well as product-led growth, i.e., providing more product solutions to our partners and therefore, getting more application flow that's much more balanced in terms of risk. That was the initial stance behind, call it, our guidance in the beginning of the year. What you saw after Q1 as raising on the low end is because we have very strong confidence in our product-led strategy. And I can tell you now, obviously being in this quarter that we have very strong confidence in continue to delivering that and grow that with primary focus on the auto side. There's obviously tailwinds, right, in the marketplace besides the uncertainty. You have higher spreads, higher interest rates, which could impact potentially a little bit the, call it -- what we call FRLPC or unit economics. But overall, the continued strong growth and the products that we have out there should more than offset any pressure in the FRLPC, and we'll continue to see that translate into higher FRLPC revenue less production costs in dollar terms in terms of growth. And remember, the business has a significant operating leverage. So every dollar of growth that we see in FRLPC in dollar terms pretty much flows through straight to the bottom line in terms of GAAP net income profitability, operating income. So...

Okay. And just in terms of the funding model of the business, it's evolved quite a bit over the last few years from, I think, entirely prefunded ABS to now about half your funding. So how do we think about the funding diversification going forward? Are you going to continue down that path of continuing to lean away from that? Or how are you thinking about it?

We have traditionally looked at the funding more so as, obviously, access to capital and focusing less on the economics and much more so on the diversification. Ultimately, what we try to do is not rely on one single name or one single channel at any point in time, and obviously, tactically pivot between the different channels. So if you take the -- if you go back 2 years ago in early 2024, 100% of the funding was basically done through the traditional prefunding ABS. Today, that prefunding ABS represents approximately 50% of our total funding. There is forward flow structures, there is pass-through structures, there is vertical risk retention. There is different -- there is revolving ABS or different flavors between, call it, the full loan forward flow and the prefunding ABS. And the goal, as I said, is much more continue to diversify and bring on more partners into the -- more funding partners into the mix. Specifically, what we saw going back a little bit to your other question, what we saw in Q1, the call it, forward flow private credit on the consumer side, while there's still a lot of capital to be deployed and is being deployed, they're going through a repricing. And that's why we tactically pivoted in Q1 a little bit more so into the ABS type of products because public markets, the demand is as robust as we have seen in the last multiple years. Like if you actually look at our series of ABS issuance that we have done in the last 4 or 5 months, every other deal, we will upsize. We have increased the number of investors we work by 30 in the last, call it, 9 to 12 months. So there is now a little bit of a separation between private markets and public markets. That will probably converge back over the next few months, but like that's what we currently see. And that's where the mix of funding currently stands.

Okay. And I guess maybe as we think about the last 2 years as well, relatedly, your unit economics have evolved from primarily coming from your funding partners to now your lending partners. So can you talk about what drove that shift and how we should think about it going forward relative to this year in the past quarter?

Yes, that's something like we're obviously very proud of in terms of the accomplishment. It's probably the #1 driver of how we managed to get the business to be consistently sustainably GAAP net income profitable. If I take you back 3 years ago, we were -- our unit economics were close to 2%, 2.5%, i.e., for every dollar -- for every $1 billion of volume, we would earn $20 million to $25 million. Two years forward, today, we're closer to the 4.5%. So we managed to more than double the unit economics. And obviously, on a $10 billion volume business, high level, that's an incremental $200 million more coming through, real cash, real fees. And because of the operating leverage, that's all going straight to the bottom line. To your question, I think we're now at the point where -- and for the last, call it, 12 months, that 4% to 5% represents what we think it's much more the mature state. And therefore, from here on, it's much more volume growth, product-led growth and ultimately, maintaining that sort of 4% to 5% range while we continue to grow volume is what will drive bottom line profitability.

And I guess maybe just to take it back to the ABS markets. Can we spend a moment talking about what you're seeing there? And I know you touched on this already a bit. So maybe just more specifically, what are you seeing there from like spreads or interest demand? You talked about how on earnings you're intentionally leaning back into that market. Just maybe elaborate on what's driving that decision.

Yes. So I think it's going back a little bit is in 2025, you saw significant competition and demand that didn't seem sustainable on the private credit side. A lot of different funds and investors competing and driving sort of the cost of capital lower. And it was actually much more competitive to do funding through these private credit sort of sources. That has normalized either as a result of some of the things that we saw in the marketplace with Tricolor and MFS and the overall dislocation in private credit, particularly on the corporate side. But ABS markets are more economic right now. There is significant more demand. I think part of that is also because we also cut our credit late last year. So we're actually benefiting disproportionately from the demand from public markets because we have lowered the cost of capital and the expected sort of loss assumptions and pricing. It goes back to my point that like these are just ways capital is finding its way to deploy. At the end of the day, the secular tailwind of like insurance capital and pension capital continues to increase their allocation into consumer credit, is still very strong. And the reason for that is because simply the consumer, the U.S. consumer is very resilient. And we saw consumer credit performance has been very stable. Now to your point, pricing-wise, in 2025, we saw sort of the trough sometime around, call it, September or so, October when it was the last rate cut. And then you started seeing some movement against that in Q1. Today, what I would say is like spread across benchmark rates, which is for us about the 2-year and then spreads have widened by about somewhere between 100 and 125 basis points. So that's obviously having an impact across the board, right? Everybody is adjusting a little bit on their cost of capital. But again, from our perspective, keep in mind, like most of our fees, most of our profitability come from the lending partner side. We can very easily adjust our production and our pricing and this type of movements doesn't really have a material impact on our ability. And we're very scaled as well, right? Like having 170 investors in our ABS and every deal we go out to market, we use 35 or 40 of those, and we rotate into that is a very strong place to be, and we feel very good about that scale and our ability to continue to execute seamlessly through the public markets.

And just as you think about the pivot back to ABS, how should we think about your ability to self-finance? And do you think you'll need to raise equity or debt to help fund that 5% risk retention? Or do you think you've reached the point where you're effectively recycling capital?

So it's definitely the latter. So if you actually think where we're trying to get to is on a marginal basis, think about it, we earn $4 to $5 upfront in terms of cash from the fees. And then we need to hold some of that as part of, call it, risk retention or risk participation more broadly. And today, we're closer to -- like in the last quarter, it was like literally just 50 basis points. That obviously, was a very strong quarter for us, and we managed to accelerate a lot of the cash from historical deals. But ultimately, strategically, what we try to do is -- and it goes back to your question around unit economics and overall capital efficiency. We managed to get the unit economics to that 4% to 5%. And through the cycle, what we're trying to do in terms of risk participation is be somewhere between 2% and 3%. And therefore -- and that's on a marginal basis. So therefore, you're at the point now where you're actually -- you can self-fund this type of growth. And we feel very good about that part, and it's a deliberate effort that we have tried to put in place over the last 2 years to really reposition the company to make sure we don't have to raise any more capital. We don't have to raise equity. Obviously, the balance sheet will change along the way. We'll tap into like debt capital markets and everything else, but like we're at a point where we can self-fund that type of growth.

And I think one big topic we haven't really touched on yet, EP, is consumer health, macro, very top of mind questions for many investors. You have a bit of an interesting perspective given where you sit in the ecosystem as more of a second-look provider. So can you talk about what you're seeing in your data, your underwriting? And is there anything from an early indicator standpoint that you see that's a bit more unique versus others?

So I think to your point, we feel we're uniquely positioned because we see the application flow and the performance across more than 30 consumer lenders across banks, like from top 5 banks all the way to fintechs and across 3 asset classes, some of them with a very short duration and like the BNPL all the way to the auto, which can go as far as 18-month type of term for us. And we can recalibrate, obviously, and assess this type of information. At the same time, we're monitoring outside of this asset class as well, like credit cards and trends like everybody else. What I would tell you is the consumer is -- the U.S. consumer, despite everything that's happening in the macro environment and geopolitical environment and everything is very resilient. And the consumer credit is performing very much in line with expectations. And there is no better validation not just for us, but for other players in the marketplace by the fact that investors continue to deploy capital in these asset classes. Now having said that, there is a lot of uncertainty in the marketplace. We took the stance that we're going to have to be more cautious in the beginning of this year, late last year to cut some of that production. And if some of that uncertainty materializes into a real risk, we're well positioned for it. If not, we would have left some money on the table, and we're happy with that type of decision. I think overall, it seems like -- and even if you look like the 2026 vintages, again, very early on, you have like good -- very early indicators suggesting good performance. But the uncertainty is still there, like whether it's inflation, whether it's unemployment, whether it's interest rate path, whether it's the K economy. One thing though that people just don't really appreciate about Pagaya is when you actually look at the consumer we're underwriting, people are surprised to hear that like the average consumer in our personal loans has $120,000 income and a 680 FICO score. And that consumer, if you think about it, given what's happening in the marketplace with AI and white collar jobs or with inflation risk and oil prices, it actually sits sort of at that sort of center of the K economy, if you think about it on the lower end of the upper part of the K. And it's quite immune to some of those risks. Still, I think we feel very good about our overall credit positioning, something we're obviously monitoring day in, day out like everybody else. We'll have to continue to see how that progresses over the course of the year and how persistent some of those uncertainties are.

So it sounds like the performance from a credit perspective is still in line. I guess I'm curious, have you done any work to maybe try to pull out what the different various drivers are, whether it be higher tax refunds versus the impact of gas prices? Is there any observations from the more nuanced...

So what I would say is it's interesting that you have that together with a very strong tax season, let's call it. And what you saw, for example, is in auto, you saw significant demand for new loans and people sort of getting more cars. At the same time, on the personal loan, a lot of people use the tax refund to accelerate a little bit the payments. Again, those are sort of nuances, right, but just giving you a little bit of a flavor. Credit card delinquencies at the same time are a little bit on the rise, and that's something we're monitoring. And obviously, people are tapping into personal loans to refinance those at lower and more predictable costs. So it's -- you can see things going in multiple different directions, and that's the type of uncertainty that we have to live with. And what we're trying to do from our perspective is to be well positioned for whenever that uncertainty translates into a certain risk because you can never really predict when that will happen. It's just a matter of how you're positioned to deal with it when it comes. And you know it's going to come. It's just a question of when and what form it will take. I think what we have proven out relative to some of the other players, again, it doesn't mean they're doing something wrong, is that we are risk first particularly in the credit risk and then really focus on optimizing for growth and profitability more so than the other way around where we see a lot of the other players, again, nothing against that approach, but to push for that growth in light of the strong consumer and strong credit performance. And we're not looking to change that credit posture at all at this point.

You mentioned, I think if I had it right, you're more -- you think you're a little bit more at the lower half -- or the lower part of the upper half of the market, right? So where do you think that goes over the next few years? I mean, do you think you'll continue migrating a little higher? And is that coming from maybe just a purposeful partner acquisition mix? Or is it a little bit more you're going to underwrite a little tougher -- or a little tighter to get there? Like how are you thinking about that?

Yes. So look, on the credit side, I can't really predict like we'll always move. But I think what we are quite unique in is like if you think about Pagaya today, just from the 30-plus partners that we have, we look at -- we get $1 trillion of application coming our way. And from that, we approve approximately 1% of that to get to that $12 billion to $13 billion of volume. But if you actually double-click into this application flow, we're very uniquely positioned for that spectrum of consumer that's call it, very broadly, call it, from 550 FICO all the way to like the 750. That's our niche. Like our data advantage and production data that we have for that type of consumer is very difficult to match by any other lender out there. You can have banks who are focusing on the higher FICO score. You have subprime lenders who are focusing on lower than that. The advantage, the data advantage and the moat that we have in that sort of spectrum, we feel is quite unique. But I cannot predict obviously, credit. What I can tell you is that when you think about partner mix, we are increasingly obviously focusing on adding more bank partners, which would arguably provide more access to more flow on the higher end of even the spectrum as I just described for us, call it that 650 to 750 FICO. But that's just a matter, as I said, of partner mix. That's how we see the strategy. Now having said that, remember, to your point, that's as it relates to the existing asset class, which is personal auto and POS. Down the line, we could be -- go a little bit on the offense as well and potentially explore acquisition opportunities in other asset classes, maybe home improvement, maybe like purpose-driven POS, potentially even credit cards. Again, right now, the ROI on the existing asset class is very high for us. So we're focusing on executing on that. But that will also potentially drive a little bit of that mix into, call it, the type of consumer we're underwriting.

And thinking about your capital allocation strategy, you've been profitable for over a year now. You've been generating cash. How are you thinking about deploying capital here? And are you looking at M&A, more buybacks, dividend? Or what are you sort of prioritizing at this point? And obviously, I think we recognize every company is always looking at M&A. If you were to look at that, what are some of your, I guess, biggest needs at this point that you'd consider looking at?

So I think the uniqueness in the business model is also coming across on the capital allocation. What I mean by that is like we don't have any capital allocation alternative we have does not have to compete with organic CapEx. We don't have any of that. The model is already built out. The infrastructure is already built out. We can even double the volume that we do today without any really incremental investment. Obviously, on the margin, there will be a little bit more hiring, a little bit more support, but like we don't have that. And that's a great place to be. If you actually look at our P&L, it's much more of a pure tech P&L rather than a traditional consumer lender. We don't have to spend money to get more application flow or add more partners to it. So that's a great place to be in that regard. So now when you think about capital alternatives at a high level, we could potentially buy back some of our high-yield notes that we issued last year, which are obviously trading at prices that, from our perspective, don't make sense. And we have been doing some of that. We could buy potentially back some stock given the relative valuation there or do some M&A. Given the uncertainty in the marketplace, our first choice now is to basically preserve some of that capital and continue to build the cash flow profile of the business. And then if the right opportunity comes along, we can basically either go a little more aggressive or more on the offense side in the M&A side, which from our perspective, if you actually look at our partners where we actually see most of the opportunity, if I had to choose 1 or 2 sub-asset classes within consumer lending will be either on what we call purpose-driven point of sale, i.e., longer duration, larger ticket items within point of sale like home improvement or health care or things like that or potentially even credit cards. What will drive that decision, though, it's where our -- like it will be our partners. Again, we see ourselves as a utility. We want to be embedded in every single lending institution in consumer lending out there. And if they expand into these types of asset class, we would want to expand with them. That's how we think about capital allocation. And obviously, it's going to be a very dynamic decision. But we feel very well sort of positioned for that and our ability to execute either organic or inorganic type of growth.

And maybe just to make this a little full circle back with the original question. What are the barriers to entry in your business? What's your moat? And how difficult do you think it is to replicate what you do? And maybe as a part of that question, one question we always get across all of our businesses that we cover today are what's the risk of AI? Do you view that as additive to you? Or how hard is it to replicate what Pagaya does today?

Yes. So obviously, we get that question particularly from you, investors. Starting a little bit with the first part, the real advantage is the data that we have, our own production data. Again, think about $1 trillion of application flow coming our way. We extend approvals back about 10% of that, so $100 billion of approvals that actually -- and only 10%, obviously, of that converts. When you think about $100 billion of approvals and within a reasonably tight range of the consumer profile, that data advantage is honestly quite unique and very difficult for anyone to replicate. And it's basically, again, across 3 asset classes, banks, nonbanks, affiliates, to organic flow, and that's quite unique. And our ability for the model to continuously price those consumers increasingly over time more accurately, I think it's quite unique. And there is no other player in the marketplace that has this type of amount of data to do that specific consumer. There are potentially solutions out there where basically they are supplementing as a service some of the underwriting for some of our consumer lenders, but no one is actually offering an end-to-end solution from the actual AI integration, technology integration, full white-label solution all the way through the funding. And that's a very unique place to be. We paid the price. Like it's not an easy thing for us to get where we are today, as you know. Like to really build that infrastructure took us some time. And now that we have crossed the breakeven point, obviously, we're reaping the benefits for that. On the AI side, I think people -- like for us, we are -- we don't believe we're sort of, call it, threatened by that part because first of all, we're fully AI enabled on the front end in terms of the underwriting, 100%. But again, it goes back to the production data. It's not just somebody can go out and buy like, let's say, the bureau data and really build a model. And by the way, just to be clear, maybe somebody will try that out, but that will require significant sort of money to be spent to really build the infrastructure over time, generate this type of data. But we feel good about having, call it, a first-mover advantage because if that happens, and it may happen, like somebody will actually see the opportunity and they'll try to do it. I cannot really predict the future, but I can tell you is we could potentially along the way, price them out or maybe acquire them. So it's a good place to be from a competitive advantage perspective because of the data, again, moat and the relative scale that we have already achieved. That's how we think about our relative positioning. And I think that's generally recognized by investors. It's just like it's a quite unique animal. You don't really have another B2B business out there that's really providing this white-label solution. And we feel very good about the competitive positioning that we have.

All right. Great. With that, I think we're out of time. EP, pleasure.

All right. Thank you so much for having me.

Thank you.