Pagaya Technologies (NASDAQ:PGY) CFO Jonathan Dobres outlined the company’s growth strategy, funding model and profitability trajectory at the 46th Annual Canaccord Growth Conference, emphasizing expansion with existing lending partners as well as new partner additions.
Dobres described Pagaya as a technology platform that connects lending partners with institutional capital, using an AI-based decisioning engine to evaluate loans that are funded primarily off balance sheet. The company currently operates with about 35 lending partners across personal loans, auto lending and point-of-sale financing, with approximately $14 billion in annualized consumer loan volume, he said.
Growth Through Products and Partner Expansion
Dobres said Pagaya’s growth is driven less by widening its credit criteria or increasing consumer marketing spending and more by adding lending partners, launching products and gaining access to a larger portion of partners’ application funnels.
Earlier in the year, Pagaya reduced or largely eliminated originations in its two riskiest credit tiers after identifying those lower-income borrower groups as potentially more exposed if consumer conditions weakened. Despite that step, the company continued to grow by accessing more applications through its lending partners, Dobres said.
In the second quarter, Pagaya’s total dollar value of applications exceeded $300 billion for the first time. Dobres said product-led growth was a contributor to the company’s 140% year-over-year auto growth.
In auto lending, Pagaya previously received applications that a partner had declined. The company now works with partners to identify borrowers whom the lender may technically approve but whose original offers may be less likely to convert. Pagaya can offer those borrowers different loan terms, potentially resulting in a funded loan under the partner’s name while allowing the partner to retain customer contact, servicing revenue and dealer relationships.
Dobres said this higher-funnel access has supported stronger borrower and collateral characteristics. In personal lending, he said Pagaya’s average borrower has about $120,000 in income and a FICO score in the 670-to-680 range. In auto lending, the average vehicle at loan inception is now about three years old with 30,000 miles, compared with vehicles that were roughly five to six years old with 60,000 miles two years earlier.
Pagaya has added five partners so far this year and expects to add three more before year-end, including two regional banks, Dobres said. New partners may take roughly 12 months to reach maturity, as integrations are completed and the company evaluates how its models perform with the new lending relationships.
Funding Mix and Institutional Demand
On funding, Dobres said Pagaya’s current annualized funded-volume run rate is approximately $14 billion. Pre-funded securitizations account for about 60% of the company’s funding and provide roughly three to five months of visibility into future funding, he said.
Pagaya has more than 175 institutional investors with which it regularly engages, including asset managers, insurers and pension funds, according to Dobres. Over the prior three weeks, the company completed about $2 billion of oversubscribed securitizations, he said.
The company is also expanding its use of forward-flow arrangements, which provide six to 18 months of funding visibility, and longer-term revolving structures. Dobres said Pagaya is pursuing 12-to-24-month committed facilities in which it invests capital alongside banks and asset managers. While Pagaya may initially provide 3% to 5% of capital in such arrangements, the capital can be redeployed as the structure revolves over time.
“What we care about is diversity and commitment,” Dobres said, referring to long-term funding visibility.
Margins, Operating Leverage and Balance Sheet
Dobres said Pagaya’s fee revenue less production costs, or FRLPC, reached a record level in the latest quarter. The company expects FRLPC to remain in a 4% to 5% range as a percentage of network volume, though it expects to operate at the lower end of that range for the rest of the year.
That lower-end positioning reflects the addition of newer partners and products, which initially generate lower margins before scaling, as well as the effect of higher benchmark rates on funding-side contributions, he said.
Still, Dobres said the company’s core operating expenses have remained approximately flat over the last six quarters, supporting operating leverage. He said FRLPC dollars convert to the bottom line at margins of roughly 90%, aided by Pagaya’s limited marketing spending.
Pagaya has about $1 billion in investments on its balance sheet, consisting of risk-retention and discretionary investments in securitization and other funding vehicles, Dobres said. About half of that amount is in equity portions of securitizations, while the other half consists of B and BB bond tranches that produce cash yields in the low- to mid-teens.
Dobres said the bond tranches have never missed a payment or been impaired in Pagaya’s history. The company’s net investment as a percentage of volume was about 2.4% over the last 12 months, he added.
About Pagaya Technologies (NASDAQ:PGY)
Pagaya Technologies is a financial technology company that applies artificial intelligence and machine learning to the credit and asset management industries. Through its proprietary data-driven platform, Pagaya analyzes vast datasets from consumer credit portfolios to build predictive risk models, enabling institutional investors to gain access to alternative credit products. The company’s solutions streamline underwriting, optimize portfolio construction and facilitate the efficient securitization of consumer loans, credit card receivables and other asset classes.
Founded in 2016 and headquartered in New York, Pagaya has expanded its operations to serve financial institutions and asset managers primarily in the United States.
