Good afternoon, everyone. My name is Sam Salvas. I'm on the Fintech Equity Research team here at Needham. Today we have Gal Krubiner, co-founder and CEO of Pagaya, here to give a presentation, and afterwards we'll open it up to do a little Q&A. So with that, Gal, thanks for coming, and I'll hand it over to you.
Perfect. So hi, everyone. Thank you very much for having me. Thank you for inviting me. I think what we'll try to do today, we've prepared a presentation, a little bit the basics on one-on-one of what we're trying to do, how we do it, and where we are marching towards. So let's kick it off, and after that, any questions or whatever, would love to have and to discuss. So the best way to start what we do and how we think about it is obviously from the mission, and then we'll move into the business overview. So when we think about what is Pagaya trying to solve in the world, we are trying to deliver more financial opportunity to more people in the U.S.
While that's a mission that potentially many companies has, I think still investors are underappreciating the fundamental issue in the U.S. ecosystem of lending and how much there is still to solve. The best way to put it, or the easiest way to describe it, is with a simple fact that is staggering: 42% of the U.S. consumers are either denied for financial lending or are not getting the credit they are looking for. Think about that. The biggest economy in the U.S. in the world, with the most sophisticated capital markets, financial system, banks, et cetera, still, 42% of people are getting denied for credit. And as you can imagine, that part of the system is hurting more people that are discriminated or other things.
When we thought about that, we said we want to solve it, or at least to help to mitigate that problem as much as we can. And when we started, we saw a lot of like what we called Fintech 1.0, and a lot of companies that were digitalizing the way personal loans and other products are being consumed through the internet. But when we thought about it and we thought to ourselves, "Should we start to have another business that is another lender, digital lender?" It didn't make sense for it, because we didn't think the amount of impact we could have on that number is actually worthwhile what we did. So we took a different approach. We went to the infrastructure play.
We thought that if we'll be able to build the infrastructure of lending a little bit different, the outcome of that number would be massively lower, and that's what we were focusing in Pagaya. We build a network that enabled to increase the access to credit. How we do it is rather an interesting story. We took two sides of the most important players in this ecosystem that provides consumer lending in the U.S., and we brought them together. On the one hand side, we have the lenders. Today, while we speak, already millions of millions of millions of customers are going to their lending partners, let it be banks, let it be fintechs, let it be auto lenders, to ask for credit that, as we said before, are getting denied more often than not.
On the other side, there are investors that are actually looking to invest in these assets and to gain access to these type of assets, as we know them, the private credit. So while connecting the two in a very unique manner, we have managed to create a network that is enabling all of that to happen and to increase the origination of loans in the U.S. by a lot. Pagaya originating in a year, something like $8 billion of new loans through that system, through connecting between lenders to investors. For a Pagaya business model, and we'll touch about it later, we are earning fees in an agent business per se, of 3%-4% on every $100 of originated loan that we have created. Let's start with the way it works from the consumer perspective.
So a person is coming into one of the lenders that is registered in our network. It can be one of the biggest subprime lenders in the U.S., such as Ally Bank; it can be SoFi; it can be Klarna; and it can be a top 5 U.S. bank that we just lent to a few months ago or top 4 OEM that we just lent to 4 months ago. The applicant is filling the full form and asking for a credit. For some unknown reason, cost of capital, lack of technology, that one of the lenders decided to deny the borrower. In that particular situation, instead of sending a decline reason to the borrower, the connectivity to the Pagaya network is allowing them, in an API, to send it to us. We are reviewing the application with a very strong data and AI analytics that we have.
We have over 250 data science analysts. From that, 80%-90% are getting declined, we're finding another 10% that we can actually approve, and we know that they are gonna get a very good performance at the end. What we do in that moment, we're sending back an application, an offer, to the lender that is sending that in return to the borrower. Borrower doesn't even know that happened. They are getting an offer from one of these lenders. If they went to Ally, they will get an Ally loan or an Ally offer. If they went to SoFi, they will get a SoFi loan. So they are staying in the ecosystem of the lender they chose to. They are getting the offer that actually was provided by Pagaya through the lender-...
The consumer is accepting that offer, and we have created a new loan, and we are then placing it with our investors on the back end. Now, why it's so unique about it? The marketing dollar that we are spending is zero. We are already relying on the marketing dollar of the lenders that spent and brought these borrowers to the door. The lenders loving it, because otherwise that borrower would have gone home without getting any offer. So it's a pure new customer for them, pure margin for them, and the most important thing, we solve their balance sheet need because we're bringing the money from the investor. So the connectivity between a capital and the underwriting AI was the true product innovation that we brought to the world, that allowed for the lenders to increase their production by 10%-20% of what they did before.
All of that goes into the bottom line. They have more customers, and in the same time, they don't need to do anything else. When we did that, we actually started to scale that. We started all of that in 2016 in a personal loan, and we managed to move it into the auto loan space and to the POS. One of the only fintech companies that managed to penetrate into three scaled products, per se, and we have very notable partners in each that we talk about in a second. We have more than 28 lending partners on the partnering side that are fully connected to the LOS system of the origination. As I said before, part of them is a top five bank, federal bank in the US.
We are seeing more than $1 trillion of applications every year, and we had 100% retention with our partners, lending partners, since we started. Trying to say what I said before, lending partners love it. On the other side, we have over 90 institutional investors. We have already originated almost $20 billion of personal loan, auto loans, and POS. We are the biggest personal loan issuer in ABS in the United States, yet not many know about us on the equity capital.
Behind that, very sophisticated and seasoned team, a combination of well-known bank lender-banking leaderships from our President, Sanjiv Das, that was the CEO of Citi Mortgage, to Leslie Gillin, that was the Chief Marketing Officer of JPMorgan Chase, to many other leaders that help us and take the company to the ability of integrating that very sophisticated technology into the banks and to do that. So that's the high level. Let's summarize the key investment highlights and why we're so excited about the business that we have. We have a very strong, powerful business model that is fit for purpose to solve a very big problem in the U.S. We have a growing advantage network, because as the network is growing, the data is growing. As the data is growing, our ability to approve more is actually growing.
We have managed to develop a product-led growth company that is enabling us to lend more and more partners as we think about the different parts of the ecosystem, and we have a very attractive economics that is flowing through our balance sheet. Today, we're at a run rate of over $100 million from an EBITDA perspective. So Pagaya today, from a run rate perspective, as I said, is originating over $8 billion. We have a, what we call a fee revenue less production cost, gross margin, fancy word to say, gross margin, of almost $300 million, and because we have leverage already in our scale, we're managing to have an adjusted EBITDA of over $100 million on a run rate. All of that is based on Q3 numbers. Where we are going from here?
We are trying to take the business to a $25 billion of network volume. We'll touch in a second how we're gonna do that, but the fact is just doing more of what we do. That will allow us to have a $1 billion of net revenues, gross margin, and from that, because of the additional leverage that we get, a pass for a $500 million of EBITDA is rather easy. These are our medium-term growth targets that we have put in front of the street, and as we work through in the company, that's what we're marching to. Now, what I want to do is, I want to take a little bit a deeper look on the two sides of the value proposition that we show, both for the lenders and to the investors.
So later, when we have questions, feel free to point to the right areas of interest. First, we start with the lender. The lenders are our biggest partners. We love them. We hear them, we listen to them, we learn from them. We are solving one of their biggest problem, high cost of acquisition and a gap to the long-term value from the borrowers. We design a technology tool that is super strongly embedded into the loan origination systems of these lenders to be able to do all of that seamlessly. For them to be able to ping us in the API in less than 0.5 second, and to be able to give us really the application. But the real question that you are interested in is why they love us. And why they love us is these very simple, three basic points.
We help lenders say yes to more customers. Without Pagaya, 20% of their customers wouldn't be in existence. They are taking 0 incremental funding risk because they don't need to commit anything in that funding process, and they do all of that in a frictionless real-time, which allows them to keep the customer. That is almost a perfect product for any lender in each industry that they exist, and that's what we started from the personal loan and moved to the auto loans, and ended up with the POS, point of sale. What you see in front of you is a case study. When we are going into a lender, and we are running through all the applications that they have, we are giving them the business case of why they should care and why they should listen.
What you see in front of you is the approval of one of the lenders that we work with in that process, divided by the FICO scores into the, what are the potential approvals that Pagaya approved, and therefore, what are the enabled issue approvals that could happen? You can see that the numbers are very high. We are talking about 20-25% of incremental approval, that parts are getting converted and parts are not. We are talking about millions of customers for the more mature partners that are working with us already, or hundreds of thousands of customers that are working with us already for a few years, and thousands of thousands of lenders that are starting with us in the beginning.
You have below are testimonials of the potentially two most sophisticated subprime auto lenders in the U.S., testifying that to work with Pagaya gave them an edge and gave them a lift. And as I said, we did that across the personal loan, which we originated over $14 billion. We did it in the auto loans, and we managed to connect to over 40,000 dealerships. Can you imagine, for a company with 650 employees, how tough it would be to connect to 40,000 dealerships? Almost impossible. We are leveraging the infrastructure of our partners, hand to hand, trying to get to a better outcome. And the third one is the payments. Our biggest partner is Klarna. Eleven thousand merchants that we never met, but is connected to our system and our ability to provide them lending to their customers.
On the investor side, we are providing the ability to access to a very scalable AI-vetted loans. So when you think about it, the core power, and we'll see it later, of the ability to provide a good, better performance for the institutional clients, is relying on the fact that we have the access to all this data. The network is very powerful to the ability to feed the AI algorithms into the outcome that we're looking for. And that is creating an ability for a big institutional client, like Temasek sovereign wealth fund of Singapore, that is investor in Pagaya, both in the assets and in the equity, to generate and to source billions of dollars of consumer credit-based assets into their allocation over time.
As we all know, private credit is definitely an asset class that is getting more and more familiar in the, in the sphere, and replacing the bank into the prov-- in the ability to provide credit to the borrowers. We have more than 93 institutional investors on our institutional platform, which means you invest personal loan, you invest with Pagaya. And we have managed to gain more and more market share as the years went by. We'll not talk about it today, but our way of operating is rather different than the others. We have a pre-funded model, so we are taking the liquidity risk of running out of money for originating loans to a very little. Because we are going to institutional clients, and we tell them, "Hey, we're about to originate loans from our 28 partners.
“Would you mind to participate?” And then they are providing us capital in a co-mingled pre-agreed ABS deals to be able to go and to buy them based on few restrictions. So the ability of Pagaya to left one day with a lot of loans and not a lot of liquidity is very minimal to not existing. We still have some credit risk as we are investing in the ABS that we put as part of the Dodd-Frank rules, and therefore, we have some exposure to the credit risk, but it's minimal compared to the billions of dollars that we are owing.
To summarize, we have built a unique AI network that has one of a kind lending product to the partners, and very scale solution for the institutional investor world to be able to drive value across the ecosystem and to solve or to try to help for the mission that we are standing for, which is reducing the 42% of people that are getting denied for credit for no reason, because the performance is. What you see in front of you is the difference between a credit regular business to the AI network that we have. The reason why we love our business so much is because it's not cyclical. When you are thinking about the top of the funnel, which is the light blue, it's continuing to grow as we add partners, as we gain more flow from the partners.
As you can see, it's in the trajectory of a growth company. While the conversion rate, which is how much we see to how much we produce or fund, could change over time because of microeconomic scenarios, still, the growth story is very clear. So while people look on Pagaya today and say, "Okay, it's only growing 10% or 20%," yeah, but that's because of the economy going against. And when that's going to bottom down, and it did, and it will, the potential of the upside is enormous. And that what makes us so excited about the resiliency of the business, and why we can originate $100 million plus of an EBITDA in a macro environment, which usually credit is a tough word. So the flywheel effect to end up is more data.
The more investor, more product, more lenders are giving more data, and more data is being generated into a higher conversion, into a better data, and into a higher origination. So the flywheel and the uniqueness position that we have in the ecosystem is allowing us to continue to grow through cycle with our partners. Our growth initiatives, simple put, same product that you integrate with more lenders. We are talking to 80% of the top 25 banks. We never had a no. We had a, "Not now," because it's a heavy lift. Let's talk in a quarter. But there is no lender in the world who will say no to something like that. Number two, work on a better and better algorithms and models to increase the conversion through the power of technology.
And lastly, build more products for the network to bring more value to your, the partners that are already considered to be the most lucrative clients in the world, that are connected to Pagaya from a tech perspective. All of that is bringing us to the $25 billion of origination network volume that I shared in the beginning, that this is our goal. What you see in front of you is the different origination by different colors, by the cohorts of lenders that we lended. So all the production that has actually happened and is anticipated to happen from lending partners that we lended in 2021, and then in 2022, and then in 2023, and then in 2024.
70%-80% of that production projected in our medium-term growth plan is already from existing partners, i.e., we don't need to add many more partners or very few in order to hit our medium growth targets, which are very, very high. Last point is... the beautiful part is everything is automatic in Pagaya. We never speak with a customer, we never approach a customer, therefore, scalability is 100%. So how much we need to invest more to onboard 2, 4, 5, 6 new partners? Nothing, because we have the infrastructure. Now, you will need to make the team a little bit bigger, account managers, et cetera, but nothing compared to what you would assume in a regular business.
We have managed to move to a much higher EBITDA numbers, partly by cost saving and being in a very strong position to continue to leverage our operational leverage. With that, thank you so much for listening, and I think we'll move to the next part.
No, but up to questions if you guys have anything.
So all of... yeah, so both of them has different parts. The lender will go to collect the car, call the borrowers, "Hey, why you didn't pay?" That's a service. They do that, and they love it because I cannot, I cannot make damage for them on that. That's the reputational. Very sensitive to that. And yes, the loss are on the investor side. The investor side, they get the interest rate, and they get, take the loss. As I said, there is a small piece that we are participating in that, which can be between 5%-10% in the areas of, like, how we need to put it, the money to work in many regulations. Investors. Yeah, but that's gonna be one of the losses that they have in the pool of their loans. Yes. Yes, every month. Every month.
5 went delinquent, 5 paid back, and so on. So 10% of that is the I don't have the paper. 10% of that is what we record as revenues usually is a 5%. Yes. Now, the way you do that, again, from exposure perspective, you can lend towards that, you can fund it. There are many ways. You don't need to put 5% upfront, but from exposure perspective, you do. In every ABS transaction in the U.S., the issuer needs to hold 5%. It's part of the skin in the game regulatory requirement. Yes. Any other questions? Sometimes and sometimes. Half, half. No, because what's happening is, like, it's already calculated into the interest rate of what you think you're gonna get versus that. So like 15%-20% is like the call the business as usual.
Now, to get from a 15 to a 30 is very, very extreme scenario. And again, this is consumer credit, regardless of Pagaya or not. So actually, 2021 was a very, like, with the interest, in the interest rate and the inflation, was a very bad credit cycle for consumer credit, and the vintages of 2021 got very hurt. So we have a lot of data. And the answer is, there are some sensitivity to exactly what you mentioned, just not in the model. Yes. So, so you have two questions here. Let me put in order.
Right.
So first is like, who are the type of borrowers you're lending to, right? What you will see on the screen is that all of them are, this is on the auto side, at least 550 FICO and up to 700. So the answer is no, it's not the unbanked. It's the regular Americans-
Right.
Working. Just to give you a little bit of...
Not even low credit. It's just that, like, a top five bank has a cutoff of FICO of 720. But just to give you a little bit of a sense, the average income for a borrower in Pagaya on the personal loan is over $100,000. The average FICO, 680. So to the point of where I started with, and I—with your permission, I want to go back there, that is not—like, people tend to not exactly know the details. The 42% are not the unbanked in a very silos place.
No, no, no, no. $100,000 earner, living in every place in America, renting house, buying house. They are regular customer.
Still, because of a lot of regulation and the lack of sophistication in the tech and many reasons, they are left behind. So out of the 680, the banks or the lenders, if something is not exactly right, we're out. That's question number one. Question number two about Klarna. Klarna is actually lending to the people, the consumers, not the merchants. So no, it is true, it's POS, but it's to lend to the customers of the merchants when they are coming to the merchant website. But the actual Exactly, but the actual lending is for the consumers. I hope that makes sense. Yes. Yes. So the reason usually they get rejected is because of a one hard-cut rule. So this bank that I just said, 719 or 721 FICO, no. One-time bankruptcy in life, no.
Now, 20 years ago, was the only best way to get the in scale ability to do underwriting. These days, you have better tools. So don't think about AI as an AI, just think about it as an algorithm that knows to take more things into consideration, more in data, more in parameters, and to form a better view. Now, it doesn't mean that every customer that is being rejected, AI could be a good solve for it, but it's definitely mean that there is a 10%-20% of people that didn't get that because of a fast, hard-cut rule, which they should have been. And how we know that? Because the performance of the loans of Pagaya that we are monitoring versus the partners are as good or better. So point being is, they didn't get a loan, not for a good reason. Yes.
Yes, I don't think I have the slide here, but like 2021 was not a good, not a good year. 2022, much improved year, and 2023 is very good. Exactly. Exactly. So we took that concept, we reverted it. We went to the investors first. We said, "Hey, we have a securitization, we have an offer, a stack debt, a triple A, a double B, an equity, everything. It's already in security format. We're gonna give you the security, you're gonna wire money into a trust." T+0 , they get securities, money is being sitting in a trust, $500 million.
T+1, we are taking the origination of the loans, not through us, directly to the vehicle, and exchanging between cash from the investor pool, which is already in securitization, a trust of Pagaya, fully controlled, to the lenders to give the loans to whatever we approved, and they are getting the money. So the trust is getting the loans and wires money. After 3, 4, 5, 6 months, pool money has been exhausted, and there is a pool of assets. Then, all the interest rate income is going into that pool, and all the losses are being eliminated from the future return principal of that pool. And that pool, on a monthly basis, is distributing interest rate principal to the different owners of the securities of that vehicle. And that's how you don't have any warehouse, no what we call liquidities, yes.
No, they are already holding the securities. They're already holding the certificates, the securities. Because you have different capital stacks. So they hold it already, they hold in the beginning a pool of cash, that a loan is being filling the loans versus the cash. They do not. And after that, they're getting the cash flow stream from that assets, from these assets. Yeah, it's a good question. So think about it, all the fees that are being generated into the transaction, the partner fees, the marketing cost of them, and so on and so forth. So it's the full fees that are being generated in a transaction like that because of the principal, but the real revenues is the FRLPC, which is the net revenue, which is a pure cash in the door. Yeah. So there are three parts.
One is, this capital that is being there is short duration, is only two years. We have a recycling effect, massive recycling effect. The second piece is you can have, in different structures, ability to do commingling, of risk sharing, et cetera. And the third piece is the financing of what I said, which is you own it and you bring someone else. So call it that, like, that, that will be in the hundreds of millions of dollars, that you will need to use as working capital for that. And then you have the ability to do forward flow arrangements and other things that we're not persuading right now because it's not in the size that really troubling, but at some point you can do that. Any more questions?
We have what? No, not at the moment.
All right. I guess we'll wrap it up there. I guess, y'all, I know you guys had an announcement, was it yesterday morning? had a few things in it, including a proposed reverse split-
Yes.
Headquarters change and results. Maybe, give us a quick rundown of that announcement before we wrap up.
Definitely. So from results perspective, we announced that we are beating the high target for EBITDA and volume and network, and that reflect the strong quarter that we have. This is the fourth or fifth time we've beaten rates in the last year. And then, as part of the market volatility that we're seeing in the stock and some dislocation of early investors, such as Tiger, et cetera, that took the position out and reduced stock, what we did is, we did a reverse stock split in order to make sure we are gonna be above the indexes inclusion this year, which is an important piece. And the second piece is, we have moved the U.S. headquarters to the U.S. and started going to become a U.S. filer.
So to make sure we are continuing to provide more transparency and more applicability for investors around the world to invest, and to be more considered as a U.S. company rather than a foreign issuer, company. So that, that's the things we announced yesterday, and I think we got a lot of, like, positive momentum and receptivity to that, from the understanding of how to help the stock to have a better trading dynamics. I think a year ago, we were more in the camp of, like, we didn't have enough liquidity, and, like, people were not sure about business model.
In the last year, after we managed to prove out very strongly the fundamentals, the positive EBITDA, the ability to lend big partners, et cetera, and the liquidity in the stock went up dramatically, we are now looking into getting more institutional investors on the cap table and the ability to drive that value. I think that with the growth rates that we are seeing and going to have, without the headwinds that we had in the last two years, which are crazy for businesses like that, I think it's a $10 billion-