All right, I think we're live now. Good. Good. All right. Well, I'm David Scharf. I cover financial technology, fintech, consumer finance here at Citizens. It's a pleasure to have Pagaya with us, CFO Evangelos Perros, who I don't know. Everybody calls you EP.
Yes.
I think after a number of years kind of selling all of us short, I think we can call you by your full name.
Great to be here.
It's a ple-.
Thank you for the invite.
Yeah. Pleasure to have you back. I'll tell you what, I've been covering the company for, I don't know, about 2, 3 years now. Definitely one of the most unique of all the marketplace lenders. This is where I always turn it over to you for like a 60-second commercial. However you want to describe your role in Pagaya, go ahead.
Thank you. Thank you for having me. It's great to be here. Well, the simplest way to think of Pagaya is think about it as a network that connects lending partners on one side of the network with funding partners on the other side. Lending partners like banks and non-banks and fintechs, companies like SoFi, Ally, U.S. Bank, Klarna. We're today in three asset classes: personal loan, auto, and point of sale. Then on the other side of the network, as you know, we have one of the largest independent funding networks out there. We're the largest ABS issuer in personal loans. We work with north of 150 investors, and access to capital to some of the deepest pockets of institutional capital out there.
When you think about Pagaya, we make fees from both sides of the network. Most of that, though, comes from the lending partner side for the use of our technology. We underwrite loans on behalf of those partners, and effectively, we have an end-to-end solution where they use our technology, they maintain the customers. We're a B2B, we're not a direct-to-consumer originator. They maintain the relationship with that consumer while delivering these assets, these loans into institutional investors who are looking to deploy capital in consumer assets. That's at a very high level where Pagaya is today.
Got it. Well, this is usually the part where I ask some question about your B2B2C model and, you know, expanding products and whatever, but I'm gonna cut right to the chase.
Okay.
You know, you recently reported your fourth quarter results, which were quite strong, as they've been for the better part of the last year. Very strong guidance. Some of the commentary raised a few eyebrows. To summarize, and correct me kind of if I have this right, you know, you noted that your lending partners, which, as you said, are personal loan, auto, point of sale, buy now, pay later, you know, they weren't seeing any credit stress. You know, no real warning signs at all. And in fact, we had been through an earnings season where most lenders pretty much said credit seemed pretty stable. Yet, you suggested that they maybe weren't as aggressive-
Mm-hmm
...in terms of their 2026 origination outlooks or marketing spend, however it may be. There seemed to be a little disconnect between what on the surface seemed to be a lot of stability, both in your results and their results, and some of the nuance about your commentary. Maybe I would just throw it open to you, EP. You know, what did you hear?
Well, first I'll start by saying that, again, as a company, when you look at 2025, we exit the year with $80 million of GAAP net income profitability, four consecutive quarters. To your point, very strong results. In fact, when you look at 2026, and you look at the guidance, focusing on GAAP net income profitability, which is the primary metric that investors should be focusing on. We have always said we're in favor of profitable growth and not growth at any cost. We're still looking at, call it 50% growth at the midpoint of the guidance on GAAP net income basis. To your point, what we did in Q4, we basically, reacted effectively to two things, if I had to simplify it.
One is on the macro and the uncertainty around the macro, and more importantly, the how protracted that uncertainty was. We'll, you'll always see these locations. The marketplace, short-lived, like Liberation Day, and things like that. When you actually go back in December, when we decided to take that action, you're actually looking at we're in a marketplace where there is uncertainty around interest rates, around the K-shaped economy, the upper end of the K, the lower end of the K, geopolitical situations. Back then it was Venezuela, Latin America, policy things like the credit cap, the cap on credit cards and things like that. There was uncertainty that actually had been somewhat sustained for a few months.
That already is something that should generally, as you would expect for somebody like that in consumer lending, to take, to take a pause. The other piece, though, that actually did create some confusion, I will acknowledge that, was we reacted to what we saw from our lending partners. And I think part of the confusion was that people interpreted this as potentially, you know, our lending partners are cutting or tightening their credit box. It was none of that. What we did see is their, call it aspirations or plans for 2026 growth and their growth trajectory being somewhat a little bit more balanced relative to the 2025 growth that they were delivering.
When you see that across multiple partners, because we are a B2B and we have that benefit, this is already giving us a signal there is something a little bit more systemic. It doesn't mean anything about the consumer or the credit performance. In fact, what we said is the consumer is healthy and resilient. The credit performance is in line with expectations. When you see that sort of a little bit change in the mindset from more of the lending partners, it's time for us to step back and consider whether we should take any action because it came across multiple partners. I think what people miss though is what allows us to actually take actions in certain cases like this, which is two key things in the business. One is the operating leverage. We're a B2B business. We have operating leverage.
We managed to pull this, call it, take out some of the higher risk tiers, and yet we can still come out and deliver $100 million-$150 million of GAAP net income profitability in our guidance in 2026, a 50% growth year over year, while eliminating higher risk type of production. I think that's what people should be expecting from people in consumer lending, and if we can afford to do it, we will always take that. Obviously, given what's happening, we remain even more cautious given what's happening obviously in the environment with certain things shifting, but the reality is the same thing. The other piece is that we cut about, call it, $1 billion or so, $1.5 billion of, call it, production in our planning for 2026.
Keep in mind that because of our product-led strategy and the highest number of partners, lending partners that we have in our queue on the onboarding phase, we can actually more than offset that with new part-partners and new products because we have very good visibility in that part. When you put all of this together, this is what basically gave us the confidence, these signals, the confidence that we should take action and that we feel good about the action because we can already deliver something that's even much more to the benefit of the shareholders and all the constituents within Pagaya.
Got it. You know, clearly the company's in a very unique position. I mean, you're the only really the only underwriter I'm aware of that's integrated into 30 other lenders. You're seeing what they're turning down, you're seeing what they're sending towards you. Everybody else is learning from their own portfolios. You're the only company I'm aware of that's actually learning from the underwriting decisions of all these lenders. You know, is it fair to say that... I mean, would you characterize Pagaya as a good canary in the coal mine, a leading indicator?
Once again, the disconnect coming out of the call was, wait a second, I just heard all these credit card issuers, auto lenders, personal lenders say things are fine, and you were suggesting that as well, except also suggesting they weren't willing to grow as aggressively this year.
That's a good indicator potential for people to use. Obviously, you know, as you think about the cadence of disclosure and everything will have to be at every earnings. What I would say is well, don't expect us to change course from one month to another or one quarter to the other. That's something to keep in mind. Like, we have to really have a very strong confidence level in these things that we see in order to make a decision. To your point, though, the big benefit is exactly that we see information from 30-plus lending partners. We see approximately $1 trillion of applications a year from all those partners across multiple asset classes, across multiple channels within those lenders. I think that's really the benefit.
The production data that we have is really what's the sort of, call it, moat for us and what really fits the underwriting. That's what allows us to react.
Was the change that you saw from those partners, was it just maybe a couple of the large, the largest partners, or was it more broad-based? Was it more across more of the 30 than just maybe the top 5 or something like that?
It was a mix. It was, like, more across, to be honest. With a little bit more focus to your question on the personal loan in auto. Part of that is, again, since you're asking the question, you know, when you think about point of sale, or BNPL is something that's growing so much faster, where any pullback, it's a little bit more disguised by the big numbers. In auto and POS, a little bit more obvious signal there. Again, just to put into perspective, the growth, as an example, if somebody's growing at 50%, call it, year-over-year in one year, and that growth may be dropping to 30%, that's already something in there when you see it across multiple partners.
Again, I would focus a little bit that the decision is possible for us, A, because of the visibility that we have and the ability to replace this volume with new volume, as well as the operating leverage. That's a very important piece to think about the business within the broader ecosystem.
No. That's helpful, EP. You know, for me, one of the biggest takeaways, if I'm an investor, even if I don't know anything about Pagaya, if I'm invested in other consumer asset classes, I would be listening to all of your calls.
No, I appreciate that.
Just 'cause you clearly the nature of your business is you are hearing and seeing things that, you know, others just can't see directly from those lenders. Let's kind of pivot to the funding side.
Yep.
Once again, without kind of harping too much on the, you know, challenging headlines, but, obviously, you know, the company's diversified significantly, in the last few years so that there's a pretty good balance between ABS and flow deals, private credit partners. Private credit has obviously, you know, endured quite a, quite a bit of shocks in terms of at least just headlines in recent weeks. Any general thoughts about just the stability either of your funding partners specifically or just, you know, the durability of those, Those channels?
Obviously, you know, everybody's listening to the noise that's in the marketplace right there. What I would say is, if you step back and you look at this over the, call it, last few years, the sort of what I call secular trend in the growth in private credit is still here, especially when you think about these consumer assets. We may have a little bit more challenges right now on the corporate side, but it's still here to stay, and people will continue to deploy this type of capital. Having said that, when you look at in the last 12 months or so, or 18 months, we have actually been saying since the beginning of 2025, the first half or so of 2025 was much more, call it, frothy relative to previous years or relative to the second half of 2025.
What you saw in the second half, especially call it in the middle of Q3 onward, private credit being a little bit more disciplined in their approach, in the partners that they're working with, in how they're deploy capital, pricing and things like that. You should expect that. Remember, these private credit providers are also working with banks that provide back leverage. Everybody in the ecosystem after sort of, call it, September or so, started being a little bit more disciplined in their approach. That's a little bit the macro story. When you think about Pagaya, we have a lot more to do, but we're actually in some ways looking at just facts.
We actually benefited a little bit in the last five or six months, whether because we're a scaled partner, whether because we can give diversified access to diversified type of partners across all three asset classes. Some of the actions that we took as well, which are actually benefiting investors. The data or the facts speak a little for themselves. Even, you know, in Q3, Q4, we announced two new forward flows, one in our first auto forward flow, one in point of sale. We were very successful in some of the execution and selling some of the certificates in our ABS, which we hadn't done since 2021. We had a lot of success on the point of sale and the personal loan through some new revolving structures that we put in place with investors like 26North.
Generally speaking, you saw a little bit of those investors gravitating towards the more scale and more established platforms, obviously on the back of very strong and expected type of credit performance. Obviously we remain cautious because of everything that's happening. I think what I would highlight is for us, we have put so much effort in the last two years to really diversify our funding, that we're not really reliant on one or two players. That's the big thing that we have been working, in like day in, day out for the last multiple years, and it was always about diversification of funding.
In fact, some of these new structures that we've put in place that we're really excited about and I think excited a lot of the private credit investors like, the revolving structure that we did with 26North, which is significant demand for some of these things. It's actually providing capital for a longer time period because we can recycle the capital within the structure itself.
Got it. you know what, EP? I'd like to shift to sort of product evolution. You, you've already referenced kind of the asset class diversification. Company was founded on personal loan.
Mm-hmm.
Turned down underwriting. Biggest ABS issuer in that asset class. Now you're doing auto, working with some of the largest subprime auto lenders, Westlake, Exeter, Ally, obviously Klarna on POS. Beyond that sort of second look underwriting, can you talk a little bit about what else the company's expanding into?
I think that's probably the most exciting part when you think about the business strategy overall, which is we have actually diversified away from the traditional, call it, second look product. We now have products like the Affiliate Engine, the Direct Marketing Engine, more like products that are much more like first look or dual look type in terms of nature, which basically allows us to get more access or create even more application flow for our partners themselves. A good example is the PreScreen product. This is a product where we basically put our underwriting. It's already embedded in the Loan Origination System of our partners.
We're actually putting it on the rails of their marketing engine and using that with our data to identify consumers who maybe, you know, more of higher propensity to activate a certain offer, again, based on our underwriting. We have a lot of dual look programs where we go side by side with our partners. Our partner gives two offers out there to the consumer, all coming from the same partner, one backstopped by them, one by us. That provides more opportunity to the consumer or higher probability to activate this order versus the others. Ultimately, the goal is very simple, is get more access to more application flow and create more application flow that we can actually expand. When you look at our partners today, they have a customer base of approximately 60 million.
We have extended credit in our history to about, you know, two and a half million of consumers. Not to say that all the 60 million consumers will be eligible for Pagaya, but, like, when you think about this, sort of readily available consumer base, the ability to grow that, monetize it, is actually quite unique, and I think that's what we're most excited about.
Should anybody infer something about the margin structure if the business makes changes to more of this kind of, you know, earlier stage marketing-oriented kind of product, or is it similar just on a transaction unit economic?
The answer is it's less about the product because the reality is the way we think, generally how we structure our agreements with our partners and the fee sharing is based on the total volume we do with them versus product by product. There are some variations obviously to that. Specifically speaking about margin, which in the case of Pagaya is basically portrayed by what we call FRAPC or fee revenue less production cost. That's much more driven by more of the asset mix and the new partner mix. Newer partners generally start with lower volume and therefore lower fee rates per volume, per dollar volume. A little bit the asset mix because there are some changes in the different asset classes that just drive that.
I think for those who have followed the story, and you have as well, is like you go back 2 years ago, our fee, our margin, our Fee Revenue Less Production was close to 2.5%. Today it's closer to that, call it 4%-5%. On a $10 billion business, that's a $150 million-$200 million more cash flow generation, more profitability in a business that has significant operating leverage. That's what I would say. It's the drivers really on the margin, asset mix and new partner mix.
That's why we said, that now that we have sort of managed to increase the unit economics and the focus is building the network and adding more partners, you should actually see our FRAPC trend towards the midpoint of that, call it 4%-5%.
Got it.
that we have out there as guidance.
really like every processing model, I mean, you've got to a certain amount of scale where, you know, each incremental transaction.
Yeah.
-is not only tremendously profitable, but you're in some way self-funding.
Mm-hmm.
Can you talk about the, you know, all the various factions competing for your free cash flow?
Yep.
Since you're the CFO, I'll put you on the spot. I'd be remiss to note that, you know, typically we ask you about buybacks, but you also have some senior notes out there that are yielding in the high teens probably now with a bid sub 80. I mean, is buying back some of those an option for the company as well?
Yeah. Let's separate a little bit the cash flow, a little bit profile of the business and how we deploy capital, and then we can talk about capital allocation in the context of this environment and some of these, what I consider to be, dislocations, I guess, on pricing. The business is now at the point where on a marginal basis, we generate this $4-$5 per dollar of volume. Effectively at day one, we basically need to put in on a net base, net of capital coming back and things like that, of approximately call it $2-$2.5. Somewhere between $2 and $3 on every quarter. On a marginal basis, we're actually generating cash flow. How do we get there?
We improve the unit economics to get to that 4% to 5% upfront. It's all cash. Operating leverage, there is no incremental investment in the business from a cash perspective. There's no variable cost. On the funding, we're now at a good mix where you have to put, call it net of capital coming back from those deals without any financing activity whatsoever to basically get, you have to put in 2% to 3%. Therefore, your cash flow generating as we are when you look at cash flows from operating activities and net of cash flows from investing activities. That's a little bit how you think about the cash flow business and it took a tremendous effort to obviously get that over the last two years.
When you think about capital allocation now as a business, the good thing about Pagaya is you don't have any Growth Capex. Any other alternative that we can think of, whether it's plowing the cash back into the business and supporting some of our or buying some more of our structures, whether it's buying back stock or the bonds, they're not competing with growth. They're not competing with Growth Capex. We don't have that. That's a great place to be, as you can imagine. The infrastructure is already built out for the business to even double the amount of volume without any incremental investment. Now, to your point, the.
What we have been saying is one way to create a creative, sort of deployment of this type of cash instead of sitting in cash is either to return it to shareholders, return it to bondholders, where for those who don't know, we did a high-yield note back in the September of $500 million rated by the three agencies at a significant, you know, lower cost than the previous balance. Very happy about that execution. Continue to sort of lower the cost of our funding, very similar to what other business are doing. I think right now what's happening with the dislocation is something that we were constantly trying to think between these three alternatives. We did buy back some of the bonds in Q4. We did some in Q1.
Ultimately, it's a purely sort of mathematical decision in some ways, and we continue to assess that on the base of liquidity, the market environment, the pricing, and all of that will come together for us to continue to allocate capital accordingly.
Got it. All right. It's a good note to end on. We just finished up.
Okay.
EP, thanks so much for being here.
Thank you very much. Appreciate it.
Okay.