Well, good morning, everyone. Thank you for coming to our lovely session with Pagaya's Chief Financial Officer, Evangelos Perros. Did I pronounce it correctly?
Yes.
Okay, great. Well, this is very exciting. Pagaya is obviously doing very well, and we've been big fans of the story for a long time. I've known Gal for many years. You guys are pretty much at the backbone of the entire fintech ecosystem, so it's a great place to be. Maybe as we speak about Pagaya more broadly, for the people that don't know Pagaya, can you maybe give us an overview of how it actually fits into the fintech ecosystem in the U.S., but also globally?
Yep. First, thank you for having me. Really excited to be here again this year. Think about Pagaya as an infrastructure that we build that brings together lending institutions on one side, consumer lenders, banks, non-banks, fintechs, and connects them directly through our technology with institutional investors who are looking to get access to credit assets like personal loans, auto, and point of sale. We are basically offering a white label solution to those lending institutions, integrating our technology with our loan originating systems and effectively expanding their capabilities in underwriting, while obviously they get the benefit of retaining their customers and everything that comes with it. We're probably unique in the space in that regard, and today we're integrated with about 35 or so lending partners, doing about $12 billion, $13 billion of network volume across the asset classes.
Obviously continue to looking to expand and basically become the utility in this space for all lending institutions in the U.S. Not yet expanding internationally. Obviously, for us to do this, you do require a very data-rich sort of country like the U.S. to actually do it. While we actually started with bureau data and things like that, right now the production data that we have is quite unique and potentially down the line, we could consider expanding internationally as well.
The number of lending partners and funding partners continues to grow very nicely. What do you think is actually driving that?
I think it's the value proposition. The company has really evolved over the last 10 years. On the funding side, it's obviously a little bit more commoditized in many ways. We have an extremely strong presence in capital markets that we've built over time. We're the largest ABS issuer in personal loans today. We have grown this franchise since the beginning of our founding. The value real proposition, where real diversified is on the other side of the network, the lending side. You should think about our solution to them allows them, in the case of banks, for example, to retain customers, retain the deposits of those customers, effectively expanding the lifetime value of those customers for them. Because you need to keep in mind, we are not the originator on record. We are not an originator ourselves.
We go in, supplement their sort of underwriting with our own underwriting. The customer stays with them. The customer, after they do a loan that was approved by Pagaya, get monthly statements from their bank of choice. They maintain the servicing, they maintain the customer relationship, and everything that comes with it. In the case of auto, if you think about the auto industry and auto lenders, we're at the point of lend, and ultimately what these lenders are solving for is increased dealership satisfaction and dealership activation rate. We can come in and provide products to them at that point to really expand these capabilities. In the case of BNPL, it's all about merchant acquisition and merchant network expansion. We can do the same thing there. Traditional BNPL provider, you can come in, provide options on bigger ticket items, more purpose-driven type of POS.
Every partner is solving something else, ultimately, it's all about them being able to trap their customer by offering more solutions without, by the way, of any use of their own capital. We provide the funding for them. That value proposition is quite unique and is resonating, and even recently, for those that follow the story, these sorts of new lending partners onboarding has really accelerated.
You talked about the value proposition, but maybe if we can talk a little bit about the growth. Maybe high level, how does management think about near-term growth and medium-term growth, and what do you think are the key levers that are going to drive it in terms of verticals and whether it's buy now, pay later or any of the other things that you mentioned?
First, let's start with the fundamentals of how we go to market, how we grow, which is for us, growth comes in the form of getting more access to more application flow. How do we get that? By adding more partners, lending partners to the network. Growth for us is not like a lever that we don't have any marketing cost. We don't reach out directly to the consumer. We're a B2B platform. The growth comes by adding more partners to the network. Obviously monetizing that relations. We start with a certain type of product, a more Decline Monetization product, as we call it, and then expand to different other products that we can offer to the partners. It's completely different than in a B2C.
To your specific question of where we see the growth opportunities is both on the product-led strategy with a focus on the auto vertical. Auto is still on a relative basis, much newer product line for our asset class line for us relative to personal loans. It's a much more obviously fragmented opportunity. We have the opportunity to add significant, a lot of more big players there, and we actually see both the demand for our solutions from auto players as well as our ability to call it monetize our product strategy with our existing partners really paying off. We have very high confidence in that. Personal loans will continue to grow, but it's in a much more mature state for us. Then obviously down the line, as I said with my first question, we look at ourselves as a utility player for all the lending institutions out there.
If our partners go more into POS, we'll go with them. If our partners go into credit cards, we'll do that too. That's how we see our growth strategy, both in the short term as well as more in the medium or long term.
Mm-hmm. Maybe can we dig a little deeper into the new partners? I think in the last six months you've signed about five new partners.
How should we think about the volume contribution for this year and next year, how big could this partner become over time?
Yeah. I think it's obviously very exciting for us to keep on adding more partners to the network. You should all think about this as planting the seed of growth for 12 to 18 months out. It does take a lot of time to ramp up a new partner. We start very slow. The models need to adjust. We're obviously very prudent about the risk that we're taking up front. The new partners that we added, let's call it in the last four or five months, will not really have a meaningful contribution in terms of volume and even more so in terms of unit economics, at least until best case year end of 2026, but definitely into 2027. That's how a little bit to think about their contribution.
Again, it's across multiple partners, but when you step back, again, think about Pagaya like a stack of partners. You have the mature partners where you're introducing more products and monetizing those relationships, ultimately keep on adding more partners. We actually have very good visibility about sort of the growth trajectory of the business two, three years out. The way we think about it is think about us a little bit more as a call it 20% growth year-over-year, over the cycle. Sometimes it will be less. This year, for example, we took some credit actions because we saw some uncertainty in the marketplace. We're looking more at the mid-teens growth, obviously in some other years will be more. It's just like a very phased approach by adding more partners to the network. That's how to think about it.
Fair enough. Maybe can we switch gears to the guidance, talk some specific numbers?
Yeah.
I think you raised the low end of your network volume guidance and increased the total net income guidance. Can we talk about those two different-
Yeah
line items and what drove that decision?
Yeah. To step back, I think we came to market in beginning of the year and sort of cut some of our expected, what the market expected for us to deliver in terms of volume as a result of the uncertainty in the marketplace. What we said is we're obviously in a position to do that, and we feel very good about that decision, and I don't think there is any doubt that it was proven to be a good decision given the uncertainty in the marketplace. We said we're also in a position to do that because we can actually offset that credit-driven type of growth with more product-led growth, as well as new partner growth. Still deliver, call it mid-teens type of growth year-over-year, 2026 over 2025.
A quarter ahead, jumping ahead, we feel have very strong confidence in our product-led strategy. It's really resonating with our partners, particularly in the auto space, as I was saying before, which gave us the confidence to increase the guidance for the rest of the year, more so on the low end, which at that point to keep in mind, right, we're going through the tax season. There's obviously some things that muddy the waters a little bit because of the seasonality. What I can tell you today is we did that increase, we felt confident then, and we continue to have very strong confidence in our ability to deliver this network volume growth through new products and new partners.
Maybe a big topic has been the funding environment and capital markets. I think during the last conference call, Q1, you said that you are tactically pivoting towards ABS in the near term due to repricing that you're seeing in the whole loan sale market. Can you dig a little deeper and give us more color on what you're specifically seeing there?
Yeah. Well, first and foremost, if you step back a little bit on which channels of funding we're using, we're quite diversified. We have overflows. We have obviously one of the strongest ABS sort of practices out there on the large and personal loans. There is different flavors in between those type of products. We're able to pivot at any point in time. Before I go into what we saw specifically, I think one thing to keep in mind is when you actually look at consumer credit, consumer credit performance has been very stable and actually very attractive, particularly in this environment where corporate credit has been a lot of the issue. Point 1, and the consumer in the U.S., we can all agree, is very resilient. You can ask, is strong or not, but it's definitely resilient.
That by itself is still driving deployment into the consumer assets. Where is this deployment coming from? It's either from insurance type of capital or pension plan, like opportunistic or yield sort of seeking type of asset. That demand has not changed at all. It continues to be very strong, again, because the consumer is strong and because the consumer credit is performing well. What did change, though, is how it finds its way to deploy that type of capital. What you saw in 2025, you saw obviously what I call, to some extent, an exuberant demand from the private credit side and a lot of competition and a lot of capital being put to work through that type of channel, and actually made it much more economic relative to even the public side, capital markets like ABS. Now you see a normalization of this.
You don't have the issues that you have in corporate credit. We haven't really seen the contagion even there for some of this private credit in the consumer side. They're much more rational, they're much more disciplined, and let's think about it as a normalization. What we said is, "Look, now this has become a little bit less sort of attractive on a tactical basis into the beginning of the year." We pivoted more so into ABS, where you see the demand is extremely strong. Every other deal that we go to market on the ABS, we have managed to upsize. The scale of the franchise allows us to be able to pivot and do that. This is a little bit the dynamics.
Again, keep in mind that the secular trend of insurance capital, pension capital, and all of that deploying into consumer assets is as strong as ever because of what I said before, consumer and consumer credit performing well.
That's good news.
Yes.
That's very good.
So far. It's obviously something that we need to be very cautious about.
Sure.
I can go on about the risk. I'm sure maybe later of a question. There is a lot of, obviously, risk in the marketplace. The facts are the facts. The consumer is resilient, consumer credit is performing well. At the end of the day, that continues to fuel the demand.
That's a broader, this is a Pagaya specific or a broader.
I think it's a broader one. If you think about deployment of capital in consumer credit, it hasn't really seen a material change. Again, small movements left and right. It hasn't seen a change. That is broader thing. Obviously, for us, we offer that access to such a broad number of investors, and our structuring capability and all of that allows us to be at the front end. What I would say is, because we actually took some of the actions to cut credit in Q4, that further improved our own production on a relative basis. We actually did see a little bit more favorable, let's say, allocation into our own production, that's just on the margin at the end of the day.
I have a question about risk retention. I'm going to get a little technical, bear with me. You have the short-term pivot to ABS. How should we think about your ability to self-finance? Will you need to raise equity or debt to help fund that 5% mandatory risk retention? Have you reached a point where you can effectively recycle capital from historical deals?
Yeah. Obviously, we're a wholesale sort of funding model. That is something that people need to get comfortable when you're thinking about Pagaya. With that in mind, we set out a very deliberate sort of financial strategy two and a half years ago to make sure that we can do what you said, but without the need to raise more capital. How did we accomplish that? Very simply put, we are basically for every loan that we bring in, we make $4 to $5 of fees and in terms of real cash, generation of cash. That is cash that comes in. Because of the operating leverage in the business, there is no incremental cost to originate this loan at all. This $4 to $5 is real cash flow generation straight to the bottom line and to our cash register.
Now we have risk retention or risk participation to that in order to align with the investors. If you actually look now at our risk retention over the cycle, and even more so in the last 12 months, is somewhere close to 2%. Therefore, we have managed to build the business and get it in a place where you bring in $4 for any new sort of loan, and you have to fund it. Over the cycle, our goal is to do 2%-3%. If you look in the last quarter, it has been less than 1%. Obviously, it's going to be quite cyclical.
All of that because we improve the unit economics to get to that $4 to $5, but more importantly, through the diversification of funding, as well as the optimization of our capital structures, ABS, AAA ratings, and everything that we accomplished over the last two years to actually be cash flow positive, therefore, to be able to self-fund that growth. That's how to think about the overall cash profile. There will be times where it will be more than 2%-3%, but over the cycle, that average 2%-3% we'll be able to do and actually withstand even shocks in the economy where you may have to participate even more.
Maybe a few more questions on my end, and then we'll open it up for Q&A. Capital allocation. You've been profitable for the last five quarters, I think, and you've been generating cash, which is very good. How should we think about capital allocation strategy, M&A, share buyback, anything else we can think of?
Yeah. The first thing I would say is, it's obviously very exciting for us, is that the company doesn't need any CapEx, organic CapEx into the business. The infrastructure is already built out. We can double the volume and still not require any incremental investments into it. It's a very scalable model. Now that we have crossed the break-even point, both in terms of profitability and cash flow generation, we're basically reaping the benefits of that. There is none of the capital allocation alternatives that we can talk about now really compete with the organic growth in the business. That's a great place to be. Now when you think about capital allocations, there are effectively three of them, let's just call it.
One is to buy back the high-yield notes that we issued last year because they're trading at a price that doesn't make any sense, in our view. Obviously, buy back stock and potentially be on the offense and do M&A. In this environment where there is a lot of uncertainty, geopolitical, macro, everything that we are all aware of and reading the news day in, day out, the idea that we're going to go in excess and buy back stock and/or let's say some of the bonds, goes a little bit against how we think about prudent risk and liquidity management. We have been buying some of the bonds, but to go out and spend $100 million and not see the $100 million again, even if you improve a little bit of credit profile, it doesn't make sense, at least to the way we think about financial strategy.
To the point from the previous question is, yes, we're building up cash, but it's building it steadily and not like quarter after quarter. To go out and be heroes of buyback, it doesn't make much sense in terms of how we think about risk management in the current environment. Buying back stock even more so because it's a great signal. We all understand that. At the same time, it may not be very well-received even for some of the other constituents, like rating agencies, the high-yield investors. Interestingly enough, when we think the environment, I'm sure when we will think that the entire environment has turned and we feel confident at that point, the stock will be much higher, and the bond will be much higher, so it defeats the purpose.
I think we're very prudent, we think about risk first before we think about all the other pieces. The other one, the last one is, obviously M&A. It ties back to how we think about the growth trajectory of the business. I think there are opportunities. I think we can potentially consider being on the offense. At the same time, I can tell you the ROI that we currently have in organic growth, specifically into the lanes that we're in today, which is personal loans, auto, and POS with new partners, is so high that it actually is a better, let's say, alternative than going out to be in the M&A.
We will be opportunistic, and if the right opportunity comes up, and if our partner is looking to expand into different asset classes and they want the white label solution, we will actually execute on that as well.
Maybe my last question is, obviously this hottest topic out there is AI. How do you think AI is disrupting lending technology, and what is the advantage of Pagaya? You guys basically invented AI underwriting. How does the environment help Pagaya continue to have the lead?
Yep. Yeah, your point is, just for everyone's benefit, our front end is fully AI capable, the underwriting happens within milliseconds, it's all automated. Trying to predict where AI and consumer lending will be in six months to six years is, I think, extremely challenging. I think what we feel good about, we get obviously the question from even newer investors, is we're actually somewhat quite a bit insulated because the data advantage that we have is our own production data. It's not that somebody can go out and really replicate those kind of probabilities. To give you a little bit of a perspective, we look at, from the existing partners that we have today, $1 trillion of application flow a year.
Against that, we extend offers back to consumers, again through our partners, of $100 billion, and we actually have activation of 10% of that to get to that, call it $10 billion-$12 billion of actual volume. All of that data, of the $100 billion of offers against the application flow, is our own production data. Our ability to do A/B testing and all of that is something quite unique, and it's not that another model can come in and replicate it because that data is not available to them. That's quite unique to us.
Now, you could argue every single one of our partners has that data as well, they do not have the size of this data for this very finite sort of consumer profile, which I can speak to, across multiple different partners, across multiple different channels, affiliates, non-affiliates, organic flow, non-organic flow, banks, non-banks, top five bank, all the way to the fintechs. That is what is quite unique. That's something we built over time, that is extremely difficult to replicate either for somebody coming into the industry and try to replicate the model or, to your point, somebody using AI because the data doesn't exist. If you actually look at AI is being trained on primarily the data that you have in your own sort of corporate server and what's publicly available. That represents less than 5% of the data.
Our own production data is just our own, it's across multiple partners. That's really what the data moat is, that's how we're insulated, I think we'll continue to grow that as we add more partners. Now, the environment will change, right? I'm sure there is a lot of sort of it's going to be very dynamic. Again, I don't have to explain to people the AI and how fast it's moving. I think like anything else, we'll just continue to adjust with it and see where that takes us. We feel very good about our own AI and underwriting capability as a result of that production data that we have. Wanted to get the opportunity. That's Eyal.
Hey.
Hi.
Thank you for the fireside chat. Very interesting. I wanted to ask you what makes a consumer credit product more attractive than the other one. For example, why auto loan and not HELOC? More like in a general sense, why are certain products more attractive to you? Is that the ability to package it in an ABS?
Yep.
Is that underwriting predictability? Anything.
It's a good question. All the products are great at the end of the day. I think it goes back to our capabilities. If you think about our underwriting capabilities, is a little bit focused on these types of consumer products where range, let's say, in terms of duration between, call it, broadly speaking, six months to 36 months in terms of duration, or products that have four, five, six years terms. If you think about the different products like mortgages, for example, 15, 20 years, seven years type of duration, our model is not sort of trained to do that type of underwriting. Our model is also not trained well to do the four-month buy now, pay later either.
When you actually think about capabilities that we built over time, broadly speaking, again, six to, call it, three years type of duration, whether it's secure or non-secured, auto secured, personal or non-secured, that's where our niche is. I would take it a step further. It's also less about the asset class. It's more so, or the type of product. It's also the type of consumer. Very difficult for us to underwrite more competitively the 850 FICO score. It's just not where we play. At the same time, much more difficult to do the 500. If you actually look at our clientele, average FICO score in our personal loans is 680. Average consumer income $120,000. We have sort of focused our niche in this underserved consumer base that is still being excluded by the banking system. That's where we sort of developed our capabilities.
We can obviously expand, but to your question, there is so much still room to grow in this sort of clientele, in these asset classes. That's what makes it interesting to us. Look, from a risk perspective, managing in mortgages, the mortgage industry is significantly bigger, obviously, but it's just not where we play. Historically, we looked at some of these products, but it's just not our niche. Fergus?
Hey, it's maybe a little follow-up to the last one. In terms of the competitive dynamics, how are you seeing that? Are competitors mostly rational, and is that different by subsector in terms of what you're seeing?
To answer the question first, and this is one of the exciting things about Pagaya, is we don't have any direct competitors. If you think about it, nobody really offers a full end-to-end white label solution that we do from the full integration of our technology all the way through the funding. There are competitors, or call it players out there that may provide this as a service to supplement or validate underwriting capabilities for some of our partners, but it doesn't really exist. If you think about the broader space, and think about even from some of our partners, what I would tell you is, I think it's different business models. A lot of the consumer lenders in these asset classes are still and have been pushing for a lot of growth over the last 6 to 18 to 24 months.
Part of that is because their business model is quite unique. They see a strong and resilient consumer, and they put in marketing dollars to work. In order for that to have like actually positive ROI, they need to continue sort of pushing for that growth. Our business model is different. When we sat in December and said we're going to cut 10%, 15% of our production, we are able to make the decision because first we can continue to drive growth without expanding the credit, but still more importantly, deliver $100 million to $150 million of GAAP net income profitability. If you look at any consumer lender out there, it'll be difficult to find someone who can cut 10%, 15% of their production and still be on that type of profitability. Again, depends on size and all of that.
The point I'm trying to make is, there is no real competitor out there. The sort of the competitive trends, the dynamics are a little bit driven by the business models. Ours is quite unique. Again, I can tell you for a fact that nobody really wants to see a consumer crisis, for sure. That even for us and for them, let's just be clear. We have now the benefit of having crossed, again, going to the earlier point, the break-even point. We can position ourselves cautiously in an environment like this. Worst case scenario, we're wrong and we're just going to leave some money on the table. I don't know if I exactly answered your question, but the dynamics are different because they're driven by the inherent business model features rather than anything else. Well, good. Looks like we're just about on time.
Thank you, Evangelos. Of course. Thank you very much. Appreciate it. Really appreciate it, welcome again to Mizuho's tech conference. Great. Thank you so much. Thank you, everyone.