Pagaya Technologies Ltd.

Good day and welcome to Pagaya's third quarter 2023 earnings call. Today's call is being recorded. At this time, I would like to turn the call over to Jen C. John, Head of Investor Relations. Please go ahead.

Thank you and welcome to Pagaya's third quarter 2023 earnings conference call. Joining me today to talk about our business and results are Gal Kruvener, Chief Executive Officer of Pagaya, and Michael Kurlander, our Chief Financial Officer. You can find the materials that accompany our prepared remarks and a replay of today's webcast on the investor relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve certain risks and uncertainties. These statements include, but are not limited to, our competitive advantages and strategy, macroeconomic conditions and outlook, future products and services, and future business and financial performance. Our actual results may differ from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and filings and in our Form 20F filed on April 20, 2023, with the U.S. Securities and Exchange Commission, as well as our subsequent filings made with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. Additionally, non-GAAP financial measures, including adjusted EBITDA, adjusted net income, and fee revenue less production costs, or FRLPC, will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in our earnings release and other materials, which are posted on our investor relations website. We encourage you to review the shareholder letter, which was furnished with SEC on Form 6K today, for detailed commentary on our business and performance. in conjunction with accompanying earnings supplement and a press release. With that, let me turn the call over to Gal.

Thank you, Jensic. I would like to start off by saying that we are proud to be an Israeli-founded company, and our hearts are with all those affected by the terrorist attacks that have occurred in Israel. We have taken several measures, first, to ensure the continued safety and well-being of our team, and secondly, to ensure business continuity. we are operating without any disruption to our business. And I continue to be inspired by the resilience of our people. And more than that, I'm confident they will continue to deliver for our employees, partners, and investors. Now, let's move on into the progress we achieved this quarter. The past few months were again changing for Pagaya. First, the momentum in our business is driving continued strong financial performance. In the third quarter, we once again exceeded the high end of our guidance across all of our KPIs, delivered record network volume, total revenue, and adjusted EBITDA. We surpassed $2 billion in network volume for the third time this quarter. Our recently integrated partnership with NI Financial and Klarna are driving meaningful incremental volume. Our product is now integrated with allied network of dealerships in 41 out of 50 states. And our POS application volume doubled sequentially from second quarter 23 and 6x compared to the first quarter of 23. Total revenue grew 4% year over year to $212 million. Fee revenue less production cost grew 29% to 3.4% of network volume as we continue to drive attractive unit economics. We remain focused on profitable growth. Adjusted EBITDA grew to a record $28 million, hitting a major milestone of over $100 million on an annual run rate basis. As a result of this strong momentum, we are raising our full-year for 2023 outlook across all metrics. Mike will speak more on this in a few minutes. Our performance this quarter reflects the strength of our value proposition in the consumer finance ecosystem. By using our products, lenders get growth in origination and revenues without the associated balance sheet risk. Investors, on the other hand, get access to billions of dollars of continuous flow of assets generated by our AI credit decision technology. The demand for our product has enabled us to outperform peers and continue to deliver profitable growth. Our business is also benefiting from two structural macro tailwinds. First, banks are tightening their lending standards, pulling back on new originations as they face tight liquidity conditions and increasing regulation. Additionally, private credit is increasingly stepping in the excess capital to deploy into additional banking assets. Given Pagaya's position in the ecosystem, we can offer an attractive solution to both lending institutions and asset managers. If these trends continue, all else being equal, we expect they will be supportive to our growth in the near term. Moving on to talk about our business achievements in the quarter. we achieved a step change in our network with the addition of several transformational partnerships. We have added three new lenders to our network, in line with our ambition to add two to four lending partners each year. I am pleased to announce that we have integrated our personal loan product with a top five U.S. consumer bank. This represents our largest lending partnership to date by asset size and an incredible achievement by our team. From initial discussion to integration, we collaborated closely with a partner, working with multiple bank committees, testing and validating our models, and ensuring rigid compliance with all required regulatory and legal frameworks applicable to a large consumer bank. I'm fully confident we have a bank-ready product that now can be effective and successfully rolled out to other large enterprise customers. In OTO, we integrated our product into the loan origination system of two new OTO lenders. First, Westlake Financial, the country's leading subprime OTO lender with a network of over 50,000 franchise and independent dealerships. The second, our first OEM, OTO Captive Finance Company, ranked number four in the U.S. by new vehicle sales. Our auto product is now integrated with over 10 landowners, giving us broad geographic coverage across thousands of dealerships. These new partnerships will increase our access to independent dealerships, as well as give us a foothold in both used and new vehicle sales. Overall, we expect our integration with LA Financial Westlake and this new captive will significantly expand our auto volume over the next few years, a critical growth driver as we march towards our $25 billion of network volume ambition. Finally, we announced the integration of our rental product with three major commercial partnerships, Boulevard Residential, My Community Homes, a KKR-backed company, and Rhythm Capital Corp., These leading real estate investment firms are now utilizing Darwin's premier end-to-end offering for the management of the homes in their respective portfolios. These partnerships have significantly increased the size of Darwin platform, which will now have approximately 13,000 homes under management, making Darwin a top 10 SFR operator in the U.S. While our rental B2B2C platform is still in its early stages, these partnerships reflect the future potential of our rental product, and we are excited about the massive market opportunity ahead of us with the unique tech capabilities that Darwin has. Looking ahead, these wins reinforce our confidence in our medium-term ambition to reach $25 billion in network volume, $1 billion in FRLPC, and $500 million in adjusted EBITDA annually. To achieve these targets, we are executing three key strategic initiatives. The first, expanding our integration to more lenders to increase application volume. The second, structurally improving our conversion rate of applications with tech and AI model enhancement. And the third, delivering high quality and efficient financial products at scale to investors. Our growth strategy is outlined in significantly more detail in our shareholder letter, but I will spend a few minutes discussing it at a high level here. Starting with extension of our product, we are focused on deepening our product integration with existing lending partners while also integrating new lenders. To put it into context, The lenders we added in 2022 are expected to deliver approximately $1 billion in network volume this year. The recent addition of three large strategic partnerships, Westlake, the top five bank, and the auto captive, have the potential to deliver significant incremental volume over the next year to Pagaya. This is the third year in a row we have added at least two partners to our network. strengthening our ability to convert large, meaningful partners in our pipeline in the future. Looking at our pipeline and consistent with our track record, we are confident we can integrate two to four new partners annually. We are in discussion with 80% of the top 25 banks in the country by asset size. We have more than 10 opportunities across banks and auto captives that we consider deep funnel. with the latest stage opportunities expected to deliver billions in network volume annually once fully ramped. We can also drive growth by increasing our conversion rate of applications into loans by continuously enhancing our models and technology as we see more data over time. We recently launched new improvements in both our personal loan and auto loan models that we believe will drive improved predictive power which will drive higher asset returns and a higher conversion rate. Driving our conversion rate higher from its current sub-1% level can mean a significant boost to network volume. Every 10 basis points increase in our conversion rate on our existing application flow translates to an additional of $800 million in network volume. On the other side of our network, Our growing data advantage and proprietary technology enable us to offer institutional investors high-quality financial products. With a focus on innovative structuring and issuing at increased scale, we can lower the cost of capital, making our product even more attractive to investors. This is reflected by the consistent growth of our funding network. We issued $1.8 billion across four ABS deals in the third quarter, amounting to $5 billion issued year to date. We were once again the top personal loan ABS issuer in the U.S. this quarter. As we grew in auto issuance, we are tapping into the rated auto market, which also helps reduce the cost of capital. And our investor base is growing and diversifying. We attracted six new investors since August to the platform for a total of 93 unique investment firms, including a top-tier whole life insurance company. The strength of our product offering to lenders and investors and the wealth of data flowing through our network set us up for future revenue diversification flow by monetizing our product in new, innovative ways. We can offer ancillary services, such as the recent launch of our servicing optimization product, which improves collection for our lending partners. A product that has the potential to add millions of dollars of incremental profit every year. In summary, we have achieved a step function change in Pagaya's growth trajectory. We delivered a record financial performance this quarter, integrated our product with multiple transformational partnerships, added new investors in our funding network, and launched new monetization opportunities enabled by our connectivity. We are better positioned than ever before to partner with financial institutions across the consumer finance ecosystem to deliver more opportunities for U.S. consumers. With that, let me pass it to Mike to discuss our financial results in more detail.

Thanks, Gal. In the third quarter, we delivered record performance across all of our key financial metrics. This was driven by further expansion of our network, higher net fees on our lender product, and managing our call space prudently to deliver sustainable, profitable growth. We delivered our highest-ever quarterly network volume at $2.1 billion, representing growth of 10% year-over-year. We saw volume increases year-over-year across our auto, point-of-sale, and rental products during the quarter as we diversify outside of our most mature personal loan product. Total application volume amounted to $180 billion this quarter from our lending partners, while our conversion rate stayed below 1%. As we grow network volume, we remain focused on driving increased monetization of our network. Our fee revenue, which makes up 95% of our total revenue, grew by 9% year over year to $201 million, resulting in a record $212 million in total revenue, which grew by 4% compared to the prior year. Our take rate, defined as fee revenue as a percentage of network volume, remained stable compared to third quarter 2022 at 9.5%. Production costs were 6.1% of network volume this quarter, representing a decline of 61 basis points year over year. As a result, fee revenues less production costs, or FRLPC, was $73 million in Q3, an increase of 29% or $16 million compared to the third quarter of 2022. As a percentage of volume, FRLPC improved by 50 basis points year over year to 3.4% of network volume, our highest level in five quarters and within our target range of 3% to 4%. As a reminder, our FRLPC is composed of earning fees on both sides of our network, on the lending side and the investor side. We continue to drive increased monetization of our lender product as our value proposition to our lending partners grows in a constrained credit environment. Fees on our lender product made up approximately 60% of our FRLPC margin in the third quarter, up from 25% in the third quarter of 2022 and 58% sequentially. Net AI integration fees grew substantially to $46 million this quarter, compared to $16 million in the prior year. Fees on the investor side of the network made up approximately 40% of our FRLPC margin in the third quarter and remained low due to continued high cost of funding. Capital markets execution fees were $10 million this quarter compared to $21 million in the prior year, while contract and other fees were $17 million this quarter. Moving on to operating expenses. Total core OpEx excluding stock-based compensation, depreciation, and one-time expenses has now declined for four straight quarters to $52 million, representing a record low of 25% of our total revenue. Our reduction in expenses this year has been broad across both compensation and non-compensation line items, and we have now surpassed the $50 million in run rate savings we had announced in our Q1 call. This is in the context of delivering record volumes and revenues this quarter, demonstrating the inherent operating leverage in our business, which we anticipate can continue even with the large new partners recently announced. Improving unit economics combined with continued cost efficiency drove us to a record adjusted EBITDA delivery this quarter of $28 million. This was also our first quarter delivering positive operating income since becoming a public company, as well as our second consecutive quarter of positive adjusted net income. Our gap net loss shrank to $22 million, an improvement of $53 million year over year. As a result of the strong momentum in our business, we are raising our fiscal year outlook across all of our key metrics. Our outlook for the remainder of the year represents a few assumptions. First, while we expect to see continued strong application flow from our lending partners, We also expect to remain prudent in our conversion rate in the near term. This reflects a disciplined focus on consistently delivering for both lenders and investors. Second, we continue to target FRLPC as a percentage of network volume of 3 to 4%. While we expect net fees earned on our partner products to remain strong, we are not factoring in any material improvements in financial markets which can impact the level of fees we earn in the investor side of the network. Finally, we will continue to drive cost discipline and operating leverage, while remaining nimble to strategically invest in the growth of our business as we navigate an evolving external environment. For the full year 2023, we expect network volume to range between $8 and $8.2 billion, total revenue and other income to range between $800 million and $825 million, and adjusted EBITDA to range between $65 and $75 million.

With that, let me turn it back to the operator for Q&A.

Certainly.

We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You here don't acknowledge a new request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We'll pause for a moment as callers join the queue. The first question comes from my colleague from Benchmark. Please, go ahead.

Thanks, guys. Congratulations on a great quarter in a tough period of environment. Can you give us a little viewpoint on where you see the consumer today and, you know, with the conversion rate below one, what you're looking at from, you know, the debt capacity of the consumer and how that all plays into your AI? And then just a second piece, can you give us a breakout on, What percentage of revenue came from personal loans and the other sectors? Thanks.

Sure, Michael. Thank you very much for joining us today. So let me start with the first one and then Mike will take the second one. From a consumer perspective, and as you can imagine, Pagaya has a very unique point of view because we are connecting to over 28 different lenders, seeing day-to-day flow, applications, actually what the Lenders are pricing. So we have a very robust way to look on the consumer and to be able to assess it. In a nutshell, we'll say that from the stability and the strength of the U.S. consumer, as for now, the situation is very good. You can see that mainly in the DQs or the 30 days past due loans that we have on the vintages that actually was originated in 2023. You can see that in the sample event. And what you will experience and you will see there was a decline of these numbers from the heights of 21 and up until 23, which if I need to find a statement to say for 23, it's stability. We are experiencing stability. So the inflation wave that did impact part of the consumers seems to be behind us. And we're seeing the consumer both on the auto loan product and on the personal loan product actually stabilizing very well over time. So that's what we think from that. For the second question, Mike, you want to take it?

Yeah. Hey, Michael. Thanks for the question. You had asked about what percentage of the revenues are coming from, you know, the different product set and particularly in personal loans. First of all, it continues to be our largest and most mature product. We're roughly 65% of our volumes and associated revenues are from the personal loan space. I will say, though, in terms of volume, we actually saw larger growth this quarter in our other product verticals, which shows a little bit more of the diversification that we've been striving for. So auto is the second biggest in terms of contribution. We have significant momentum there with some of the recent announcements. And then our SFR business, our rental product, is actually something we're excited about growing in the future. Not a material impact as of yet, but something that with the recent announcements we're excited about. As that translates to FRLPC or our gross margin, We're most mature right now still with the personal loan, and we feel like there's opportunities as we get more mature in those other product lines to grow our FRLPC with those products and new partners.

Great. Thank you, and congratulations on a great quarter.

The next question comes from Joseph Buffy from Kenna Card Genuity, please go ahead.

Hey guys, good morning. Terrific progress here in the business and congrats on those new logo wins. Maybe we just focus on those new logo wins for a minute. I mean, they're very large. which is great it's just trying to get a feel for you know margin potential on on on these new logos and potentially other large ones if they have you know the same potential unit economic profile as perhaps some of your smaller ones and I have a quick follow-up hi Joey's got here thank you so much for the comments

So maybe before we go into the question of the margin, let me take a step back and give a little bit of color on how does the integration like that look like, and how we think about it in Pagaya, and then Mike will follow up with a discussion on the margin. So as you mentioned, the two new additions are very big clients. We are talking about top five banks in the U.S., and something that we are very excited about, which is an OEM that, as you can imagine, is opening for us new types of clients that we can bring into the network because our product is now suited for them too. The way we think about the cycle of a new partner is the first you have, obviously, the sales cycle. And when the sales cycle ends, actually the real work begins. And then we have three different stages. what we call post-integration that we are focusing on. We divide it by years, mainly. The first year or 12 months, if you will, is really the integration, making sure everything is working properly, that we see all the flow that we need. We are learning the flow. We are starting to ramp up, to tweak our models and to be able to be as precise as possible for the partner needs and to the flow that is coming, the new flow that is coming through these channels. The second area is what we call the ramp appeal. Then we have enough information for the models to the AI to start to kick in for the credit enhancement in the models to be able to be effective and to be able to actually produce meaningful volumes for the client, for the partner. in the different areas we are operating with. And you can imagine that a lot of that is in a constant dialogue with the partner and learning more of their needs and what needs to be developed and adopted from a product perspective to be able to provide the full suite of solutions. And then you have the third yield, and that's where I would say that the margin is coming into play. The third yield, we'll call it the expansion yield, and then there is already a very good understanding of how the assets perform and what is the scale and the size of what we can deliver and what is the materiality of the impact on the P&L of the partner side. And that's where usually we see an uptick in margin and really the ability to drive that home. In some cases, all of these things could happen quicker because of the acceleration of the teams and the work. So it doesn't have to be three years, but it's definitely three stages that you can think about each stage in between six to 12 months.

And then Joe, from a unit economics and a margin perspective, these new partners, we do anticipate following the same structure we have with our other partners. Having said that, typically what you see is, as you get into that integration year, that year one, as Gal referred to it, typically new partners start at the lower end or low as it relates to the 3% to 4% target that we've set for overall FRLPC. And then what happens, and we've demonstrated this now over the last couple years, is as we get into that ramp year and the expansion year, we start to bring them more in line because that's when the volume is really starting to scale. That's when the product is really starting to demonstrate significant value to those partners. And some of those newer partners, excuse me, some of those existing partners now that we've demonstrated that with are now even above that 4% top of the range. And so that's how to think about it is it ends up being a big portfolio effect where the newer partners tend to be on the lower end of that scale in the first year and then grow into year two and three. And then the existing portfolio is on the upper end of that range to average altogether to the 3% to 4% target that we shoot for.

Great. That's great, Collar. And then just one quick follow-up on the collections product, if we could go into that in a little more detail. Is that used in conjunction with the loans underwritten with your ALGO, or does it have a larger opportunity outside of that? Thanks a lot.

Sure. Let me take that, Joe. So, let's look at it holistically. The real power of Pagaya, what we're trying to build here is a network that is connected to as many lenders as possible in the U.S. Now, when you get to the achievement of being able to work with the 28-plus lenders, and let's hope that in the next few years we're going to reach to 30, 40, 50 different lenders, part of which are the biggest partners in the U.S. So when we think about that, we are really asking the question of what are the other products that we, as Pagaya, could bring to the table and do remember that we have the data of over 25 different partners and understanding of how the collection is working in the different parts. And on top of that, we have a very strong tech capabilities. So we are starting to invest and diverge some of the resources to be able to build products that are in a very strong need with our clients. We are in a constant discussion with our partners and asking them what are the things that they would like to see above and beyond our main type of product which exists in the three different markets, which is the expansion of the actual approvals. It happens to be that the collection servicing management to some extent are actually things that are in very interest for our partners. So what we did in this quarter, we landed one of them where we are deploying rather unique technology to be able to optimize these types of collections and to help the partners to collect more with our technology. And we do expect that in the future, call it 2024 and onwards, we are going to be able to provide these type of tools. So just to sum it up, think about it as technology tools that we are providing to them. It's not that we are doing the servicing of the collections. It's actually capabilities that we are developing in-house based on the data that we have in doing that. And maybe a last point, and you will see it in the showholder letter, We have just hired a new chief product officer who is going to bring a lot of that effort into a real roadmap of the product and understanding what are the things we can deliver as we are thinking about the future growth, targeting to have more diversified source of revenues, which part of that will be fee on technology that we are selling.

Great, thanks for that great answer. Thanks for the detail, Gal. Thank you.

The next question comes from David Sharp from GMP Securities. Please, go ahead.

Thank you, and good morning. Thanks for taking my questions. A lot has been asked already, but I did want to ask a couple on auto, which You know, obviously, as an asset class, it dwarfs personal loans. So particularly interested, you know, first on the new OEM captive. You know, I know when Open Lending signed up a couple OEM partners, you know, it started within some discrete FICO bands. It wasn't in all geographies. Is your initial... mandate with your new OEM partner for all franchise locations, for effectively all turndowns of new and used, or should we think of it as, you know, a sort of a staged rollout in terms of either, you know, credit bands, geography, and so forth?

Yeah, so hi, David.

It's Scott here. I will take it. So the quick answer to your question is yes. This is the mandate for the full flow that they are looking to find homes for. The one thing I will give you out or give a little bit more information about is that these rollouts take time. It doesn't happen overnight. And exactly the factors that you have just described are the ones that are controlling the pace and the scale. So part of them is the geographical implementation. And part of them is they ramp up into different populations. Just to give you as a reference, today with our biggest bank, Ally Bank, we are now operating in 41 states out of 50. That wasn't the case as we just signed the partner three months after. This is a very robust rollout of a very massive product that takes six months to a year. So I think you should expect the same here, maybe in a little bit faster pace as we are thinking about it from that perspective. From the other side of like different cycles, et cetera, I think less, this is really more what's coming through the way. But again, here, the more that takes time to learn, to react, to develop, and to improve themselves. And if you will go to the shareholder letter, I think you will find a lot of details about how we think about these different stages and the ability to grow that over time. I hope that answers your question, David.

Yes, fine. And, you know, just to follow up for Michael, you know, it seems like you're sort of at a sweet spot almost with this kind of 60-40 mix between kind of lender and investor economics, you know, contributing to your gross profit. As we think about the next year or so, not pinning you down on any guidance, but is that mix a big determinant of kind of where you fall between that 3% to 4% target? Or should we be more focused on just how much volume is being represented by all these new large lenders. And as you said, you know, there tends to be sort of a life cycle where we're probably closer to the lower end as you're ramping somebody up. I'm just wondering if, as we think about 24, you've added, you know, top five bank and POS, you've expanded with Westlake, adding an OEM captive, you know, Ally still ramping. You know, should we be, should our focus be more on kind of that low end of the three to four since you've got, you know,

such a big concentration of newer partners hitting their stride. Perfect. All right. There's a lot in there, David, so let me try and get to all of it.

And thanks for joining. I know it's early on the West Coast, so thanks for dialing in at the early hour. All right. So I guess in terms of the overall contribution, We're really, I would say, excited about the tailwinds that have been created over the last 12 months as we now are hitting, as you said, that 60 to 40 mix. Our goal is to maintain that 33 to 4% over time, and we'll be able to pivot depending on the overall market environment. Right now, 60% or more of the net fees and margin is coming from the partner side, and we feel like that's very sticky. because that's based on just volume and is expected to continue to grow. We think there's some real upside potential in the future if and when markets stabilize from a capital markets perspective. It's obviously been a very challenging capital markets environment over the last year, and so that gives us some upside potential for next year. And again, our goal is to optimize that, and we'll continue to pivot between the two to try and get to that and maintain that 3% to 4%. As it relates to thinking about the new partners, I touched on this a little bit earlier ago, but basically the way we think about that is on a portfolio effect, and the newer partners are typically at the lower end of that range, and then the more mature partners and products tend to be more at the higher end of that range. So you had asked about some of the newer partners to put in context. You know, the partners that we announced last year, which are really just now into that year two of scaling, those are, you know, roughly around 10% of our volume and still overall a small percentage. And that's what we expect to grow over time. And that'll be at the same time that, you know, they're grounding into that year two and year three from a margin perspective. So that's the way to think about it. Some of the newer partners that we just announced over the last couple of weeks that we're really excited about, Really, those won't really start to kick in until 2024, and I'd expect to be, you know, a year from now talking about the similar type of percentage basis for those partners as we're talking about from the cohort from 2023 today, or from 2022, excuse me, today.

And David, I will add that there is, in the shareholder letter, there is a very good description and charts Regarding the breakout of how we think about the growth of 2024 and onwards, it's part of what we call cohort of new partners. And the number that Mike was referring to of the 10% is actually going to be a billion dollars by the end of the year. So it's meaningful numbers, but we do it in the right way and trying to have the momentum over the years as we ramp up these things to the best possible pace.

Got it. Thanks so much. Thank you.

The next question comes from David Ciaverini from Wedbush Securities. Please go ahead.

Hi, thanks for taking the question. So I wanted to ask a question first on credit. Looking on slide 15, the delinquency rates plus the cumulative gross loss. And if I'm looking at this right, it looks like the rate is around 1%, which just seems kind of low. For these types of loans, I would think that the loss rate would be kind of high single digit, or perhaps even into the mid-teens type of

loss rate can you can you talk about that one percent that's shown on the slide versus a mid-teens type of loss rate yes definitely thank you for the question um just i want to orient you a little bit so what you see in front of you is really the number of accounts that were late above 30 days after three months of origination And the real question is, why do we show that? Why this is the most important thing? That's what we perceive to be the first early indicator that can give you a good flavor and sense of how the full losses are going to look like for that cohort. So as you can imagine, we, and as part of the platform and the underwriting AI, is tracking that very closely in order to feed into any changes that might need to happen. So if you put that in context, in the highs of 21, when you see that it's more like a two and two and a half, which we are 40, 50% lower, that will not mean exactly one-to-one that the difference is going to be 50% lower, but it's a very good close number that the end of the CML is going to be in that difference as such. There are other factors to take into consideration, which is the community's prepayment rate, which is dropping in an environment like that, and therefore all else being equal, it's actually creating a much better performance because the good borrowers are actually staying for longer and paying for longer, so the duration is a little bit longer. So all of that, you say, that this is the early indicator that we are tracking and sharing with the market to show the stability that we are seeing in the credit, and it's very known to support that in Q4 we enter into the zone of where we want to be from a performance perspective, and in 2023 we see a very strong stable outcome. Thank you.

Got it. So this is more of an early indicator type of chart. Can you discuss, you know, the performance over a longer term, you know, beyond the first three months of following issuance versus, say, base case expectations going in.

How has recent kind of performance been in that regard? Sure. Thanks, David. It's Mike.

Look, overall, what I would tell you is our performance has been trending in line, if not slightly improved, over the overall market. So we don't disclose specific numbers. There's a lot of research that you can look into, you know, in the rating agency reports, et cetera. But overall, I would tell you we've been operating in line and slightly improved over the market. And it follows the same trends that you see on the early indicator graphs that Gal just spoke to.

And maybe just one connection between the early indicator to the full CNRs, et cetera. This is something that we are monitoring, and we are seeing that actually the early indicators are in line with what we would expect as a progression of the losses over time. So the high-level comment is that whatever you see here in the early indicator is very tied to the performance of the loans, even in months six, nine, 12, 18. And up until the end of the CNL, it's just like the most consistent one we can show here.

Great. Thanks for that. And then shifting over to the funding side of the equation, looking on slide 11, on the right-hand side you're showing, you know, the growing ABS investor base now up to 93 in October. curious about the concentration of the ABS deals. I know early on there were some very large participants in those deals. I was curious as to how perhaps, you know, the top five investors, what percentage they make up of recent deals that you've issued.

Yes, definitely. So so from a concentration perspective, the diversification perspective, I think we are actually getting a much more diversified book. Think about it as Pagaya as a program, and maybe we're speaking about the main shelf, which is paid, was really kind of like institute with two, three major kind of like supporters. These things tend to be much more diversified, and the 93 unique investors is a good indication for the fact that that is becoming the most well-known ABS shelf out there for personal loan and therefore you should expect the reduction very much of the of the consecration of the top five from from from from just that places you can imagine that asset managers and other parts have become a bigger part of the bigger part of the production um in soviet west fund etc has actually become lower. So with the bigger reputation and the longer type of, I would say, performance track record, you do see many more clients and customers that are joining into that. And I think in page number 14, you can see the actual AVS investor base pie, and you can compare that a few quarters ago, and you will see that there's a notification mix that you are going to look for.

And I would just add, David, to your question. The top five accounts, at least for 2023, roughly are averaging around 50% of the deal size. And so, as Gal said, it's a mix of we're happy with the large strategic investors that continue to put capital to work with us on every deal, but then complementing that with some of the new investors that are under the network and balancing that out is really what we've been attempting to do over the last few quarters.

I guess that number a few years ago were more like 60 or 70%. So that's definitely the right direction.

And along those lines, I was curious about the pipeline of adding alternative asset managers in the same pie chart I see you see. Private equity is on here, hedge fund is on here, but I recall during the quarter I saw a media report about how Pagaya was partnering with an alternative asset manager for potentially acquiring the Green Sky company. which of course ended up going to another bidder, even though you guys apparently media reports had you guys bidding higher. But I thought that was intriguing to see you guys potentially partnering with an alternative asset manager. So I guess the question is, what does the pipeline look like for partnering with these private credit funds as you look forward to further diversify your funding base?

Yeah, definitely. So actually, it's funny that you ask that because this is what we consider to be one of the strongest tailwind out there. If you think about it from an allocation perspective and capital raising perspective, if I need to describe 2023, it's the shift from private equity to private credit. So in a world of very low interest rate, you see a very big chunk of the allocation of institutions going into private equity because the cost of capital is so low. And in the world of higher interest rate, you see that the private equity are very struggling to capital raise. But on the other side, private credit is actually ramping up and ramping up very fast, even faster than I expected. And that goes interestingly well. with another tailwind that the world, another macro phenomenon that the world is experiencing that is becoming a tailwind for us is that the banks have liquidity constraints and in the same time have regulatory scrutiny that is going up. And the method here is that the private credit is definitely looking to exchange more and more of the liquidity that is being provided to the market through, back in the day, the banks. Now, if you think about it in the context of our funding capacity and capabilities. But GAIA has always been on the strong foot with the asset managers. That's really more where the places our capital market capabilities are coming from. And you can think about other so-called technology platforms that are more thinking about it from a bank balance sheet or depository perspective. And if you will pay attention very closely, you will see that the demand for these platforms from that perspective have dropped massively, while the ones who have better capital market or asset management alternative, as you say, background and capabilities, have managed to be very relevant in these market environments. I want to give you a little bit of what I think about 2024 from that perspective, as we see more credit funds, private credit funds that are ramping up. I think that the actual spreads in what is being called more the junior pieces are actually going to compress a lot because the amount of bids that you're going to have out there is going to be meaningfully materially above the capital that was raised. So I would expect 2024 to actually be a year where a lot of that capital dry powder is needed to be deployed And PAGA is really in the core heart of the ability to assess the assets and to be able to replace the need of the bank balance sheet by the private credit balance sheet to provide these liquidity and funding for the consumer Americans, which is really what our mission is all about.

Great. Thanks very much. Thank you.

The next question comes from Hal Goach from B. Reilly Securities. Please go ahead.

Hey, thanks for the call today. I wanted to ask you about the conversion rate or approval rate. You mentioned a 10 basis points change can lead to $800 million change in network volume. It appears that approval rates or conversion rates are very, very big swing factors. Can you just give us some more details on tactics and technology to improve that? Because we see the application volume on slide 11 was basically flat year over year. And unless that application flow goes up a lot, it will have to come from a higher approval rate. So what are your thoughts on that? Thanks.

Sure. Thanks for the question, Hal. And you're right. When we think about really what generates network volume, it's pretty simple. It's your application flow and then it's your conversion rate. And we're now sitting on give or take $200 billion a quarter in application flow. So that's very robust in terms of being able to produce growth in network volume for us. What is being managed very prudently right now is that conversion ratio. We're under 1% right now. You know, one way to look at that is we've been able to deliver record network volume even in spite of a very prudent and conservative ratio down below that 1% level. The way to think about the technology is the more and more data we get, and as we're watching the application flow from 25 different lending partners now and upwards, that allows the models to continue to improve, to get smarter, to be refined. and all things being equal, that can lead to an increase in conversion rate. Having said that, we're going to continue to be very prudent, thinking about our investors, delivering returns for our investors. And so it really will depend on the quality of the application flow and ultimately how the liquidity environment evolves. And we're ready to maneuver, you know, up or down, depending on that dynamic. The good news there is that when you're starting with such a large application flow, as you pointed out, every small basis point, incremental change can lead to significant volume increases without growing the overall network.

But on the partner side, Mike, you know, when you only approve, you know, one penny out of every dollar of application flow set, you know, how does that, for that partner who's trying to, you know, convert more of their funnel, meet customer needs, you know, for customers coming to a bank or auto OEM or dealer or FinTech, you know, when you're only approving 1%, you know, how do you communicate the efficacy of your whole program to those partners when it's 1% though?

Yeah, it's a good question, Hal, and one way to think about it is, remember, we're all incremental volume to those lending partners. So it's all on top of what they're able to produce. So this is all, you know, excess and more customers for them lowers their acquisition costs. So even in small numbers that can actually be very meaningful. And actually when you look at it from their perspective of what's their volume, so not, not our application flow, which is across 25 different lending partners, which will vary partner by partner, For our largest partners and our most mature partners, we get up to 20% to 30% of their total volume. So that's the way to think about it, or that's the way they think about it from their perspective is, what is my, not Pagaya's, but what is my, as a lending partner, volume going to increase by with Pagaya? And we've been able to demonstrate that that number gets into the teams of percentages and can be up to 20% to 30% with our largest partners, and that's really what they get excited about.

That's a great answer. Thanks a lot. Thank you. Thanks, Hal.

The next question comes from John Hatch from Jefferies. Please, go ahead.

Morning, guys. Thanks for taking my question. Most of my questions have been asked and answered, but maybe a couple new ones. Maybe talk about the competitive environment. What I'm predominantly talking about is Depending on the product, are you still able to kind of press yield out to the consumers, or is the competitive markets make that a challenging task?

Hi, John. Thank you very much for joining us. It's Gavriel. So, yeah, in this environment, the ability to roll out the costs to the consumer is rather high, I would say. The lack of liquidity in the market and the fact that banks are pulling quite massively is actually allowing for both phenomena. One of them is very strong positive selection. So we see better ball wells and better credit quality. And the other piece is because there is less competition, the ability to price them in the place which is appropriate for the risk-reward of these days is actually an easier task than it used to be. So overall, I would say that this is definitely an environment that on that side is very favorable for the ability to push all of that into an economic outcome.

Okay, that's very helpful. And then similarly, I guess at the system level, we're seeing credit spreads, call it in the AVS issuance markets, somewhat stable now relative to, say, maybe seven months ago, a year ago. Maybe can you comment on kind of the investor side of the network and where they are in terms of, call it, fluctuations in credit spreads or or demand flows?

Yes, definitely. So I think investors are becoming much more constructive and looking to deploy capital. It is a market where the big guys and the more mature programs are getting most of the attention. I always say that a first-time issuer is not something that you see that often these days. It's something that, for example, in 21 you saw more than anything. So the long story short of it is that we see much more participation, and we expect that participation to be even more and more coming up in the next few months, I would say. So we see a tailwind from private credit, as I mentioned before, and other parts about deploying. And we think that this is actually going to stay. From a spread perspective, very stable in the last year. I think next year, and I spoke about it before because of the private credit over fundraising, it's going actually to start compressing. We should wait and see. But definitely the money and the deployment is out there. It just goes to the right shelves and the right companies that have enough robustness to be able to drive that properly.

Okay. That's also very good color. Thanks. And last one, I know, Gali, you talked about your partners in the SNEP, but maybe can you just give us a high-level characteristic of the pipeline for partnerships on both sides of the network as you see it coming together over the next several months?

Yeah, so let me start with who is the lenders, and then Mike will take the investor side. From the lender's side, there is, again, another very strong tailwind to our products or the products that the fact that our banks are looking to give the solution to their customers but in the same time have limitations on their balance sheets both from liquidity and regulation perspective. So that drives a lot of interest in our products. we are focusing on big banks and big auto providers, which part of them are auto captives, which is a market that we opened just recently. If you're looking a little bit for a headline, I would say we're now speaking to 80% of the top 25 banks in different stages. And in the letter, we outline how we think about the 2022 cohort that we onboarded, the 2023 that we just announced, the three partnerships, and how we think about the 2024 deep funnel type of a thing, we have something like 10 real open opportunities in the deep funnel that we expect to convert in the next year or so, and to be able to help us guide to the $25 billion of production that we are looking to have in the next few years. So we have a lot of confidence in that respect. From the length of the product perspective, as you know, we have three products, which is the personal loan, auto loan, and the point of sale. The personal loan is actually something that we got on board with a bank this quarter, and it's marking the ability to bring that product to a AAA bank grade as expected from us, which is second to the auto loan product, which we did last year. And then on the auto loan, we are now with Westlake and other more than 50,000 dealerships and wanting to expand that even more. From a POS perspective, point of sale, this is the most interesting for me at least because this is really a place where we see banks are investing a lot of tech, a lot of effort, a lot of productization in the ability to bring this product to life. there is a little bit of understanding that a credit card, which is a major driver for revenue for them, is something that could potentially be at risk from the point of sale, buy now, pay later, and so on and so forth. So we see no less than a rush to these places, and when Pagaya has the product that he has, we are becoming one of the major solutions for that and looking to bring more customers to that. So something we're focusing on and believing that a lot of growth will come from that. So I think that's from the lender perspective. And Mike, maybe you want to give a little bit more.

Yeah, just briefly on that, John. Look, on the investor side, Dahl spoke a lot about the tailwinds in terms of just overall capital and this democratization of credit coming up of the bank balance sheets into capital markets. The one thing I would add is as we grow, We have the capabilities to operate across products on the investor side as well. And one thing we're looking forward to as we grow in our overall volume is expanding. The ABS markets are very deep and liquid, but we also have the potential to grow into other types of funding arrangements with investors who want more of a direct forward flow product or other types of investment products. And we've been able to expand on that side of the network over time as well and we'll do so going forward based on investor demand.

Okay. I really appreciate that, guys.

Thanks very much. Thank you.

Thanks, guys, for joining us today.

This concludes the question-and-answer session. I would like to turn the conference back over to Kyle Krugner for closing remarks.

Thank you, everyone, for joining us today. As you can see, our business has achieved a step change in our last quarter, and I'm excited about the future potential of our network. We will remain focused on delivering value for lenders and investors while providing more financial opportunity to more people. Thank you, everyone, for joining and the partnership, and hope to see you soon in our next learning course.

Have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.