Pagaya's 4Q23 Letter to Shareholders

This morning we presented our record 4Q23 results. Here is our letter to shareholders.

I want to start by sharing how proud I am of what our team has accomplished on our journey thus far and the exciting future we have ahead of us.

2023 was a strong year for Pagaya. We prudently grew our network while managing through a volatile capital markets environment to deliver consistent performance for lenders and investors. Our resilient business model and differentiated product offering enabled us to meaningfully expand our network of lending partners and investors and improve unit economics to reach a new phase of sustainable, profitable growth.

We announced transformational partnerships with industry giants including U.S. Bank, Westlake, Exeter, and a top 4 auto captive. We added 31 new institutional investors in 2023 and another 11 in January 2024, including top tier asset management firms and insurance companies.

As a result of our strong execution in 2023, we far exceeded the targets we set at the start of the year, ending the year with network volumes of $8.3 billion, total revenue of $812 million, and adjusted EBITDA of $82 million.  Based on fourth quarter results, our annual adjusted EBITDA run-rate is more than $135 million. We reported our second consecutive quarter of positive GAAP operating income and positive operating cash flow, and our third consecutive quarter of positive adjusted net income.

Achieving scale and profitability of this magnitude at this speed reflects our commitment to our mission to deliver more financial opportunity to more people, more often. As I reflect on what we’ve done and where we’re going, 2023 was a Year of Resilience  and we believe 2024 will be a Year of Momentum.

With the progress we have achieved over the past 12 months - adding enterprise-level partnerships, achieving better economics with our top lending partners, and partnering with the world’s leading asset managers and banks on our capital strategy – we believe our business has significant momentum moving into 2024 and beyond. Our aspiration is to become the trusted lending technology partner for the consumer finance ecosystem, with an expansive product suite that meets the complex needs of the country’s leading financial institutions.

In support of this aspiration, we will continue to drive disciplined execution of our product and partner-centric strategy, led by our President Sanjiv Das. Our strategy will focus on further developing our product roadmap, deepening existing lender relationships with expansion into new products, verticals or consumer segments, adding new top-tier lenders and investors, and accelerating the profit potential of our network. We are exploring ways to create value for our partners and their customers with innovative new products (such as pre-qualification programs) and data-driven model improvements. Capitalizing on our recent success adding large banks and auto captives to the network, we expect to advance our deep funnel pipeline opportunities, which today includes industry-leading lenders across the personal loan, auto and point-of-sale markets. Finally, we will continue to enhance margins with our newer lending partners and verticals and explore ways to fuel growth with more capital-efficient funding structures.

As we expand our network and product suite, we are reaching a point of sustainable profitability, setting us on a path to deliver expected adjusted EBITDA in the range of $150 million to $190 million in 2024, and positive net cash flow by early 2025. These are important stepping-stones as we pave the path to achieve positive GAAP net income.

2023: Developing and Advancing an Enterprise-Grade Lending Product

Since our inception, we have been focused on developing and expanding our flagship lending product - our second-stage reevaluation program. This product, which enables lenders to improve customer acquisition and monetization, is seamlessly integrated via API to lenders’ loan origination systems and is backed by an AI-powered network and a unique pre-funded capital model. By integrating our product, connected lenders can increase originations by up to ~25%.  Our product uniquely decouples asset risk from customer relationship economics. Lenders can increase customer lifetime value, lower marginal customer acquisition costs and offload the associated balance sheet exposure through Pagaya’s funding network. Our top  lenders have seen an increase in activation rates (rate at  which customers accept a loan offer generated by Pagaya’s  technology) of 5x or more over the past 3 years.

Building off our early success in the Personal Loan market, we made significant investments in technology and infrastructure  over the last few years to expand our product to new markets, such as auto and point-of-sale. In 2023, we achieved a step change in our network on two fronts – expanding from fintech lenders to large-scale enterprises and driving improved unit economics as we strengthened our value proposition. On both counts, we’ve significantly outperformed. We integrated our product with U.S. Bank and 3 leading auto lenders and  signed game-changing partnerships in our SFR business.

We also continued to deepen existing relationships with an expanded product offering. Our ability to enhance network monetization by creating value for our lending partners is becoming evident: FRLPC growth of 42% in the fourth quarter outpaced network volume growth of 33% in the same period.

We are now integrated with 29 different lenders, connecting us to approximately 20,000 merchants, 2,000 branches, 25,000 unique auto dealerships, and 20 million U.S. consumers. This cross-lender, cross-asset data set gives us a tremendous underwriting advantage over traditional systems, enabling us to generate more than $20 billion in new credit for consumers since inception.

Our most recently integrated partnerships are progressing well. We are beginning to see application flow from U.S. Bank’s existing customer base across its nationwide network, with an expected ramp-up in the second half of 2024. Our product is delivering a 2x activation rate for large banks in our personal loan vertical compared to the average for all personal loan lenders, reflecting the monetization potential of a large bank’s brand and stickiness of its customer base.3 On the auto side, we completed the first phase of expansion with Westlake in December, penetrating 4K dealerships in 6 states, with phases 2 and 3 expected to be complete by the beginning of 2025, at which point our product will be present in all 50,000 dealerships. Our partnerships with a top 5 auto captive and Exeter remain in early days of integration, and we expect to be live across all dealerships by the end of 2024. In SFR, we are on track to manage 13,000 homes under Darwin by the first half of 2024, our tech-enabled property management platform, creating a top 10 single-family rental operator within less than 12 months from acquisition.

Strengthening our funding capabilities

Our unique pre-funded business model, where we raise capital before assets are originated, gives us agility to grow profitably through cycles. At the same time, it gives us flexibility to lean in and utilize our balance sheet efficiently to meet network demand and position us for sustainable, profitable growth.

In 2023, we delivered $6.6 billion of ABS transactions across our PAID (personal loan), RPM (auto) and PATH (real estate) shelves. We solidified our leadership as the #1 personal loan ABS issuer in the country, with our personal loan issuance approximately 2 times that of the next largest issuer.

We grew our investor bench by 31 new firms in 2023, including an additional 11 firms added in January 2024, for a total of 109 unique investment firms currently participating in our funding network. New investors added in 2023 contributed over 25% of all funding raised in the year. Our investor base continues to diversify, with our top 5 ABS investors contributing approximately 50% of all ABS funding raised in 2023, compared to 70% of all ABS funding raised in 2022. The world’s leading investment firms continue to place their capital with Pagaya, evidenced by our recently announced $290 million credit facility with leading financial institutions such as BlackRock, UBS O’Connor and JPMorgan Chase. Last quarter we talked about the opportunity for growing allocation to U.S. consumer credit from private credit markets – we’re beginning to see this take life, translating into strong demand for our financial products.

As capital markets evolve, we will continue to remain nimble with our funding strategy. We are confident that the strides we took in 2023 to strengthen our funding network will bear fruit as we execute throughout the coming year.

2024: Accelerating Momentum as We Advance our Product Ecosystem

As we move into the next stage of our evolution, we will be  laser-focused on how we can best meet the needs of our partners with a growing product offering, while enhancing monetization and optimizing capital allocation. Our strategy, therefore, will be driven by separate and unique objectives for  the two different parts of our business: our fee-generating business and our capital efficiency business.

The fee-generating side of our business, with fees earned from both our lending and investor partnerships, today makes up over 95% of our total revenue. Our fee-generating potential comes from the value we create for lenders via the integration of our product and the creation of assets for institutional investors. We expect this side of the business to be the key contributor to the future earnings potential of our business, with the ability to generate stable, predictable fee revenues through market cycles.

The capital efficiency side of our business, which is focused on effectively balancing volume growth, profitability, and capital allocation, will own the asset portfolio and our capital & risk management strategy. This side of our business will remain focused on managing the broader business through credit cycles by providing the fuel that the fee-generating business  needs to execute.

Our 2024 Growth Plan

With a network that is connected to some of the country’s largest lenders and 100+ investment firms– we expect 2024 to be a Year of Momentum, with a focus on the following strategic initiatives:

• Expand our product to new, enterprise-level lenders.

  The investments we made over the past few years to create an enterprise-grade lending product began to bear fruit in 2022, with the additions of two large banks, a global buy-now-pay-later provider and three of the country’s leading auto lenders. Capitalizing on this momentum, we expect to advance our deep funnel pipeline to meet our target of 2-4 large partner additions in 2024. We currently have approximately 15 opportunities that are in the later stages of our pipeline (expected onboarding timeframe of 12-24 months), with a focus on large national banks and auto captives. The addition of each enterprise lender means connecting to millions of new customers, the opportunity to expand across multiple products, and tens of millions of dollars to our bottom line once fully ramped.

• Deepen existing partnerships & enhance network monetization. 

  Higher customer conversion from our flagship product has unlocked opportunities to help our lending partners further monetize their customer relationships, enhance customer lifetime value and remain their customers’ lender of choice. This creates new monetization opportunities for Pagaya. As we continue to demonstrate our value-add, we will work closely with newer partners to elevate existing economic arrangements to the levels we have with our more mature partners. Approximately ~40% of our lending partnerships are generating FRLPC from both our lending and investor products, while the remaining ~60% are only generating FRLPC from our investor product, representing significant upside for future margin improvement.

• Build out the roadmap to expand our product ecosystem. 

  Our recent integrations with large U.S. lenders are deepening our understanding of how these institutions can leverage technology to elevate their customer relationships. These learnings are bringing to light new ways Pagaya can help solve their problems and become their trusted partner on their digitization journey. We are actively developing new products, such as pre-screen online programs, that allow our partners to reward their existing pre-approved customers with additional credit opportunities. This product will allow our partners to monetize existing relationships with little incremental marketing cost. We are also working with several of our auto lenders to co-develop a new car loan underwriting product, expanding beyond our flagship used car loan underwriting product. These discussions reflect the expansive value proposition we can offer, enabling Pagaya to improve partner economics and diversify our revenue streams. We expect the bulk of these initiatives to become accretive to growth beginning in 2025.

• Drive capital efficiency and profitable growth. 

  At the same time, we will execute a financial strategy that will focus on network monetization, disciplined cost management and an efficient funding and capital allocation plan to optimize net cash flows as we fund new network volume.

As the two parts of our business work in tandem, we believe our business will be in a position to generate positive total net cash flow by early 2025, assuming no meaningful changes in the macroeconomic environment. Reaching net cash flow positive represents an important milestone in our company’s evolution, giving us sustainable fuel to reinvest in our growth and create new value for our lenders, investors, and shareholders.

In summary, Pagaya is in the strongest position it has ever been to revolutionize the consumer finance ecosystem at scale. When we founded Pagaya, we built a product to solve a major gap in the financial services industry, by helping more U.S. consumers get access to credit. The connectivity we built with our second stage reevaluation product enabled us to achieve scale rapidly across the U.S. and create a steady growth engine for the company, already putting us on a path to sustainable profitability. Even in significant market volatility, we expanded our network with the addition of transformational, large-scale lending partnerships and delivered record financial performance.

We will capitalize on this momentum as we execute in 2024 and enter the next phase of our journey to become a more Product and Partner-centric company.