Pagaya Technologies Ltd. Q3 FY2023 Earnings Call

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 Jency 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 Krubiner, 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 strategies, 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 20-F 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 that are posted on our Investor Relations website. We encourage you to review the shareholder letter, which was furnished with the SEC on Form 6-K today for detailed commentary on our business and performance in conjunction with accompanying earnings supplement and press release. With that, let me turn the call over to Gal.

Thank you, Jency. I would like to start off by saying that we are proud to be an Israeli founded company. 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. 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. More than that, I'm confident they will continue to deliver for our employees, partners, and investors. Now, let's move on to the progress we achieved this quarter. The past few months were a game changer for Pagaya. First, the momentum in our business is driving continuous strong financial performance. In the third quarter, we once again exceeded the high end of our guidance across all of our KPIs, delivering record network volume, total revenue, and adjusted EBITDA. We surpassed $2 billion in network volume for the first time this quarter. Our recently integrated partnership with Ally Financial and Klarna are driving meaningful incremental volume. Our product is now integrated with the Ally network of dealerships in 41 out of 50 states. Our PoS Application volume doubled sequentially from the second quarter of '23 and increased six times compared to the first quarter of '23. Total revenue grew 4% year-over-year to $212 million. Fee revenue less production costs grew 29% to 3.4% of network volume as we continue to drive attractive unit economies. We are very 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 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 achieve growth in origination and revenues without the associated balance sheet risk. Investors, on the other hand, gain access to billions of dollars of continuous flow of assets generated by our AI credit-efficient 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 to deploy capital that traditional banking assets cannot supply. 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 support 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'm pleased to announce that we have integrated our personal loan products with a top five U.S. consumer bank. This represents our largest lending partnership to date, by size, and an incredible achievement by our team. From initial discussions to integration, we collaborated closely with our partner, working with multiple bank committees, testing and validating our model, and ensuring strict compliance with all required regulatory and legal frameworks applicable to a large consumer bank. I am fully confident we have a bank-ready product that can be effectively and successfully rolled out to other large enterprise customers. In auto lending, we integrated our product into the loan origination system of two new auto lenders: first, Westlake Financial, the country's leading subprime auto lender with a network of over 50,000 franchised and independent dealerships. The second, our first OEM auto captive finance company, ranked number four in the U.S. by new vehicle sales. Our auto product is now integrated with over 10 lenders, giving us broad geographic coverage across thousands of dealerships. These new partnerships will increase our access to independent dealerships and provide a foothold in both used and new vehicle sales. Overall, we expect our integration with Ally Financial, Westlake, and these new chapters will significantly expand our total volume over the next few years, a critical growth driver as we march toward our $25 billion 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 Rithm 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 the Darwin platform, which now manages approximately 13,000 homes, making Darwin a top 10 FFL operator in the U.S. While our rental B2B, B2C platform is still in its early stages, these partnerships reflect the future potential of our rental product. We are excited about the massive market opportunity ahead of us with the unique capabilities that Darwin has. Looking ahead, these wins reinforce our confidence in our medium-term ambitions 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 is extending our integration with more lenders to increase application volume. The second is structurally improving our conversion rate of applications with tech and AI model enhancements. The third is 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 view. Starting with the expansion of our product, we are focused on deepening our product integration with existing and new 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 banks, 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 discussions with 80% of the top 25 banks in the country by size. We have more than 10 opportunities across banks and auto captives that we consider significant funding. 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 with more data over time. We recently launched new improvements in both our personal loan and auto loan models, which we believe will drive improved predictive power, leading to higher asset returns and higher conversion rates. Increasing our conversion rate higher from its current sub-1% level would provide a significant boost to network volume. Every 10 basis point increase in our conversion rate on our existing application flow translates to an additional $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 products 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 will once again be 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. Our investor base is growing and diversifying. We attracted 60 investors since August to the platform, totaling 93 unique investment firms, including a top-tier whole-life insurance company. The strength of our product offering to lenders and investors, along with the wealth of data flowing through our network, sets us up for future revenue diversification flows by monetizing our products in new innovative ways. We can offer ancillary services, such as the recent launch of our servicing optimization products, which improves collections 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 to 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 cost base 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 rates 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 the third quarter of 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 costs of funding. Capital markets execution fees were $10 million this quarter, compared to $21 million in the prior year, while contracts 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've 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 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 GAAP 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 product to remain strong, we are not factoring in any material improvement in financial markets, which can impact the level of fees we earn on 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 billion and $8.2 billion. Total revenue and other income to range between $800 million and $825 million, and adjusted EBITDA to range between $65 million and $75 million.

The first question comes from Michael Legg from Benchmark. Please go ahead.

Thanks, guys. Congratulations on a great quarter in the tough period of the environment. Can you give us a little viewpoint on where you see the consumer today? And the conversion rate below one, what you're looking at from 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 in the other sectors? Thanks.

Sure, Michael. Thank you very much for joining us today. 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 at the consumer to be able to assess it. In a nutshell, we say that from stability and the strength of the U.S. consumer, as of now, the situation is very good. You can see that mainly in the big use, or the 30 days plus delinquencies that we have on the vintages that were originated in 2023, you can see that in the supplement. What you will experience and see there was a decline of these numbers from the highs of '21 up until '23, which it's tough to say, but for '23 it's stability; we are experiencing stability. The inflation wave and its impact on consumers seems to be behind us. We are seeing the consumer both on the auto loan products and on the personal loan products actually stabilizing very well over time. So that's what we think from that. Mike, you want to take the second one?

Yes. Hey Michael, thanks for the question. You had asked about what percentage of the revenues are coming from different products, particularly personal loans. Personal loans continue to be our largest and most mature product, where roughly 65% of our volumes and associated revenues are from the personal loan space. I will say though, in terms of volume, we saw larger growth this quarter in our other product verticals, which shows a 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 in our SFR business. Our rental products are something we're excited about growing in the future. They do not have a material impact as of yet, but we are optimistic that with the recent announcements, this will change. As that translates to FRLPC, our gross margin is most mature right now still with the personal loan, and we feel like there are opportunities as we mature in these 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 Vafi from Canaccord Genuity. Please go ahead.

Good morning. Terrific progress here in the business. And congrats on those new logo wins. Maybe we could focus on those new logo wins for a minute. I mean they're very large, which is great. Just trying to get a feel for margin potential on these new logos and potentially other large wins, if they have the same potential unit economic profile as perhaps some of your smaller ones? Then I have a quick follow-up.

Hi Joe, it's Gal here. Thank you so much for the comments. So before we go into the question of the margin, let me take a step back and give a little bit of color on how the integration looks like and how we think about it at Pagaya, and then Mike will follow up with the discussion on margin. So as you mentioned, the two new additions are very big clients. We are talking about a top five bank in the U.S. and something that we are very excited about, which is an OEM. As you can imagine, this opens up new types of clients that we can bring into the network because our product now suits them too. When we think about the cycle of a new partner, the first thing you have is the sales cycle. After that, when the sales cycle ends, the real work begins. We have three different stages that we focus on post-integration. The first stage is really the integration, making sure everything is working properly. We are learning the flow, starting to ramp up to tweak our models and be as precise as possible for the partner needs and the new flow coming through these channels. The second stage is what we call the ramp-up yield. After that, we have enough information for the AI models to improve the credit scoring and create meaningful volumes for the clients and partners in the different areas we are operating in. You can imagine that a lot of this happens in a constant dialogue with the partner, learning more about their needs and what needs to be developed from a product perspective. Then comes the third stage, which we call the expansion yield. By this point, we have a good understanding of how the assets perform and what is the scale of what we can deliver. This is usually where we see an uptick in margin and really drive that home. In some cases, all of these things could happen quicker because of team acceleration and work. So it doesn't have to take three stages, but there are definitely stages that usually take between six to twelve months.

And then Joe, from a unit economics and margin perspective, these new partners do follow the same structure we have with our other partners. Typically, what you see is that during the integration year, new partners start at the lower end of the 3% to 4% target range that we’ve set for overall FRLPC. Over time, as we get into that ramp year and expansion year, we start to bring them more in line because that's when volume scales up and the product demonstrates significant value to those partners. Many newer partners we're just starting to use some of those existing partners now have reached or even exceeded that 4%, which is the upper limit of our target range. As you look forward, consider it a portfolio effect, where newer partners begin at the lower end of the target range initially and grow into year two and three. Existing partners tend to be at the higher end of that range, averaging around 3-4%.

Great. That's great color. 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 AI? 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 building here, is a network that is connected to as many lenders as possible in the U.S. Now, when we achieve the capability of working with over 28 lenders, and hopefully in the next few years, we will reach 30, 40, 50 different lenders, we are really asking the question of what other products we, as Pagaya could bring to the table. We have data from over 25 different power mills and an understanding of how collections work in different parts of the market. On top of that, we have strong tech capabilities. So, we're starting to invest resources to build products that strongly meet our clients' needs. We are in constant discussions with our partners, asking them what products they would like to see beyond our main offerings that exist in three different markets, including the expansion of actual approvals. Interestingly, collection and servicing management are actually areas of strong interest for our partners. We have landed one such partnership where we are deploying unique technology to optimize collections and help partners collect more effectively through our tech. We expect that in the future, beginning in 2024 and onward, we will be able to provide these types of tools. So just to sum it up, think about it as technology tools that we are providing to them. We are not executing the servicing of the collections ourselves, but rather developing capabilities in-house based on our existing data. We will have a roadmap for the product led by our new Chief Product Officer to understand what we can deliver, as we target future growth and a more diversified source of revenues through technology fees.

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

The next question comes from David Scharf from JMP Securities. Please go ahead.

Thank you, and good morning. Thanks for taking my questions. A lot had been asked already. But I did want to ask a couple on auto, which, obviously is an asset class related to personal loans. I'm particularly interested in the new OEM captive. I know when open lending signed up a couple OEM partners, 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 unused, or should we think of it as a staged rollout in terms of credit bands, geography, and so forth?

Yes. So, hi, David, it's Gal here. I will take it. The quick answer to your question is, yes. This is the mandate for the flow that they are looking to find homes for. One thing to note is that these rollouts take time; it doesn't happen overnight. The factors you described are controlling the pace and scale; it involves geographical implementation and the ramp-up into different populations. For reference, with our biggest bank, Ally Bank, we are now operating in 41 states out of 50. That wasn’t the case when we just signed the partner three months after. This is a robust rollout of a massive product that takes six months to a year. I think you should expect the same here; maybe slightly quicker. Regarding different cycles, less is the approach as we're moving forward, but the more we start to learn and react, the more our capabilities will grow. Additionally, the shareholder letter contains extensive details about how we think of these different stages and our ability to grow over time.

Yes, that's fine. Just to follow up with Michael. It seems like there's a sweet spot of almost a 60/40 mix between lender and investor economics contributing to your gross profit. As we think about the next year, not pinning you down in any guidance, but should we be focused on that mix as a determinant of where you fall between the 3% to 4% target? Or should we focus more on how much volume is represented by these large new lenders? As you said, there tends to be a life cycle where we are probably closer to the lower end as you're ramping somebody up? I'm just wondering, as we think about ’24, with the top five bank and PoS, with expanded partnerships adding an OEM captive, while Ally is still ramping, should our focus be more on that low end of the 3% to 4%?

Perfect. There’s a lot in there, David. So let me address your points. Thanks for joining early this morning. In terms of overall contribution, we are really excited about the tailwind created over the last 12 months, and as you mentioned, maintaining that 60% to 40% mix. Our goal is to keep that 3% to 4% range over time, and we will pivot depending on the overall market environment. Currently, over 60% of the net fees and margin are coming from the partner side; we believe that's very sticky, as it's volume-based and expected to continue to grow. There is real upside potential if and when capital markets stabilize, which have been challenging over the past year. We think we can navigate our way through that while optimizing our portfolio. Regarding newer partners: they typically start at the lower end of the range, but more mature partners average toward the higher end. For context, partners announced last year are just now reaching year two and currently represent roughly 10% of our volume. This is expected to grow over time. The new partners announced recently will take a year or so to talk about similar percentage growth as we're seeing with the 2022 cohort today.

And David, I will add that the shareholder letter provides solid descriptions and charts detailing the breakout of how we think about growth in 2024 and beyond, particularly concerning the 2022 cohort of new partners mentioned. The number Michael referred to, targeting roughly $1 billion by the end of the year, is significant, and we aim to ensure real momentum as we ramp things to the optimal position.

Got it. Thanks so much.

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

Hi, thanks for taking the question. So I wanted to have some questions first on credit. Looking at slide 15, the delinquency rates plus the cumulative gross loss? If I’m reading this correctly, the rate is around 1%, which seems kind of low. For these types of loans, one would expect a higher loss rate, perhaps into the mid-teens. Can you talk about that 1% shown on the slide versus a mid-teens loss rate?

Yes, definitely. Thank you for the question. Just to orient you a bit; what you see is the number of accounts that were late 30 days after three months of origination. The real question is why we show that; it's perceived as the first early indicator that gives a good flavor for how the losses will look for that cohort. As you can imagine, it's a part of the platform and the underwriting AI tracking this closely in order to make adjustments as needed. In the highs of 2021, we were seeing delinquencies around 2% to 2.5%. We are approximately 40% to 50% lower than that trend presently, which invites caution. While it won’t directly translate to a 50% lower final loss ratio, it does show substantial improvement. There are also other factors, such as varying prepayment rates, which impact performance. In this environment, prepayment rates are dropping, creating a better performance profile overall. So all else being equal, we see the metrics reflecting strong stability, and we anticipate positive outcomes in 2023.

Got it. So this is more of an early indication type of chart. Can you discuss performance over the longer term, beyond the first three months following issuance versus base case expectations?

Sure, thanks, David. Overall, I would tell you our performance has been trending in line, if not slightly improved, compared to the overall market. We don’t disclose specific numbers, but if you look at the research available through rating agency reports, you’ll see that we track similarly to market trends as Gal just explained.

To connect the early indicators to their four CML, we monitor both and validate that early indicators are aligned with expected performance. High-level observations indicate that the early indicators are effectively reflecting future outcomes even at six, nine, twelve months, and beyond the final loss measurements.

Great. Thanks for that. Shifting over to the funding side of the equation. On slide 11, the right side shows 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 large participants. What percentage do the top five investors make up of the recent deals you've issued?

Definitely. From a cost installation perspective and diversification perspective, we are actually seeing a much more balanced picture. Pagaya as a program previously had a handful of major supporters, but we now see a much more diversified tale with 93 unique investors indicating that we have become recognized in the ABS market for personal loans. Therefore, you should expect a reduction in the concentration of the top five investors. The trend goes in the direction of increased participation from asset managers and other players. If you view our funding base chart on page 14, you can compare it to previous quarters and see that diversification has developed substantially.

To add to your question, the top five accounts for 2023 roughly average around 50% of the deal size. While we value these strategic investors who consistently put capital to work with us across every deal, it's also important to complement that with new investors in our network, balancing things out, which has been our objective over the past few quarters.

The percentage a few years ago was more around 60% to 70%. So we're definitely headed in the right direction.

Along those lines, I was curious about the pipeline of adding alternative asset managers. I see private equity and hedge funds are in the pie chart; during the quarter, I saw media reports about Pagaya partnering with an alternative asset manager to potentially acquire GreenSky, which ultimately went to another bidder, even though, apparently, you guys bid higher. I thought it was interesting to see you guys potentially partnering with an alternative asset manager. What does the pipeline look like for partnering with these private credit funds as you look to diversify your funding base?

Definitely. This is one of the strongest tailwinds we have. If you think about it from an allocation and capital raising perspective, 2023 has shown a shift from private equity to private credit. In a world of very low interest rates, institutions heavily favored private equity, owing to the low cost of capital. In the high-interest-rate environment, private equity faces challenges; conversely, private credit is thriving. It is ramping up faster than I expected and dovetails well with the liquidity constraints and regulatory scrutiny banks are facing. The message here is that private credit is looking to provide the necessary liquidity to the market that banks can no longer support. Pagaya has a solid foundation with asset managers, making it more useful in a landscape filled with new needs. This materializes in the ongoing shifts of institutional investor preferences and asset allocation changes that favor our offerings. I’d expect 2024 to witness substantial capital deployment with increasing demand from credit funds, allowing Pagaya to leverage its extensive asset assessment capabilities.

Great. Thanks very much.

The next question comes from Hal Goetsch from B. Riley Securities? Please go ahead.

Hey, thanks for the call today. I wanted to ask you about the conversion rate or approval rate. You mentioned like a 10 basis point change can lead to a $100 million change in network volume. The approval rates or conversion rates are very big swing factors. Could you provide more details on the tactics and technology to improve that? We see the application volume on slide 11 was basically flat year-over-year. Unless that application flow increases, we’ll either have to see higher approval rates. What are your thoughts on that?

Thank you for the question, Hal. You're right; when considering network volume growth, it really comes down to application flow and conversion rates. Currently, we handle about $200 billion in application flow per quarter; it's very robust. What’s crucial is we are managing our conversion ratio prudently; we're just under 1%. We’ve managed to deliver record network volume even with this conservative ratio, which indicates there’s significant potential for improvement. The more data we gather from our 25 different lending partners, the more our models can refine, leading to an increase in conversion rates over time. With that said, we will continue to prioritize prudent lending and delivering returns for our investors, balancing the conversion rate versus the quality of application flow.

But on the partner side, Mike, when you only approve $0.01 out of every dollar of application flows, how do you communicate the efficacy of your whole program to those partners when it's 1%?

Good question, Hal. One way to look at it is we are incremental volumes to those lending partners, serving as an added layer atop their existing capabilities. By affecting small numbers, we can significantly boost their customer access and fall into lower acquisition costs overall. Even at low conversion rates, for our larger, more mature partners, we’ve been able to contribute up to 20-30% of their total volume. This is how they perceive the value: it’s not just about Pagaya’s application flow but how much total lending they can generate with our support.

That's a great answer. Thanks a lot.

The next question comes from John Hecht 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. Can you talk about the competitive environment? How are you able to press yield out to consumers depending on the product in this current environment? Is it still feasible or are you finding it challenging?

Hi John. Thank you for joining. Yes, in this environment, the ability to pass along the costs to the consumer is relatively high. Due to a lack of liquidity in the market and the fact that banks are pulling back significantly, it’s yielding two phenomena: really strong positive selection (i.e., better borrowers and improved credit quality) and, because of reduced competition, an easier task to appropriately price these risks. Overall, I would say that this environment is favorable to enhance economic outcomes significantly.

That's very helpful. And then similarly, I guess at the system level, we are seeing credit spreads in the ABS issuance markets somewhat stable now compared to earlier in the year. Can you comment on the investor side of the network and where they are in terms of demand flows and fluctuations?

Yes, definitely. I think this is becoming much more constructive, and there's significant demand for deploying capital. In today's market, seasoned issuers get most of the focus, with a higher demand observed. Rather than experiencing a flood of new issuers as in 2021, we are now seeing more targeted participation. Overall, capital appears to be flowing towards established firms and solid projects. As for spreads, there’s been stability over the past year, but I believe as private credit fundraising picks up, we might see some compression in spreads. We'll have to wait and see, but it is clear that capital is available for companies that can drive results.

That's also very good color. Thanks. And I know, Gal, you mentioned partners in stages, could you give a high-level view of the pipeline for partnerships on both sides of the network in the coming months?

Sure. From the lender side, we are experiencing strong tailwinds in interest for our products; banks are eager to offer consumers solutions but also have limitations on their balance sheets due to liquidity and regulatory constraints. This drives considerable interest in our products. We are focusing on big banks and large auto providers, including our new auto captives, recently open markets. As for a headline, we're now engaging with 80% of the top 25 banks at varying stages. In the letter, we outline our approaches to this year's cohort while onboarding new partnerships into 2023. We currently have around 10 open opportunities in our pipeline that we anticipate converting in the near future as we move toward the $25 billion production goal. We’re confident in that respect.

From the investor perspective, Gal discussed the tailwinds on the lending side. On the investor side, we have the capability to operate across products; our ABS market is very deep and liquid. As our overall volume grows, we also have the potential to expand into other funding arrangements with investors aiming for more direct flow products or different investment vehicles. We've been growing that aspect of our network and will continue to do so based on investor demand.

Okay, I really appreciate that, guys. Thanks very much.

Thank you all for joining us today.

This concludes the question and answer session. I would like to turn the conference back over to Gal Krubiner 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 for the partnership. Hope to see you soon in our next earnings call. Have a great day.

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