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Sydnee Gatewood
Sydnee Gatewood
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Daniel Loeb Comments on Upstart Holdings

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February 11, 2021 | About:
Upstart Holdings, Inc. ("Upstart")

During the Fourth Quarter, the Upstart (NASDAQ:UPST) IPO transaction was priced by Goldman Sachs at $20 per share and raised about $180 million for the company. Since the IPO, the stock has traded to $80, with a market cap of over $5.8 billion. We initially invested in the Series C round in 2015 at a pre-money valuation of $145 million and added to our investment on the IPO with the purchase of an additional 1.2 million shares, bringing our total ownership to approximately 13.4 million shares, or roughly an 18% stake.

Founded by Google technologists, Upstart launched in 2012 and originated its first personal loan in 2014. Upstart leverages artificial intelligence operating on non-traditional underwriting variables to more accurately price risk for unsecured consumer loans and, more recently, for auto loans. Through September 2020, 70% of loans through Upstart were automated and approved instantly without human involvement. In the same period, fraud loss was negligible. Compared to traditional bank underwriting models, Upstart's AI platform has yielded a 75% reduction in loss rates. Upstart's ongoing model improvements deepen its competitive moat and continually strengthen its business case. This is reflected in increased credit rate requests and increased loan conversion leading to ~87% CAGR in the total number of loans transacted.1

Upstart's model benefits from flywheel dynamics that should drive compounding growth through a cycle of continuous model feedback and improvement. As the platform grows, more data points (payments, defaults, etc.) are fed into the model, thus improving its accuracy and supporting additional share gain. An understanding of the opportunities presented by AI and machine learning has been an important theme we have expressed in numerous investments at the firm.

Upstart's core focus is unsecured personal loans, a market that totaled $118 billion in originations between April 2019 and March 2020. This market is rapidly growing by every measure, including new loans, number of unique borrowers, and total debt outstanding. There is a significant opportunity to expand Upstart's footprint within its core consumer lending market, as well as new markets such as auto, a market worth $625 billion in originations. In September 2020, the first auto loan was processed on the Upstart platform. Beyond personal and auto, the same AI engine could also be used for mortgage and credit card originations. Upstart is also working to deliver a competitive digital lending platform to small banks, which brings with it an expanded customer base (the typical age of an Upstart borrower is 28 years old, which is a valuable demographic), lower loss rates, and new product offerings.

Upstart exemplifies Third Point's approach to lifecycle investing. Following a lead from our Structured Credit group, which had looked at funding Upstart's loan pools, we led Upstart's Series C in June of 2015 and Rob Schwartz joined their Board. Third Point delivered value on capital markets strategy, staffing, and organizational development, and eventually became a loan buyer on the platform. As Upstart grew, we maintained our ownership through further investments and placed a 10% order of the IPO in December 2020.

From Daniel Loeb (Trades, Portfolio)'s Third Point fourth-quarter 2020 letter.

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