Pagaya Technologies Ltd - Class A

I rolled much of the proceeds from Planet into Pagaya, my largest position today. Pagaya is in the business of connecting borrowers and investors; it does not interact with borrowers directly, however, instead partnering with banks and fintechs to underwrite their application flow. Given the rapid growth of its funding base, I feel comfortable with how Pagaya is delivering on that investor promise. Over the next decade, I believe the infrastructure for consumer lending will be transformed by AI, and Pagaya stands to win from AI becoming the default. Its unique, multi-asset class data is a distinct advantage, and while AI models may become more commoditized over time, differentiation in data will only continue to grow in importance.

Pagaya has made a business of lending to borrowers that other platforms have rejected, but this raises concerns. Their average debt-to-income for borrowers has moved from 22% to 29% in three years, indicating a deterioration in credit quality. While they tout improved AI models and internal credit risk scores, the explosive growth in their annual volume from $1.6 billion in 2020 to over $10 billion in 2025 may not be sustainable. Additionally, the surge in fraud, particularly through 'credit washing,' poses significant risks to their loan performance. The market's appetite for such loans could wane if consumer troubles arise.

Pagaya emerged as a potential fit for our fixed income portfolios for several reasons. Over time, the company has demonstrated, with scale, that its business model is both profitable and sustainable. Its track record shows an ability to carefully and competently underwrite consumer credit, as reflected in strong performance metrics. This competitive advantage positions the company to scale efficiently and effectively. Pagaya securitizes many of its loans, meaning it is frequently active in the ABS market, which provides opportunities for investment and supports good liquidity in these securities.

In Q3, we added to our position in Pagaya Technologies, recognizing its strong growth prospects within the technology sector. The company is positioned well in the AI infrastructure space, which we believe is critical for future advancements. Our investment thesis is supported by the overall positive momentum in technology, particularly in areas that leverage AI capabilities, which Pagaya is well-equipped to capitalize on. We see Pagaya as a high-quality company with specific growth drivers that align with our strategy.

The portfolio added a position in Pagaya Technologies during Q3, reflecting a strategy focused on investing in high-quality companies with company-specific growth drivers. The manager emphasizes a diversified approach within the technology sector, which includes holdings in software, semiconductors, AI infrastructure, and services companies, each with strong growth prospects.