Pagaya: Using Other People’s Money to Hide Massive Losses

Please refer to our disclaimer at the bottom of the report.

Summary of findings

• Nasdaq-listed Pagaya Technologies is a fintech company that underwrites various consumer loans sourced through partnerships with fintech lenders and banks. Borrowers for these loans were initially rejected by these partners because they were deemed too risky. Pagaya then packages the largest part of these loans into ABS which are sold to institutional investors via pre-funded special purpose entities.

 

• CTO Avital Pardo was the controlling shareholder of Israeli cheque-discounter Gibui Holdings, a listed company that collapsed one year after it was sold by Pardo and his brother. The trustee report described extremely deficient risk management and irregularities that pre-existed before the sale. President Sanjiv Das has a history of failing to address serious misconduct. Former COO Amol Naik was implicated in Malaysia’s 1MDB scandal while at Goldman Sachs. 

 

• The market derives comfort from the fact that Pagaya offloads risk by selling the lowest ABS tranches to what it believes are third party investors. In reality, Pagaya has used a fund it manages as a general partner to buy these tranches. There are clear signs of heavy losses. Some of the fund’s Israeli investors have tried to redeem their investment money, only to be stonewalled by Pagaya. It’s likely a large share of their investment is gone. The investors are furious with one even urging the Israeli regulator to pursue legal action. The probability of a lawsuit is high.

 

• Data from 29 of Pagaya’s publicly rated ABS transactions show that many of the lowest-quality tranches are either unrated or have been downgraded due to credit deterioration. In some cases, the company stepped in to buy back collateral to prevent further downgrades.

 

• We suspect that Pagaya charged the Opportunity Fund with inflated fees. In 2024, Israeli newspaper TheMarker reported that investors holding about $100m of the AUM raised concerns over unusual movements in the fund, including the sale of loans from the fund’s portfolio into ABS to generate transaction fees for Pagaya.

 

• Pagaya has likely exhausted the Opportunity Fund’s resources and has had to rely on debt financing to finance its risk exposures. This has led to a deterioration of its own balance sheet.

 

• The company claims that credit risk will improve in 2025 despite heavy impairments to its portfolio of notes and securities in 2024. But early 2024 vintages already show delinquency trends equal to or worse than 2023 for which heavy charge-offs were recorded . If these investments were marked to a yield of 14.7%, we estimate another 85% impairment to the portfolio as at 30 September 2024, or approximately $786m. This erases the company’s equity.

 

• With the recent acquisition of peer Theorem in October 2024, we think Pagaya wants to repeat the same playbook as with the Opportunity Fund. We believe increased scrutiny will make it much harder to pull off and that investors of the Theorem fund are likely to fight to redeem their funds, just like the Opportunity Fund’s investors.

 

• Without buyers for the lowest tranches, Pagaya will find its ability to structure ABS transactions extremely difficult. Forward flows will also be much more challenging if bad assets can’t be offloaded to a related party. We expect deal flow will slow, fee revenue will decline and losses will deepen.

 

• We have included questions for Pagaya’s management at the end of this report.
  
  

 

 

Presentation

Established in 2016, Pagaya Technologies is a fintech company with its headquarters located in New York, and its technology centre in Tel Aviv. The company listed on the Nasdaq in June 2022 through an $8.5bn merger with SPAC EJF Acquisition Corp.

Pagaya underwrites various consumer credit products, including personal loans, auto loans, point-of-sale financing, and single-family rental loans.

Unlike other fintechs, Pagaya has no direct interaction with borrowers, who are not aware of the company’s involvement. Rather, its underwriting system is integrated with “lending partners” platforms such as SoFi, Ally Financial, Klarna, and banks e.g. US Bancorp. The borrowers are typically rejected by these platforms due to their poor credit profiles. Pagaya takes a “second-look” at these “rejects”, claiming its AI system can assess credit risk more effectively than its partners. 

Pagaya then offloads the largest share of this risk into asset-backed securities (“ABS”). 

In each ABS transaction, the company packages loans into pre-funded special purpose entities (“financing vehicles”) that issue securities, divides them into tranches, then sells them to institutional investors (“funding partners”). Pagaya retains a small portion of the loan volume (5.5% in 3Q24) as the ABS sponsor.

Loan volumes have grown steadily. Since 2018, Pagaya has raised ~$27bn across 66 ABS transactions (~$9.6bn in 2024), and describes itself as the “number one personal loan ABS issuer” by size in the US.

Pagaya as an asset-light company derives 97% of its revenue from fees generated during the securitization process, rather than interest income. 

The company has posted heavy losses since 2021, with an accumulated deficit of $706m at the end of September 2024, largely driven by impairments.

Yet, management expects the risks that have dragged profitability to improve, asserting that Pagaya is “well on the way to reaching GAAP profitability” during 2025. 

Pagaya’s co-founder and CTO Avital Pardo was the controlling shareholder of an Israeli consumer credit company that collapsed amid deficient risk management and irregularities

Pagaya, in its firm brochure filed with the SEC on 18 June 2024, surprisingly disclosed that there are no “domestic or foreign criminal, civil, administrative, or disciplinary events or proceedings that would be material to a client’s evaluation of the company or its personnel”.

At the same time, Pagaya describes its managers as “visionary founders and experienced”, but a closer examination of their backgrounds undermines these claims, starting with CTO Avital Pardo. 

Pardo and his brother Ariel were the controlling shareholders of Tel-Aviv listed Gibui Holdings. Gibui was a cheque-discounter. It went public in January 2019 through the reverse takeover of a shell company (Ultra-Equity Investments) that was owned by the parents of Pagaya CEO Gal Krubiner and CRO Yahav Yulzari before the transaction.

In June 2021, the Pardos sold their stakes to Israeli businessman Yonatan Cohen. Just one year later, in June 2022, Gibui collapsed. Trading in the stock halted, and an external auditor was appointed to investigate irregularities at the company’s northern branch. 

Israeli newspaper Globes reported that Cohen sued the Pardo brothers for allegedly hiding company problems during the sale process. Gibui was placed into receivership in October 2022. 

In July 2023, trustees overseeing the insolvency proceedings published a report, which underlined the problems that ultimately led to the company’s demise existed even before the sale to Cohen. 

Loan disbursements at Gibui were poorly controlled. Basic due diligence and supporting documents did not exist. The company relied on rudimentary tools like Whatsapp and Excel to manage its operations.

Loan defaults were naturally high. But these were concealed through continuous rollovers. In this scheme, when borrowers failed to repay or their cheques bounced, the company simply returned the cheques to them. The borrowers would then re-deposit the same cheques or issue new ones. These dubious loan extensions allowed the company to falsely claim “close to zero credit at risk” in its financial reports. Again, these problems existed before the sale (see screenshots below).

Gibui’s northern branch accounted for the highest rate of bounced cheques. Israeli media outlet Calcalist reported that the Pardo brothers were responsible for bringing the branch’s manager into the company.

While Avital Pardo was not involved in daily management, his role as a controlling shareholder reflects negligence at the very least.

President Sanjiv Das’ history of overlooking major problems

President Sanjiv Das joined Pagaya in October 2023, bringing with him a resume of leadership roles at major institutions like Citigroup and Morgan Stanley. We found that his career is marked by repeated failures to address serious misconduct.

During Das’ tenure as CEO of CitiMortgage — a Citigroup unit — from 2008 to 2013, Citigroup paid $158m in 2012 to settle claims that its mortgage division knowingly pushed bad loans to the Federal Housing Administration for guarantees. The company had vouched for the quality of the loans. In reality, they were riddled with issues like insufficient income records, incomplete job histories, and missing credit reports. These issues were spotted by an employee from the quality control unit. She raised the alarm, but her bosses threatened her instead of addressing the issues.

From February 2016 to January 2022, Das was CEO at Caliber Home Loans. In April 2019, Caliber was fined $2m for making “unaffordable loan modifications with ballooning monthly payments” that struggling borrowers could not afford. Subsequently, in 2020, the company reached a settlement with the New York Attorney General, providing up to $17m in home loan forgiveness to affected borrowers. 

Ex-COO and senior advisor Amol Naik was involved in Malaysia’s infamous 1MDB case

Amol Naik was Pagaya’s COO from July 2021 to July 2024. He remains a senior advisor to the company, according to his Linkedin profile.

Before joining Pagaya, Naik spent many years at Goldman Sachs (“GS”), where he started in 1997, then made partner in 2012. 

In December 2018, certain GS subsidiaries were charged for misleading investors through a scheme where $6.5bn in bonds were issued for seemingly legitimate purposes, but the proceeds were “misappropriated and fraudulently diverted” to “defraud the Government of Malaysia and the purchasers of the bonds”. GS earned $600m in underwriting fees for the bond issue. In August 2019, the Malaysian government charged 17 current and former GS directors, including Naik, who was director at GS Asia between May 2012 and March 2013. 

The charges were brought under Section 367(1) of the Capital Markets and Services Act 2007, which holds company directors, CEOs, officers, or representatives responsible for offenses committed during their time in those roles.

GS reached a $3.9bn settlement with the Malaysian government in July 2020. Subsequently, the charges against Naik and the other defendants were dropped.

Opportunity Fund investors are unable to redeem their money after Pagaya used the fund to finance high-risk tranches

As mentioned, Pagaya underwrites riskier loans that are rejected by lending partners that do not carry this risk on their balance sheet, not even for a few days. 

This risk is also evident in Pagaya’s fee structure. Officially, the majority of Pagaya’s fee revenue now comes from lending partners, as shown below. 

However, this presentation is misleading, as Pagaya does not receive any money from these lending partners. Instead, Pagaya shares origination fees with them, something which CEO Krubiner made clearer back in 2021: 

High origination fees can indicate high risk, so this is another good reason to probe further into the quality of loans.

The market takes comfort in the fact that Pagaya offloads most of its risk to what it believes are third party investors, particularly through asset-backed securities (“ABS). Pagaya securitizes most of its exposure through ABS transactions, retaining at least 5% of the exposure to comply with Dodd-Frank requirements.

So far, Pagaya has found investors such as Blackrock and GIC for its ABS, which seems to validate the quality of the underlying loans. 

As a result, investors have focused on volume, fee margin, and other management-promoted metrics, and not risk. 

The market has failed to recognize a crucial fact: a significant portion of Pagaya’s ABS securities is not purchased by third-party investors, but by funds managed by Pagaya, who acts as the general partner. This had led to massive losses for the limited partners.

To understand how, let’s first review how ABS transactions work. ABS consist of various tranches with completely different risk profiles. Higher tranches are much less risky. They have priority in cash flow distribution, meaning they are repaid before the lower tranches. These tranches have shorter maturities and are usually over-collateralized. All of this reduces risk for top tranche investors who typically do not bear losses. When Pagaya announces that an ABS has received a AAA or AA rating, it’s referring to these senior tranches.

Lower tranches on the other hand bear more risk. They are paid last and structured to absorb losses if underlying assets underperform. The lowest tranche is often referred to as equity, residuals, or certificates.

Importantly, investors are only willing to purchase the higher tranches of an ABS structure if the junior tranches are fully subscribed. ABS sponsors will not secure any funding unless someone buys the riskiest, most exposed portions of the structure — the bottom of the stack.

This is where the focus should be: on the lowest tranches and who buys them. The market assumes that institutional investors absorb these high-risk tranches. The truth is that a large part of this exposure was sold to funds where Pagaya is the general partner. This has allowed the company to generate its reported ABS volume.

Pagaya is quite discreet about its fund management business, particularly the Pagaya Opportunity Fund, which was formed in 2018 to invest in US consumer credit. The fund’s general partner Pagaya Investments US LLC is a wholly-owned subsidiary. Assets under management were reported at ~$1.5bn as of 31 December 2023. Nearly all of the fund’s investors are based outside the US (97%).

In its SEC-filed brochure (Pg 23), Pagaya openly acknowledges that “funds have and will continue to acquire or dispose of securities issued by securitization vehicles sponsored by Pagaya affiliates, including risk retention securities…”. 

Clearly these investments have not gone well. In 2023, the Israeli press reported that the fund received “an extremely high number of requests for withdrawal”, but lacked the cash to meet these requests according to investors. As a result, management suspended immediate and full withdrawals of funds. 

Investors were caught off guard as their capital was now locked up for longer than expected. Instead of allocating repayments from the fund’s underlying loan portfolio to redeem investors, Pagaya moved highly illiquid assets into a “side pocket”, doubling the time it took for investors to exit, and far beyond the average life of the fund’s credit portfolio.

This mechanism was not properly detailed in the fund’s investment agreement. Even then, Pagaya failed to follow their own revised terms. Redemptions became even more restrictive. Investors could only get a small portion of repayments each quarter. Those seeking a full exit could now take more than six years to recover their entire investment.

The struggle between investors and Pagaya continues. In July 2024, TheMarker reported that investors holding ~$100m of the fund’s AUM raised concerns about movements within the fund:

• These investors suspected the fund’s managers used capital to purchase risky loans, possibly risk retention securities, to support Pagaya’s ABS deals.

• Another allegation was that loans in the fund were bought and repackaged for sale to maintain deal flow. In total, the fund purchased $3bn worth of assets and sold $2.3bn in 2022, resulting in net outflows of $700m. 

• Selling loans within the investment portfolio contradicted the fund’s stated purpose of generating returns from interest income.
  
  

According to TheMarker, investors claimed the loan sales were done to generate ABS transaction fees for Pagaya, suggesting the fund may have been charged inflated fees, and may explain how the company has been able to take 10% of transaction volume as fees (Pg 10, Investor presentation).

One investor even sent a letter to the head of Israel’s capital market authority, calling for legal action against the fund’s redemption restrictions, and pressuring institutional investors to do the same.

Pagaya used the Opportunity Fund to finance high-risk ABS tranches, to minimize the company’s balance sheet exposure to these securities, and, we believe, to extract prohibitive fees that are booked as revenue. 

This has allowed Pagaya to keep the securitisation wheel in motion.

We believe there isn’t much left in the Opportunity Fund, and expect that its investors will eventually launch a lawsuit against Pagaya.

Why rating agency KBRA has issued few downgrades

Pagaya and/or the Opportunity Fund typically hold the certificates and riskier tranches in ABS transactions. At first glance, all appears well, as rating agency KBRA has issued only four downgrades. But the agency does not rate ABS certificates so there is nothing to downgrade by definition.

We made the following observations when looking into KBRA’s rating actions for the tranches just above certificates across 29 publicly rated Pagaya transactions:

• For four 2021 transactions, the lowest tranches initially received BB- ratings. Three of these were later downgraded to B-, representing securities of “very low quality with high risk of loss” according to KBRA. Further downgrades were likely if Pagaya had not stepped in by repurchasing loans. In two cases, (PAID 2021-1 and PAID 2021-3) watch downgrades were removed after Pagaya supported the transactions by “repurchasing collateral”.
  
  According to one pre-sale report, Pagaya may exercise the option to repurchase delinquent loans at par value to “reduce potential losses on these loans”. This suggests the purchases may have been done to appease investors who were unhappy with the poor quality of assets in the ABS vehicles.

 

• We found five data points for 2022 transactions. Two of the lowest tranches were unrated which explains the absence of downgrades. One tranche was downgraded to B.

• Five out of six identified data points were unrated in 2023. The only rated tranche was given a B-.

• There were 14 data points for 2024. Seven were unrated while four received B- grades. The data is too recent to expect downgrades.

As such, the limited number of downgrades in the lowest tranches is largely due to many being unrated. Where ratings do exist, Pagaya has intervened by buying back collateral to prevent further deterioration.

Increasingly, Pagaya has structured ABS transactions in a way that heavily favours senior tranche investors, making the lowest tranches — those probably taken by the Pagaya Opportunity Fund — riskier. As shown below, the company has sliced ABS structures into more tranches, rising from an average of three in 2021, to six in 2024.

This restructuring does not change underlying loan risk. It does shift and concentrates risk at the lowest tranches. As shown above, the lowest tranche (Tranche C) accounted for roughly 12% of the entire ABS in the past. Now, the lowest tranche (Tranche F) accounts for only 6%. 

The implications are clear when considering loss scenarios. Previously, assuming losses of 6% on the underlying loans, and with no other credit protections, the lowest tranche would lose 50% of its initial value, with the loss shared among investors in that tranche. 

Under the new structure, the same 6% loss wipes out the lowest tranche, while those in the senior tranches stay happy, as their investment remains intact.

We are left with the question: who absorbs this risk? Pagaya’s managed fund and more recently Pagaya itself. 

Pagaya’s own balance sheet set to deteriorate despite company claims

Pagaya appears to have exhausted the Opportunity Fund’s resources, forcing the company to self-finance the purchase of high-risk notes and equity securities, with total debt surging from $212m as at 31 December 2022, to $687m at the end of 3Q24.

As shown below, Pagaya’s exposure is concentrated in the riskiest tranches (certificates). On these the company had to recognize huge impairment charges, which have understandably alarmed investors.

Management has assured improvements in credit risk going forward, but the evidence suggests otherwise. Let’s start with what has already been impaired.

• Impairment charges and unrealized losses climbed sharply from $17m in 2022 to $242m in 9M24 – representing ~30% reduction in the value of loans and securities.

 

• Losses can also be seen in ABS exposures that Pagaya was forced to buy back. As we explained earlier, investors in senior tranches expect good risk, leaving Pagaya little choice but to repurchase problematic loans, as we understand that ABS sponsors cannot afford to antagonise these investors. 
  
  Hidden within Pagaya’s general and administrative expenses are loan losses tied to assets purchased from financing vehicles and later impaired. From 2021 through 9M24, Pagaya acquired $87.6m in loans, of which 71.5% were booked as losses.
  
  
  
  Problems can also be seen in cash collections and interest yields.

• Cash collections on notes and securities, defined as cash received on these assets divided by average balances, have declined and are far lower than other fintechs such as Upstart and SoFi. This reflects problems like rising delinquency rates and/or weakening credit profiles.

• Over the last 12 months, Pagaya earned a 2.5% yield on investment securities, well below the current treasury rate of 4.17%, and marks a steep decline from 14.7% in 2021. 
  
  
  On the 4Q23 earnings call, management attributed this drop to some vague “shift in timing of interest income accruals related to a change in our ABS structures”.
  
  
  
  A more likely explanation is that Pagaya notes and securities are significantly impaired, as shown from the weak cash collections. As per the 2023 10-K, the company typically impairs loans/securities and places them on non-accrual status when they are delinquent by more than 90 days.
  
  
  
  However, management has significant discretion to override the policy, stating they “may make exceptions to this treatment and determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection”. This basically gives them room to avoid recognizing losses.
  
  

Against this backdrop, we estimate that Pagaya’s portfolio of loans and securities should be impaired by a further 85% or $786m, if we assume a yield of 14.7% (blended based on a rate of 7% for securitization notes and average traded yield of 18.1% on recent ABS transactions with B- ratings) to reflect true economic performance.

This would wipe out Pagaya’s balance sheet equity of $543m as at 30 September 2024.

Despite this deterioration in risk, management claims these problems are now behind them, an argument often used by bulls. Management has told investors to expect profits in 2025, as capital market conditions are now less challenging, and the company books “the majority of any remaining fair value adjustments” on 2023 securities in 4Q24.

We analyzed the most recent delinquency data (as of December 2024 and January 2025) for select Pagaya-sponsored ABS, focusing on how the portfolio performs as the underlying loans age. 

While there is some improvement compared to 2021-2022, the performance for 2024 transactions has worsened relative to 2023. And we know that Pagaya booked $76m of impairment charges in 3Q24, which management noted on the earnings call “primarily related” to 2023 vintage securities.

As shown below, the rate of loans delinquent by 30 days or more in 2024, including borrowers in bankruptcy, outpaces those issued in 2023.

We see the same situation in auto loans where the rate of loans delinquent by 30 days or more in 2024 is comparable with 2023.

In other words, delinquencies are getting worse, and impairment charges are likely to stay high in 2025. 

It was therefore essential for Pagaya to find another way to get rid of bad assets. This may explain the true reason why Pagaya is more optimistic about 2025. Enter Theorem. 

Déjà Vu: Theorem a repeat of the Opportunity Fund?

We have shown that Pagaya’s acquisition of high-risk tranches from its ABS vehicles consistently ends poorly. Now we believe that Pagaya is trying to repeat what it did with the Israeli Opportunity Fund.

Pagaya acquired competitor Theorem Technology in October last year for $17.5m. Theorem has been around since 2013, and similar to Pagaya, serves as a general partner for funds that invest in trust certificates, notes, and securitizations that derive their value from consumer loans. Its assets under management were ~$2.0bn according to an ADV form filed on 31 October 2024. 

Given the mounting scrutiny from Opportunity Fund investors and the likelihood that the fund’s resources have been exhausted, we believe the plan is to use Theorem in a similar way. Theorem’s SEC-filed brochure for 2024 reveals two things: 

• Theorem expects to “invest in equity securities of securitizations sponsored by Pagaya Tech and its affiliates that are required to be held by the sponsor of the securitization in order to satisfy applicable risk retention rules”.

• Holding the risk retention securities could “benefit Pagaya tech and its affiliates by reducing the amount of risk retention securities that must be retained by the sponsor of the securitizations”.

This may explain why Pagaya is more optimistic about its financial prospects, now that they have another fund to buy high risk tranches.

This seems to translate to: “We have found another fund and new sucker LPs to sacrifice. They will buy these bad risk tranches, and this will allow us to stop carrying them on our balance sheet.”

Pagaya’s investors should ask how long a company can operate if its business relies entirely on stuffing its managed funds with extremely poor risk at the expense of its LPs, a practice that contradicts its fiduciary duties. The answer is probably until the market becomes aware of this scheme. Once the cat is out of the bag, it will become much more difficult for Pagaya to rely on these funds to buy these tranches. 

We will alert Theorem LPs on Pagaya’s practices and the risk that their capital may be misused. Once Theorem investors understand what is happening, we believe they will attempt to redeem their funds, just like the Opportunity Fund’s investors. 

Pagaya is trying to develop alternatives to ABS through funding channels that include “forward flow, managed funds and pass-throughs.” This may reassure investors: unlike ABS transactions with tranches, the company could sell loans to a single investor willing to assume the entire risk. But we believe that even though forward flow investors may end up with the better quality assets, the high risk assets still need to be directed to Pagaya’s own funds.

 

Conclusion

Pagaya markets its platform as having superior AI to pick borrowers that are rejected by lending platforms. The reality is that these loans have generated heavy losses, and Pagaya has created the illusion that independent third-parties have bought into this risk.

That burden has fallen on the Pagaya-managed Opportunity Fund, which has bought significant portions of lower ABS tranches, at the expense of LPs. We believe a lawsuit from Israeli investors is highly likely and our report will probably bring much needed scrutiny on Pagaya’s practices, especially for Theorem’s investors. 

Pagaya runs an unsustainable business model. When forced to take risk on its balance sheet, the company quickly faced drastic write-offs.

Once Pagaya struggles to offload these low-quality tranches, the ABS securitisation engine will slow down or stall. Senior tranche investors will not invest without buyers for the riskier portions. This will cause fee revenue to decline. As it is, Pagaya is unprofitable, and we see no path to improvement once pressure is exerted on this company.

We are short Pagaya.

 

Questions for Management

1. What is the total value of Pagaya-originated loans held by Pagaya-managed funds? Provide a breakdown across the Opportunity fund, Theorem, and other funds along with the types of holdings i.e. certificates and tranche levels.

2. Detail the total fees that Pagaya earned from ALL managed funds from 2021-2024. What is the share of total revenue represented by these fees in each year?

3. Why has Pagaya not disclosed the conflicts with the Opportunity Fund’s investors, along with the letter sent by that one investor to Israel’s capital market authority?

4. Why has Pagaya not taken further impairment charges to ABS securities when the earned yield is unusually low at 2.5% over the last 12 months?

5. Please explain how management expects credit risk to improve when delinquency data for 2024 Pagaya-sponsored ABS already outpaces those issued in 2023.

6. How can Pagaya operate if Theorem’s LPs try to redeem their funds, same as what happened for the Opportunity Fund. Will Pagaya once again buy these high risk tranches itself?

 

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