Pagaya strategy – a smart way for institutional investors to invest in consumer credit.

Consumer credit does not go out of style.  In August, the consumer credit market increased at a seasonally adjusted annual rate of 5-1/4 percent.[1]  Consumer credit has expanded from $7.1 trillion 15 years ago to $13.1 trillion today. Within the consumer credit market,  marketplace lending platforms (MLP) have had particularly much momentum lately as consumers appreciate the convenience and flexibility of these online platforms. Over the last 12 years, more than 4 million new loans have been issued online, totaling over $50 billion in consumer credit. That is a lot of money flowing.

With USD950 million in assets under management, Pagaya has created a scalable way for institutional investors to invest in consumer credit and get exposure to this attractive asset class. So what makes Pagaya’s methodology unique? With its Pagaya Pulse technology which uses AI to cherry-pick the most attractive loans of this massive market, Pagaya has innovated beyond the traditionally used risk-management and investment-decision tools, both quantitatively and qualitatively. Our proprietary Pulse technology, allows us to manage short-duration, high-yield investment strategies that have a low correlation to the broader market. This not only makes Pagaya attractive in terms of returns but also makes them resilient in the face of economic crisis and instability.

Here are four reasons why institutional investors should invest in alternative credit:

  • Demand for consumer credit has low-interest rate sensitivity. The Fed’s recent interest rate policy changes have not affected demand for consumer credit which remained fairly consistent without large fluctuations
  • Marketplace Lending platforms offer short duration loans. Pagaya selects loans with a short duration which means that Pagaya can react quickly to interest rate changes when underwriting new loans
  • These loans have very low volatility.  Pagaya’s underwriting platform selects only specific loans that have low-risk profiles resulting in lower volatility that buy and offer loan bundles to investors.
  • Stable and high yield. Consumer credit interest rates are generally tied to short-term rates. Since 2009 the average consumer credit interest rate has increased nearly 300 basis points while BB Yields have decreased over 800 basis points.

 

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[1] https://www.federalreserve.gov/releases/g19/current/