(Bloomberg) -- Castlelake LP has agreed to purchase up to $1 billion in consumer loans that were initially created by Pagaya Technologies LTD, the latest move by private credit lenders seeking to grow their footprint in consumer debt.
The arrangement, which is set up as a forward flow deal, will allow Castlelake to buy Pagaya-originated loans for a period spanning one year, with an option to extend the agreement further, according to a press statement from the companies seen by Bloomberg News.
In a typical forward flow arrangement, investors pay for the ability to purchase future loans that lenders will make and in exchange, the lender gets capital quickly. Other forms of financing such as securitization often require a lengthier process in which banks facilitate the sale of the loans to group of investors. As a regular user of the securitization market, this set up expands Pagaya's funding sources and could allow it to cycle its lending capital quickly.
"We believe the partnership can provide access to attractive risk-adjusted exposure to consumer loans, at a time when the utility of credit is of significant importance to consumers," John Lundquist, a partner at Castlelake, said in the statement.
The forward flow deal continues Castlelake's expansion into consumer lending, which includes a recent purchase of consumer installment loans from Upstart Holdings Inc. that can reach up to $1.2 billion from June. It's not just Castlelake implementing this strategy, other private managers like Varde Partners have raised or spent billions to invest in consumer lenders. Their growth is helping to stand in for US regional banks which have historically been major players, but now are losing market share.
Pagaya's sale of its future loan book comes just days after it announced a partnership with OneMain Holdings Inc. where it will help the brick-and-mortar lender use more data in the underwriting process. That partnership followed an acquisition of a machine learning-enabled asset manager Theorem Technology Inc. in late July.
Pagaya, which came on the scene when its value spiked to more than $20 billion in the weeks after going public in 2022, is known for its business model of using artificial intelligence to help vet consumers that it would extend credit. Broadly, investments into the US consumer struggled in the last two years, as lending institutions have been forced to tighten credit standards due to losses that exceeded expectations.
This year, the company's shares have fallen about 9% as of Thursday, leaving it with a market value of around $1 billion. The company is expected to report its quarterly results Friday, August 9.
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