Investing startup Pagaya just raised $100 million to disrupt the credit markets using artificial intelligence, and it's eyeing other industries next

• Investing startup Pagaya says it's the first company to use artificial intelligence to source consumer asset-backed securities, a $244 billion market.
• In Pagaya's first push, the company raised money from Israeli and US institutional investors to buy $100 million of consumer ABS, focusing first on personal loans for borrowers with high credit scores.
• The company, whose chief investment officer left BlackRock last year, plans to move into other types of lending, including auto loans and corporate credit, and eventually a real estate fund - all managed through artificial intelligence.

Artificial intelligence has been the topic du jour on Wall Street.

JPMorgan is cleaning up its database to do artificial intelligence better. Other managers are using it to augment their sustainable investing strategies.

Enter Pagaya, a New York-based startup using artificial intelligence to evaluate loans. The company, which landed $75 million in debt financing from Citigroup last year, is betting that active management and technology can reshape the consumer asset-backed securities market, which includes credit cards, auto loans, and student loans. Last year, total issuance was $244 billion, slightly up from 2017's $239 billion, according to asset manager TCW.

Pagaya announced on Wednesday it had raised money from American and Israeli institutional investors for its first effort, a $100 million round of consumer ABS structured by Cantor Fitzgerald. The company uses artificial intelligence to evaluate and buy individual loans in the US, a departure from the traditional process of pooling debt and then selling it.

Pagaya currently manages $350 million overall and is close to hitting $500 million, co-founder Gal Krubiner told Business Insider.

Read more: Credit Suisse's CTO says that AI could create huge opportunities on Wall Street and that banks haven't even scratched the surface

In this first round, the company is buying short-duration personal loans made to borrowers with high credit scores, Krubiner said. For future efforts, they'll buy credit card loans and near-prime and subprime auto loans, a much larger market than personal loans.

Five years ago, Krubiner said technology was not advanced enough for Pagaya's current strategy, but the explosion of data and the ability to process it via cloud computing now facilitates the artificial intelligence-led process.

"The ability to unwrap the securities and to look at the single level of loans becomes very powerful and meaningful," he said. "That's why an active ABS with artificial intelligence makes so much sense today, when a few years ago, it didn't make sense ... That's going to change the full way that the total ABS market is going to get funded."

He compared the coming evolution of consumer ABS to collateralized loan obligations. Banks previously issued static pools of loans, evaluating groups of loans by risk, before investors like Blackstone's GSO took a more active role in cherry-picking individual loans to better evaluate risk and return.

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Pagaya is investing on behalf of pension funds, insurance companies, and banks. The institutional investors are typically allocating money from their fixed income portfolios for the strategy, though some think of it as private credit or an alternative, the company's chief investment officer Ed Mallon said. Mallon joined last year from BlackRock, where he last was a managing director overseeing opportunistic investments.

"We're trying to underwrite people in a consistent, scalable, and repeatable process," Mallon said. "There's a lot of value that you can capture for institutional investors by unwrapping these assets and building them from the bottom up with an investor's perspective in mind, where you're creating a balance of returns for the investor."

Krubiner said his ultimate goal is a quantitative real estate fund, built on the same principles of active artificial intelligence management. Because the real estate market generates "endless amounts of data" available online, from rental prices to consumer demographics, Krubiner said the industry is ripe for a new type of fund.

"It's crazy!" he said. "No one is doing it yet."