Israeli fintech company Pagaya Technologies (Nasdaq: PGY) rose 334% on Wall Street last week, up 119% on Friday alone.
Pagaya listed on Wall Street in late June, after completing its SPAC merger, and saw its share price fall 67% in its first few week of trading. So from a share price of $2.70 last Tuesday, the share price closed at $11.70 on Friday, giving a market cap of $7.7 billion, slightly below the $8.5 billion valuation, at which the SPAC merger was completed.
Pagaya provides solutions based on machine learning and big data that allow financial institutions to more accurately manage credit allocation procedures. Pagaya was founded in 2016 by CEO Gal Krubiner, CRO Yahav Yulzari, and CTO Avital Pardo.
Eden Discovery hedge fund founder and CEO Assaf Nathan thinks that the volatility began with a long position taken by an investor who took advantage of the low float in the share price and in practice this caused serious problems for short traders, by pushing up Pagaya's share price.
Short-selling is a way of making profits on paper when a share price is falling. The trader borrows shares from the owner and sells it on the market, and subsequently buys it back, if and when the price is lower, in order to give back the shares to their owner. If the share price does go down then the short seller profits.
Nathan said, "Pagaya began life as a SPAC, 'a financial creation' without any business activities, made up of shares that the public holds, and then seeks a company to merge with. When it finds a company to merge with, it is larger than the SPAC. In other words, the merger, changes structure let's say from 1 million to 10 million shares.
All the existing shareholders in the merged company hold, as it were, shares in the SPAC, and need to register them, a process that takes several months. The share is not registered for trading and Pagaya recently filed a prospectus to register the shares as warrants. This is a process that takes time while Pagaya plays 'ping pong' with the US SEC. I hope for the sake of the short-sellers that this happens quickly."
In Nathan's assessment, "A smart investor saw the share price falling after the merger and attracted short-sellers like butterflies around a fire. As the price fell, an interesting situation was created and less money was needed to take control of all the float. In Pagaya, all the float was less worth than $200 million. Probably, somebody saw that all the float was on short-sell. The float was low enough that the purchaser would not become a party at interest.
"What is happening is that brokers automatically loans shares to short-sellers. But the same person who bought can contact their broker and ask not to borrow any longer and the broker has to take back the shares they lent. The short-sellers for their part some of whom borrowed from other brokers, and some who won't find, because there are not enough and the blanket can't cover everyone. So a shortage is created, and they have to buy on the market (a short squeeze) and thus the share price rises."
In theory Nathan says, "The share can reach infinity. Every day more shares go out of circulation and you have to buy on the market, every time somebody has to cover themselves. It's like a hot potato going from hand to hand. If I had to gamble, I would bet on it not be over yet."
Nathan stresses that he does not have any position of Pagaya. He warns that some funds with short positions could collapse because of this situation.
Published by Globes, Israel business news - en.globes.co.il - on July 24 2022.
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