Upstart $1.2B Forward-Flow Agreement with Fortress Investment Group

Upstart Holdings has secured a forward-flow agreement with Fortress Investment Group, which will purchase up to $1.2 billion in consumer loans from Upstart's platform through March 2026.

This agreement is designed to provide Upstart with a steady, diversified source of capital, reducing its reliance on internal funding and supporting its rapid loan origination growth. Fortress, which manages $50 billion in assets, sees this as an opportunity to invest in high-quality, risk-adjusted consumer credit assets through Upstart’s data-driven, AI-powered platform. Citi will provide the debt financing to Fortress for these loan purchases.

The partnership highlights growing confidence in AI-powered lending, with Upstart’s platform enabling over 90% of loans to be fully automated. This deal is part of Upstart’s broader strategy to secure resilient capital sources and scale its operations across economic cycles.

The $1.2 billion forward-flow agreement between Upstart and Fortress doesn't openly disclose yield targets or risk tranches in its public documents. However, by examining industry-standard structures and indirect hints, one can uncover the essential terms.

Expected Yield Structure

• Fortress typically targets 10–13% net IRR in its credit funds, based on historical performance (e.g., 10.2% net IRR for Fortress Lending Fund I).

• Upstart loans have delivered 9.8% gross annualized returns across all cohorts since 20182, suggesting Fortress likely negotiated pricing to achieve comparable or better risk-adjusted returns through leverage (Citi’s debt financing enables this).

Risk Tranche Mechanics
While not explicitly stated, Upstart’s prior deals suggest:

1. Senior/Junior Split: Fortress likely holds senior tranches with priority cash flow rights, while Upstart retains junior positions or credit enhancements to align interests.

2. Loss Coverage: Upstart’s balance sheet exposure (11% of loans held as of Q1 2025) implies retained risk via first-loss provisions or recourse arrangements.

3. Dynamic Pricing: Yield likely adjusts based on Upstart’s AI-driven risk grades (A-I categories), with Fortress paying less for higher-risk loans to maintain target returns.

Fortress’s participation signals confidence in Upstart’s ability to deliver mid-teens leveraged returns while offloading balance sheet risk.

How is Upstart regulated and what are some of the key regulations it is subject to?

Upstart is subject to a variety of federal and state laws and regulations. Key regulatory bodies include the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), which oversee aspects like marketing practices. State agencies also regulate aspects of the business through licensing and examination.

Specific regulations mentioned include the Gramm-Leach-Bliley Act (GLBA) regarding privacy and data security, the Bank Secrecy Act and USA PATRIOT Act for anti-money laundering and counter-terrorist financing, and state usury laws, although federal law may preempt state limits in certain cases for loans originated by state or federally chartered banks. Upstart is also subject to federal securities regulations, including those related to the Securities Act and potentially the Volcker Rule.

What types of intellectual property does Upstart use to protect its business?

Upstart protects its intellectual property through a combination of patents, trademarks, domain names, copyrights, and trade secrets. They also utilize contractual provisions and information security measures. As of December 31, 2024, they held four issued patents and four patent applications related to their risk model and data engineering. They also have trademark rights in their name, logo, and brand indicators, with select registrations in the United States. Additionally, they rely on unpatented trade secrets and confidential know-how.

How does Upstart manage the loans originated on its platform and what happens to these loans?

Loans originated by Upstart's lending partners are handled in several ways. They can be retained by the lending partners, purchased by Upstart and immediately sold to institutional investors under loan sale agreements, purchased and held by Upstart for a period before being sold, or held to maturity by Upstart for purposes like product research and development. Loans held by Upstart are classified as either held-for-investment or held-for-sale. Loans purchased for immediate resale are accounted for as transfers of financial assets, with Upstart recording an asset or liability for estimated post-sale servicing arrangements.

What is the nature of Upstart's debt obligations, specifically the convertible notes?

Upstart has issued senior unsecured convertible notes, including the 2026 Notes, 2029 Notes, and 2030 Notes, with maturity dates in August 2026, October 2029, and November 2030, respectively. These notes are convertible into cash, shares of common stock, or a combination, at Upstart's election. Holders can require Upstart to repurchase the notes upon a fundamental change event. Upstart also has the option to redeem the notes for cash under certain conditions related to its stock price. The notes are accounted for as a single liability at par, with associated debt issuance costs amortized to interest expense.

How does private credit, including forward-flow arrangements, relate to the broader financial system and what risks are associated with its growth?

Private credit, a market where non-bank entities provide loans, has grown significantly. Forward-flow arrangements are a common structure within this market, particularly in sectors like consumer and small business loans. While beneficial for providing capital, the growth of private credit also presents risks. The companies financed through private credit are often highly leveraged and may be more susceptible to economic downturns. Concerns exist about the transparency and potential systemic implications of this market, especially regarding its exposure within the banking system and the level of regulatory oversight compared to traditional lending.

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