For savvy investors, portfolio diversification extends well beyond traditional stocks and bonds. One often overlooked area that quietly delivers strong, risk-adjusted returns is private lending, particularly first-position trust deed investing. In this structure, an investor provides capital to a borrower, secured by real estate, and holds a senior, or “first-position,” lien on the property. This means that in the event of default, the investor is first in line to recover funds, typically through a sale or refinance of the collateral.
What’s unique about this space is that while you’re investing in debt, you’re doing so through an equity-style vehicle. In other words, it’s an equity investment into a debt product. Most investors intuitively understand that equity, like stocks, tends to be more volatile and higher risk (and potentially higher reward) than debt, like bonds. But what if you could generate stock-like returns with bond-like volatility? That is the appeal of first-position private lending. One person’s debt becomes another person’s equity opportunity, backed by a real asset and governed by a clearly defined legal structure.
A Timeless Strategy That Most Investors Still Overlook
Private lending has been around for thousands of years. Despite its strong fundamentals and long track record, it is rarely discussed in mainstream investment circles. Much of that comes down to access. These are not investments you can buy with a few clicks in a brokerage account. They are sourced and managed by specialized lenders with deep experience in real estate, tight underwriting controls, and direct relationships with borrowers.
Another challenge is visibility. Unlike publicly traded assets that are tracked, indexed, and widely promoted, private lending exists in a more fragmented space. Most of the best operators are small and focused, not seeking the spotlight. They do not advertise aggressively, pay to be featured on advisor platforms, or rely on the distribution networks used by most financial advisors.
Because of that, many investors simply do not hear about these opportunities. Advisors tend to recommend products that are easier to evaluate, easier to report on, and more aligned with traditional fee structures. This means that even high-performing and low-volatility investments often go unnoticed and, as a result, remain effectively invisible to most investors. Not because they are risky or unproven, but because they require a bit more curiosity and a willingness to look beyond the standard options.
Protection Starts with Position
Private lending is typically backed by trust deeds, which are legal instruments securing a loan against real property. A first-position trust deed means the lender has the senior claim on the property in case of default. A second-position trust deed (or junior lien) carries significantly more risk since it only gets repaid after the first lienholder is satisfied.
During financial downturns, like the Great Recession, the value of real estate can drop quickly. In such cases, second-position lenders are often wiped out entirely. First-position lenders, however, are more insulated. If the loan-to-value (LTV) was conservatively underwritten (say, 60 to 65 percent), the collateral can typically be sold or refinanced to recover principal and interest, even in a declining market.
This security structure makes first trust deed investing one of the most defensible forms of private lending.
Beating the Bear: How Private Lenders Outperformed the Market
During the Great Recession, private lending strategies significantly outperformed the public stock market in both drawdown and recovery. From peak to trough, the S&P 500 fell approximately 57 percent between October 2007 and March 2009, wiping out trillions in investor wealth and taking nearly four years to fully recover. In contrast, private direct lending funds that focused on senior secured, low LTV loans to middle-market borrowers, saw drawdowns of just 7 to 9 percent on average, according to the **Cliffwater Direct Lending Index (CDLI), which tracks the performance of middle-market direct loans held by U.S. business development companies. Many of these portfolios fully recovered within 12 to 18 months. Similarly, private real estate lenders with disciplined underwriting and conservative leverage often preserved capital or experienced only moderate impairments, especially if they remained in first position and avoided bubble markets. While not immune to the crisis, private lenders benefitted from hard collateral, contractual cash flow, and the flexibility to work out loans rather than being forced to sell. The result: while public equity investors endured a historic collapse, well-structured private lending strategies proved far more stable and capital protective.
When Simplicity Outperforms Sophistication
Private lending strategies remain largely under the radar for many investors. These opportunities are not typically available through mainstream brokerage platforms and are often managed by smaller, specialized firms that focus on underwriting discipline, real
collateral, and direct borrower relationships. They require a more hands-on approach to evaluation, including an understanding of how the underlying assets are originated, secured, and serviced. As a result, private lending tends to fall outside the scope of most traditional portfolios, despite offering characteristics that are fundamentally different from public market investments.
Periods of market stress have helped to highlight those differences. During the Great Recession, for example, first-position private lending strategies experienced materially smaller drawdowns than public equities and often recovered more quickly. This relative resilience can be traced to core structural features, including conservative loan-to-value ratios, asset-backed security, and the ability to negotiate terms directly with borrowers rather than rely on secondary market liquidity.
Like any investment, private lending carries risk. Outcomes depend on the strength of the collateral, the experience of the lender, and the terms of each individual deal. But when structured thoughtfully and underwritten conservatively, first-position trust deed investing has shown an ability to deliver more stable and predictable results, particularly in uncertain environments.
It is not a replacement for public market exposure, nor is it suited to every investor. But for those seeking to diversify their sources of return and reduce reliance on market-driven volatility, it may be worth including as part of a broader portfolio strategy.
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