Evaluating Risk vs. Return: What the Numbers Say About Secured Debt Investments

One of the popular questions about investment – ‘Is it worth managing a high level of risks for a specific investment’ ?  Investments that have higher risks with themselves often carry a huge potential of profits and considerable returns. While the investment with lower risk usually leads to lower returns, driven by their safer nature. 

Risk and returns always keep chasing each other while forming the basis of investment, as they are the core parameters that investors use to evaluate the potential of success and safety of their investments. 

You might be thinking, ‘Still, the question is not answered clearly’. Keep reading this article to evaluate the relationship between risk and return. And get your query resolved with the simultaneous analysis of what numbers say about secured debt investments. 

5 things you’ll learn:

1. What Are Secured Debt Investments?
2. Why A Property Lending Fund Makes Sense
3. Risk Compared To Return In Secured Debt
4. What Default Rates & Recovery Really Tell You
5. Evaluating A Secured Debt Investment

What Are Secured Debt Investments?

Let’s start simple: secured debt investments live exactly how they sound.

These investment opportunities consist of loans backed by physical assets. Typically, these assets are real property of some kind. If the borrower defaults on repayments, the lender can take legal ownership of the asset to recover their money.

It’s this factor that separates secured debt from it’s unstable cousin: unsecured debt. When you lend without a secured asset, there’s no recourse. If something goes wrong, it’s hard to get capital back.

Property lending funds operate by pooling investor money and lending that capital against property assets. These types of funds usually specialize in first mortgage investments. This means the loan is first in line to be repaid in the capital structure.

This matters. When secured debt defaults occur, investors are first in line to be repaid.

There are countless benefits to this structure. For starters, it provides the investor with downside protection that few other investments can match.

Why A Property Lending Fund Makes Sense

Property lending funds make sense right now for a handful of reasons. Here’s why investors are increasingly turning to secured debt and private credit markets.

The Growth

Private credit is one of the fastest growing asset classes around. At the start of 2025, the private credit market was worth approximately $3 trillion USD. Industry experts, like Morgan Stanley estimate this market could grow to $5 trillion by 2029.

That’s HUGE growth. Especially when you consider that this growth has taken place over a relatively short period. While other assets have boomed over recent years, private debt has come from nowhere to capture the attention of big investors.  

Investment Migration

So where are investors migrating from?

Stock Markets. Bonds. Crypto. Peer-To-Peer lending.

Returns are rallying across secured debt. Here’s why investors are buying in.

Investors want stable, passive income with less fluctuation. A property lending fund offers just that:

• Fixed interest payments
• Low market volatility
• Real estate secured against every dollar invested

Plus, there’s a huge benefit for investors who choose direct lending strategies during periods of rising interest rates. These types of strategies allocate capital directly to borrowers at higher interest rates without going through a public market.

Historically, direct lending has proven to perform better in times of rising interest. Morgan Stanley shared an incredible statistic: direct lending strategies saw average returns of 11.6% during periods of rising rates. The long term average? 9.6%.

Simply put, investments that perform above the long-term average when it comes to rising interest makes bank for investors searching for stability.

Risk Compared To Return In Secured Debt

When evaluating every investment opportunity, risk is always something you should consider.

However, risk is always associated with any investment. The main thing is to know how to manage that risk and understand what happens when things work opposite to expectations.

But let’s take a look at real data…

When it comes to risk, secured debt has some compelling numbers.

For example, the Proskauer Private Credit Default Index recently reported that Q2 2025 default rates for senior secured and unitranche loans sat at 1.76%. Compare this to the high yield bond market which has traditionally hovered around 3-5%.

Interest rates hikes and a slowing economy are causing ripples across the financial landscape. Even so, default rates in the secured senior debt markets remain well below other areas of the market.

But here’s the thing…

What happens when loans DO default?

That’s where secured debt REALLY shines.

Recovery rates for secured debt vs. unsecured were recently highlighted in S&P Global data. Here’s what they found:

Senior secured bonds from 1987 to 2023 had a mean recovery rate of 58.1%.

Compare that to the 44.8% recovery rate for insecure bonds over the same time frame.

In simple language –

If a secured loan defaults, investors historically get back more money than they would with an unsecured investment. Why? Because there’s a real asset that can be used to recover lost capital.

When you invest in a property lending fund specifically, that asset is real property.

When underwriting these loans, funds take out a registered mortgage over the asset. Should the worst happen and the loan defaults, the property can be sold to recover as much capital as possible.

Again, this doesn’t mitigate risk 100%. But it does limit how much investors can lose if things do go south.

How To Evaluate A Secured Debt Investment

Property lending funds aren’t created equal.

Before you consider investing in a fund, there are a few key aspects that you should always evaluate.

Loan-To-Value Ratios

When lending against property, there’s a term called “loan to value”. LVR’s measure the amount of the loan compared to the value of the asset.

The lower this ratio, the more equity built into the loan. And when underwriting loans, strong funds keep conservative LVR’s.

Diversification

No property lending fund should have ALL of it’s loans tied up in a single state, investor or property type. Diversity really is critical when evaluating the health of a fund.

Track Record

Every investment comes with risk. That doesn’t mean every investment blows up when the economy sneezes.

Look for funds that have true strategies for weathering downturns.

Security Position

Secured debts can be loaned in different positions. First mortgage funds are ideal because they are the first to be paid in a recovery situation.

Anything below that is inherently riskier.

Transparent Reporting

As an investor, you have a right to know where your money is going. How is the fund performing? What are the risk factors? How are they structuring loans?

If your fund manager isn’t prepared to be open about these items, walk away.

The Verdict On Risk vs. Return

Being a smart investor – it’s essential to understand the relation of risk with returns to make better financial decisions. Investors who choose quality property lending funds with strong security positions can rest easy knowing their money is in a safe and growing environment.

Once a right balance is created between these two major considerations of investment – risk and returns. Long term growth becomes a handy asset. 

A safe way for beginners – Start investing slowly in investments that don’t require constant monitoring and gradually expand your horizons.