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Private credit “is a buyer beware” market, the head of Canada’s largest pension fund said, warning institutional investors against rushing into deals.

John Graham, chief executive of Canada Pension Plan Investment Board, told the Financial Times that the C$778bn ($561bn) fund mainly invested directly in private credit rather than funds.

He said to non-investment grade private credit investors: “It’s a ‘buyer beware’ market. You should be sophisticated and you should know what you’re buying.”

While Graham thought private credit served a useful role in the system, distributing risk broadly, he had concerns over the “speed at which deals are getting done”. 

“We have to make sure that we aren’t compromising on due diligence,” he said, adding that he sometimes had to remind his teams that “it’s OK to miss something”.

Graham ran credit strategies at CPPIB before taking the top job in 2021. His comments come as money continued to pour into private credit this year, which he said had contributed to rushed deals.

Private debt funds raised $154bn in the first nine months of this year, according to PitchBook. That puts managers on track to raise less than the $230bn for 2024, but annual fundraising is still far above levels seen a decade ago.

Individual investors have also been buying more. Consultancy Oliver Wyman said that private credit holdings by the wealthy have grown 2.5 fold in the past three years — four times faster than the traditional institutional business.

However, the sector has faced a series of setbacks this year. Blackstone president Jon Gray said in October that the era of excess returns had ended as central banks had cut interest rates, with mid-teens returns in private lending giving way to more muted results.

The implosions of auto parts maker First Brands and subprime auto lender Tricolor, which had both amassed debt from non-bank lenders, also reverberated across credit markets and prompted further warnings on wider risks from private credit blow-ups.

CPPIB has a large allocation to private markets compared with some other large pension funds globally, with 11 per cent in public and private credit and 29 per cent invested in private equities. 

Graham said despite low distributions from private equity funds back to investors in recent years, CPPIB had been investing in the asset class for 20 years. “We continue to be believers in the governance model around private equity and private ownership,” he added.

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Graham also said that the partnership between institutional investors such as CPPIB and private equity funds, known as general partners, had been “a very profitable model for everybody”.

If the rush of retail funds into private equity changed norms, such as buyout fund managers offering their large fund backers the chance to invest directly into companies to lower their fees, he said it would “impact, undoubtedly, our appetite for the asset class”. 

Last month, the Institutional Limited Partners Association trade group warned that the number of deals needed to deploy wealthy individuals’ cash could pull managers’ attention away from investing the capital of pension plans and endowments.