Manager drift, opaque leverage, and rushed deployment are showing up across the asset class. TD Asset Management on what separates a resilient manager from a vulnerable one
If you are a Canadian plan sponsor or financial advisor with private credit on your watchlist, the most important question to be asking right now is not whether the asset class belongs in your portfolio. For most institutional and Defined Contribution-aligned mandates, some version of it already does. The question is whether the vehicle in front of you was built for the cycle that is coming, or for the one that just ended.
For Canadian plan sponsors, who have long been counted amongst the most sophisticated allocators to private credit globally, the speed of deployment, and what it has done to underwriting standards, manager behaviour, and portfolio construction, is the defining question facing the asset class today.
Few are better positioned to assess the shift than the team at TD Asset Management. Louis Bélanger, Vice President & Director, Private Debt Portfolio Management, joined TDAM in 2016 to help establish an investment-grade private credit strategy out of the firm’s asset liability management group, and has since helped grow it from zero to over $5 billion[1], serving primarily insurance companies and pension funds. “Institutional clients typically like continuity,” he said, a quality that has been the platform’s defining feature. Scott Henshaw, Vice President & Director, Alternative Investments at TDAM, joined roughly seven and a half years ago after a stint as a portfolio manager on a different strategy and prior experience at a U.S.-based direct lending firm.
The retail pivot, and why it matters
For most of its history, private credit was an institutional asset class. Bélanger traces a structural shift in fundraising to the period around the start of the pandemic, when institutional fundraising slowed and large U.S. money managers turned their attention to designing products for wealth and retail platforms. “That was a real change in the private credit industry,” he said, “because prior to that, you had to be a sophisticated investor, with significant resources, to have access to the asset class.” Registered investment advisors and the broader wealth distribution system, he noted, had no meaningful access to institutional-quality managers before that pivot.
For sponsors evaluating product, the first analytical step is recognising that private debt is not one thing. Bélanger distinguishes between investment-grade private debt, which sits in the liability-matching bucket of a pension portfolio as a complement to corporate bonds and offers “diversification and yield enhancement without increasing risk,” and the higher-yielding below-investment-grade segment that dominates the headlines. The latter behaves more like an alternative to equities, with floating-rate, shorter-duration deals that target an 8 to 10 percent return in a clean year, “barring any credit issues.”
For defined contribution (DC) plans, the asset class remains a structural fit only as part of a broader solution. “In a DC platform, it’s going to be hard, as a pure standalone asset class, to facilitate the capital call drawdown experience,” Henshaw said. Where it has appeared, it is typically embedded as a sleeve in a core-plus mandate “where the manager knows they can properly manage it.” His broader concern with the U.S. wealth-channel build-out is that capital was raised quickly, before institutional discipline could keep pace around it- “portfolio construction is a worrying oversight,”.
The red flags that should be on every sponsor’s checklist
If there is one section of this conversation worth pinning to your manager-evaluation framework, it is this one. The retail money raised over recent years created intense pressure on managers to deploy capital quickly, and Bélanger argues proper due diligence has taken a backseat. “You have to take your time, you cannot be rushed,” he said. “Make sure you read the documentation, make sure you meet with management, make sure you go and kick the tires.”
The most visible consequence has been poor portfolio construction, not weaker covenants in isolation. Bélanger pointed to the recent surge in software lending, where some managers, in his words, “backed up the truck” on the sector while others were more judicious. “Having one or two loans default in a well-diversified portfolio doesn’t hurt that much,” he said. “But when you’ve got 15 of your 25 loans that are in non-accrual, because they’re all correlated, they’re all in the same sector, that’s a problem.”
Henshaw’s red flags are aimed squarely at the manager-selection problem sponsors face. It is genuinely difficult, he said, to look past the pedigree of a large, reputable manager with $60 billion under management. The warning signs sit at the edges. One is a franchise raising $10 billion in an asset class it has never underwritten before.
Another is mandate drift driven by scale. “A Manager used to do lower middle market loans where they saw the best value,” he said, framing a hypothetical. “Now they've raised $20 billion in their latest fund. Lower middle market deals are impractical at the bite-size required to deploy billions of capital. They’ve drifted for reasons unrelated to their past and their DNA as a credit manager. That’s what we worry about.” He added a third lens for sponsors: “Diversity of pipelines and depth of pipelines matter a lot too.” A manager with strong credit views but concentrated sponsor relationships will inevitably move where those sponsors move.
The leverage question may be the most pointed test of all. Leverage is not bad in itself, Bélanger said, but becomes dangerous “when it becomes a crutch to generate higher returns.” He pointed to business development companies, where “for every dollar of redemption, they got to raise additional dollars to pay down the leverage,” exacerbating liquidity pressure and feeding a negative loop of gating headlines and further redemptions.
Henshaw framed the design question for sponsors directly: leverage should be “resilient for the bad times, and not designed to juice the good times.”
Private credit, used correctly, is a long-life, illiquid allocation that can deliver durable income and genuine diversification across a cycle. It is not a vehicle for chasing flows, and the managers most likely to deliver on its promise are the ones who have moved deliberately away from 'hot money' flows.
Cycles, he noted, will come. The vehicles built to survive them are not always the ones with the most attractive recent return numbers, and that is precisely why the diligence work matters now.
TD Global Investment Solutions represents TD Asset Management Inc. ("TDAM") and Epoch Investment Partners, Inc. ("TD Epoch"). TDAM operates in Canada and TD Epoch operates in the U.S. Both entities are affiliates and wholly-owned subsidiaries of The Toronto-Dominion BankTDAM and TD Epoch products are also available through a network of affiliated and unaffiliated distributors. Please contact our distribution partners to find out more.
This article was produced in partnership with TD Asset Management
[1] As of March 31, 2026, TDAM total capital commitments for the private debt Pooled Fund Trusts and mutual fund allocations to Private Debt totaled C$5.143 Billion.
