The credit chief for Canada’s largest pension sees signs of “bubble-like” exuberance in the rush to finance AI, cautioning that investors should scrutinize their exposure to the nascent technology.

“You cannot wake up one day and just say, ‘Well, we just had this theme that AI was great, and we woke up and it was 25% of our portfolio,’” Canada Pension Plan Investment Board’s global head of credit investments, David Colla, said in an interview.

Canada’s top pension plan, which oversees C$863.6 billion ($617.6 billion), continues to finance AI-tied projects, including those involving CoreWeave Inc., the largest of the so-called neoclouds that lease out AI chips. But the pension, whose AI investments make up about 3.5% of its credit portfolio, is becoming increasingly selective about such bets.

“There will be winners and losers along the way,” Colla said. “And there’s going to be a lot of volatility.”Fears of an AI crash have pervaded the market, in part because of the circular financing embedded in many debt packages. Tech giants including Nvidia Corp., Amazon.com Inc. and Microsoft Corp. are bankrolling AI upstarts that rely on the larger companies’ products. That amplifies the backers’ exposure and sets up a potential domino effect if some AI companies go under.

Colla said the pension manager is also scrutinizing the growing use of off-balance-sheet financing structures in which firms create shell companies to take on the debt necessary to build data centers. Lenders need to account for those obligations when assessing borrowers, he said, and they should apply even more scrutiny to privately held AI developers with more opaque finances.

The pension fund’s caution on AI contrasts with its willingness to deploy capital elsewhere in credit markets. During a three-week selloff in recent months, it scooped up more than $3 billion in discounted loans and bonds.

Colla also sees some of the best opportunities in lending to investment funds. The fund finance market has surged past $1 trillion, according to a report earlier this year from Moody’s Ratings. The boom has been driven by the rapid expansion of private credit and a slowdown in dealmaking that has left buyout firms holding investments longer than expected. “Fund finance is where it’s at,” he said.

Fund finance was once dominated by banks providing short-term loans backed by money that investors had promised to contribute to funds. In recent years, the business has expanded to include more complex loans backed by existing investments, attracting insurers, pension funds and private-credit managers seeking higher returns.

The growth of fund finance has also raised concerns about risk. Moody’s has warned that increasingly complex structures and multiple layers of borrowing could magnify losses if the underlying investments deteriorate. Some newer products have yet to be tested through a full credit cycle.

Colla said the appeal of fund finance lies in combining the pension’s experience in corporate lending and structured credit to evaluate the assets backing the loans and negotiate attractive terms. CPPIB recently completed two large mezzanine financings in Europe backed by portfolios of loans. The deals offer yields of roughly 4% to 5% above benchmark rates, compensating the pension fund for taking on more risk than senior lenders, Colla said.

The pension plan is also expanding into net-asset-value lending, which allows private equity funds to borrow against the value of their investments, rather than sell them. The loans can help managers generate cash while waiting for better conditions to exit their holdings.

CPPIB’s credit portfolio returned 3.8% in the fiscal year ended March 31, with about 67% deployed in the US. Its investments include $265 million in CoreWeave and $1.8 billion in CarlyleAviation Partners, and it’s a majority owner in alternative credit firm Antares Capital.