Foxes are desperate to keep keeper Schmeichel Jr, 32 — who joined the club in 2011 and helped them to the Premier League title in 2016.
But Manchester United legend Peter told BeIN Sports: "Leicester City are a really good football club.
"They’ve got good players they just don’t have the manager who can get the best out of them.
"Once they get everything sorted out — and I leave it to you to interpret what that means — you’ll see Leicester maybe in fifth to eighth place where they belong."
Denmark No 1 Schmeichel has been linked with Roma and Chelsea in the past.
But his father added: "Of course he wants to challenge himself like any other player.
"But I don’t think he wants to go to Europe.
"I think he loves England too much, I think he likes the Premier League too much, so it’s a difficult one."
Leicester welcome Crystal Palace to the King Power in Saturday’s late kick-off, the team one place and five points below them in the table.
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