Key Takeaways
- • Davidson Kempner, a hedge fund managing $40 billion and led by managing partner and CIO Tony Yoseloff, expects the true default rate for public and private loans to settle around 5-6% over the long term, with direct corporate lending returning mid-single digits, according to Forbes.
- • Yoseloff argues AI capex has masked a potential recession since 2022 and warns that a slowdown in spending combined with persistently high rates could recreate the 2000-2002 environment, when high-yield default rates rose from 5% to 12.8%.
- • Around $12 billion of DK's assets are in private credit strategies, while the firm has largely avoided direct lending and standard buyout financing, favoring asset-backed lending where competition is lower.
- • DK's flagship fund has returned a net 6.5% annually over the last 10 years per an endowment performance report as of May 2026, and its two private credit funds have net IRRs of 12.3% and 8.6%.
- • Ares Management and Blue Owl Capital shares have fallen 30% and 40% this year, respectively, amid higher rates and AI-driven disruption to private software businesses.
Summary
Tony Yoseloff, managing partner and chief investment officer of Davidson Kempner (DK), told Forbes that he expects credit defaults to rise as AI-related spending props up the economy but may not persist. DK, founded in 1983 and managing $40 billion, specializes in distressed debt and event-driven strategies such as merger arbitrage. Forbes reports the firm has generated $28.9 billion in net gains for investors since its founding, according to Edmond de Rothschild's January ranking that placed DK 18th among the most profitable hedge funds.
Yoseloff, who took sole control in January 2020 after co-leading the firm with Tom Kempner, argued that the economy avoided a major recession in 2022 largely because of AI capital expenditure, which he said offset the effects of rate hikes. He cautioned that an environment in which spending slows and rates remain high would be analogous to the early 2000s, when high-yield default rates rose from 5% to 12.8% following the dotcom bubble and telecom bust. He also rejected the notion that direct corporate lending can deliver consistent double-digit returns with virtually no defaults, saying DK never accepted that view.
DK has largely avoided direct lending and standard buyout financing, which has helped turn private credit into a $2 trillion asset class. Instead, Yoseloff said the firm has been increasing exposure to asset-backed lending, secured by collateral such as loan pools, real estate, ships and aircraft, citing less competition in that segment than in direct corporate lending. Forbes notes that about $12 billion of DK's assets are in private credit strategies, and the firm closed a standalone liquid distressed fund in 2024, folding those investments into its flagship liquid strategy.
Forbes also reported that pressure on private credit specialists has intensified, with Ares Management and Blue Owl Capital shares declining 30% and 40% respectively this year, reflecting higher interest rates and AI-fueled disruption to private software companies. Yoseloff expects that if defaults rise and more companies seek rescue financing, DK could benefit. A former partner, Michael Herzog, has sued the firm in U.K. courts alleging he was denied $80 million of partnership interest; DK has called the claims "utterly lacking in merit," and the case has advanced to discovery.
Yoseloff, who took sole control in January 2020 after co-leading the firm with Tom Kempner, argued that the economy avoided a major recession in 2022 largely because of AI capital expenditure, which he said offset the effects of rate hikes. He cautioned that an environment in which spending slows and rates remain high would be analogous to the early 2000s, when high-yield default rates rose from 5% to 12.8% following the dotcom bubble and telecom bust. He also rejected the notion that direct corporate lending can deliver consistent double-digit returns with virtually no defaults, saying DK never accepted that view.
DK has largely avoided direct lending and standard buyout financing, which has helped turn private credit into a $2 trillion asset class. Instead, Yoseloff said the firm has been increasing exposure to asset-backed lending, secured by collateral such as loan pools, real estate, ships and aircraft, citing less competition in that segment than in direct corporate lending. Forbes notes that about $12 billion of DK's assets are in private credit strategies, and the firm closed a standalone liquid distressed fund in 2024, folding those investments into its flagship liquid strategy.
Forbes also reported that pressure on private credit specialists has intensified, with Ares Management and Blue Owl Capital shares declining 30% and 40% respectively this year, reflecting higher interest rates and AI-fueled disruption to private software companies. Yoseloff expects that if defaults rise and more companies seek rescue financing, DK could benefit. A former partner, Michael Herzog, has sued the firm in U.K. courts alleging he was denied $80 million of partnership interest; DK has called the claims "utterly lacking in merit," and the case has advanced to discovery.
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