12. SEGMENT REPORTING

The Company conducts its alternative asset management business through four operating segments:

•

Tradable Credit Group:  The Company's Tradable Credit Group is a participant in the tradable, non-investment grade corporate credit markets with approximately $31.4 billion of assets under management as of March 31, 2014. The group manages various types of investment funds, ranging from comingled and separately managed accounts for institutional investors to publicly traded vehicles and sub-advised funds for retail investors. While each of the group's approximately 70 funds is tailored to specific investment objectives, mandates can be broadly categorized between long-only credit and alternative credit investment strategies. Long-only credit funds primarily seek to outperform the corresponding performing bank loan or high yield market indices. Alternative credit funds primarily seek to deliver compelling absolute risk-adjusted returns relative to publicly traded stocks, hedge funds, distressed funds, bank loans, high yield bonds or other investment types.

•

Direct Lending Group:  The Company's Direct Lending Group is a direct lender to the U.S. and European markets, with approximately $27.6 billion of assets under management across over 30 funds or investment vehicles as of March 31, 2014. The group provides one-stop financing solutions to small-to-medium sized companies, which the Company believes are increasingly underserved by traditional lenders. The group launched its inaugural vehicle dedicated to direct lending, ARCC, ten years ago as a business development company. In 2007, the group extended its direct lending capabilities into Europe and raised its first dedicated fund. The group generates fees from over 30 other funds that include separately managed accounts for large institutional investors seeking tailored investment solutions, comingled funds and joint venture lending programs with affiliates of General Electric Company.

•

Private Equity Group:  The Company's Private Equity Group has approximately $9.8 billion of assets under management as of March 31, 2014. The group focuses on majority or shared-control investments, principally in under-capitalized companies. The group manages five private equity comingled funds which focus primarily on markets in North America, and to a lesser extent, Europe and Asia.

•

Real Estate Group:  The Company's Real Estate Group manages comprehensive public and private equity and debt strategies, with approximately $8.3 billion of assets under management as of March 31, 2014. The group focuses on lending and investing assets that have been under-managed or need repositioning in their markets. The group provides investors access to its capabilities through its publicly traded commercial mortgage REIT, ACRE, focused on direct lending on properties owned by commercial real estate sponsors and operators, U.S. and European real estate private equity comingled funds, separately managed accounts and other fund types. In addition to the $8.3 billion of assets under management, the Company services a portfolio of over $5.2 billion in mortgage loans principally through a subsidiary of ACRE.

The Company established an Operations Management Group (the "OMG") that consists of five independent, shared resource groups to support the Company's operating segments by providing infrastructure and administrative support in the areas of accounting/finance, operations/information technology, business development, legal/compliance and human resources. Additionally, the OMG provides services to certain of the Company's investment companies and partnerships, which reimburse the OMG for expenses equal to the costs of services provided. The Company's clients seek to partner with investment management firms that not only have compelling investment track records across multiple investment products but also possess seasoned infrastructure support functions. As such, significant investments have been made to develop the OMG. The Company has successfully launched new business lines, integrated acquired businesses into the operations and created scale within the OMG to support a much larger platform in the future. The OMG's expenses are not allocated to the Company's four reportable segments but the Company does consider the cost structure of the OMG when evaluating its financial performance.

Economic net income ("ENI") is a key performance indicator used in the alternative asset management industry. ENI represents net income excluding (a) income tax expense, (b) operating results of Consolidated Funds, (c) depreciation expense, (d) the effects of changes arising from corporate actions and (e) certain other items that the Company does not believe are indicative of its performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with acquisitions and capital transactions, placement fees and underwriting costs and expenses incurred in connection with corporate reorganization. The Company believes the exclusion of these items provides investors with a meaningful indication of the Company's core operating performance. ENI is evaluated regularly by management as a decision tool for deployment of resources and assess performances of each of the business segments. The Company believes that reporting ENI is helpful in understanding its business and that investors should review the same supplemental non-U.S. GAAP financial measures that management uses to analyze the segment performance. These measures supplement and should be considered in addition to, and not in lieu of, the Combined and Consolidated Statements of Operations prepared in accordance with U.S. GAAP.

Fee related earnings ("FRE") is a component of ENI and is used to assess the ability of the business to cover direct base compensation and operating expenses from total management fees. FRE differs from income before taxes computed in accordance with U.S. GAAP as it adjusts for the items included in the calculation of ENI and excludes performance fee income, performance fee compensation expenses and investment income from Consolidated Funds and certain other items.

Performance related earnings ("PRE") is a measure used to assess the Company's investment performance and its ability to cover performance fee compensation expenses from performance fee income and total investment income. PRE differs from income before taxes computed in accordance with U.S. GAAP as it only includes performance fee income, performance fee compensation expense and total investment income earned from Consolidated Funds and non-consolidated funds.

Distributable earnings ("DE") is a pre-income tax measure that is used to assess performance and amounts potentially available for distributions to stakeholders. Distributable earnings is calculated as the sum of FRE, realized performance fees, realized performance fee compensation expense and realized net other income, and further adjusts for expenses arising from transaction costs associated with acquisitions, placement fees and underwriting costs, expenses incurred in connection with corporate reorganization and depreciation. Distributable earnings differs from income (loss) before taxes computed in accordance with U.S. GAAP as it is presented before giving effect to unrealized performance fee income, unrealized performance fee compensation expense, unrealized net investment income, amortization of intangibles, equity compensation expense and is further adjusted by certain items described in the table set forth in (d) below.

Management makes operating decisions and assesses the performance of each of the Company's business segments based on financial and operating metrics and other data that is presented before giving effect to the consolidation of any of the Consolidated Funds. Consequently, all segment data excludes the assets, liabilities and operating results related to the Consolidated Funds and non-consolidated funds.

The following table presents the financial results for the Company's operating segments, as well as the OMG, as of and for the three months ended March 31, 2014:

	Private Equity Group			Direct Lending Group			Tradable Credit Group			Real Estate Group			Total Segments			OMG			Total Stand Alone

Management fees
Recurring fees (includes, in the case of the Direct Lending Group, $28,318 of ARCC Part I Fees)	$	23,196		$	66,204		$	33,693		$	16,768		$	139,861		$	—		$	139,861
Previously deferred fees		—			—			—			—			—			—			—

Total management fees		23,196			66,204			33,693			16,768			139,861			—			139,861
Administrative fees and other income		76			90			17			1,290			1,473			5,392			6,865
General, administrative and other expenses		(2,000	)		(1,914	)		(3,696	)		(4,267	)		(11,877	)		(13,535	)		(25,412	)
Compensation and benefits		(8,195	)		(32,212	)		(10,805	)		(11,485	)		(62,697	)		(27,657	)		(90,354	)

Fee related earnings (loss)		13,077			32,168			19,209			2,306			66,760			(35,800	)		30,960

Performance fees—realized		13,086			39			10,213			—			23,338			—			23,338
Performance fees—unrealized		21,341			2,292			13,509			2,950			40,092			—			40,092
Performance fee compensation expense—realized		(10,472	)		(29	)		(5,506	)		—			(16,007	)		—			(16,007	)
Performance fee compensation expense—unrealized		(16,912	)		(1,451	)		(6,355	)		—			(24,718	)		—			(24,718	)

Net performance fees		7,043			851			11,861			2,950			22,705			—			22,705
Investment income (loss)—realized		1,131			(597	)		18,018			730			19,282			—			19,282
Investment income (loss)—unrealized		15,156			1,524			(12,866	)		(862	)		2,952			—			2,952
Interest and other income		2,785			98			251			11			3,145			—			3,145
Interest expense		(623	)		(304	)		(387	)		(325	)		(1,639	)		—			(1,639	)

Net investment income (loss)		18,449			721			5,016			(446	)		23,740			—			23,740

Performance related earnings		25,492			1,572			16,877			2,504			46,445			—			46,445

Economic net income (loss)	$	38,569		$	33,740		$	36,086		$	4,810		$	113,205		$	(35,800	)	$	77,405


Distributable earnings (loss)	$	18,698		$	31,158		$	40,704		$	1,499		$	92,059		$	(37,512	)	$	54,547


Total assets	$	477,710		$	195,543		$	555,851		$	167,315		$	1,396,419		$	10,437		$	1,406,856

The following table presents the financial results for the Company's operating segments, as well as the OMG, as of and for the three months ended March 31, 2013:

	Private Equity Group			Direct Lending Group			Tradable Credit Group			Real Estate Group			Total Segments			OMG			Total Stand Alone

Management fees
Recurring fees (includes, in the case of the Direct Lending Group, $23,836 of ARCC Part I Fees)	$	23,543		$	51,450		$	30,031		$	2,467		$	107,491		$	—		$	107,491
Previously deferred fees		—			—			1,139			—			1,139			—			1,139

Total management fees		23,543			51,450			31,170			2,467			108,630			—			108,630
Administrative fees and other income		117			83			—			5			205			4,455			4,660
General, administrative and other expenses		(2,238	)		(1,802	)		(2,475	)		(1,258	)		(7,773	)		(5,554	)		(13,327	)
Compensation and benefits		(6,596	)		(26,902	)		(8,767	)		(3,568	)		(45,833	)		(19,082	)		(64,915	)

Fee related earnings (loss)		14,826			22,829			19,928			(2,354	)		55,229			(20,181	)		35,048

Performance fees—realized		9,012			—			9,038			—			18,050			—			18,050
Performance fees—unrealized		25,513			1,499			54,351			—			81,363			—			81,363
Performance fee compensation expense—realized		(7,209	)		—			(36	)		—			(7,245	)		—			(7,245	)
Performance fee compensation expense—unrealized		(20,269	)		(823	)		(34,665	)		—			(55,757	)		—			(55,757	)

Net performance fees		7,047			676			28,688			—			36,411			—			36,411
Investment income (loss)—realized		926			(825	)		19,513			(37	)		19,577			—			19,577
Investment income (loss)—unrealized		2,424			3,839			(3,961	)		1,048			3,350			—			3,350
Interest and other income		406			1,151			312			39			1,908			—			1,908
Interest expense		(919	)		(637	)		(656	)		(213	)		(2,425	)		—			(2,425	)

Net investment income (loss)		2,837			3,528			15,208			837			22,410			—			22,410

Performance related earnings		9,884			4,204			43,896			837			58,821			—			58,821

Economic net income (loss)	$	24,710		$	27,033		$	63,824		$	(1,517	)	$	114,050		$	(20,181	)	$	93,869


Distributable earnings (loss)	$	16,752		$	22,342		$	47,607		$	(3,422	)	$	83,279		$	(20,472	)	$	62,807


Total assets	$	407,526		$	211,238		$	656,974		$	53,547		$	1,329,285		$	9,444		$	1,338,729

The following tables reconcile segment results to the Company's income before taxes and total assets:

	For the Three Months Ended March 31, 2014

	Total Segments			Consolidation Adjustments and Reconciling Items			Consolidated Results
Revenues	$	204,764	(1)	$	(71,136	)(a)	$	133,628
Expenses		115,299	(2)		68,831	(b)		184,130
Other income		23,740	(3)		301,437	(c)		325,177
Economic net income / Income before taxes		113,205			161,470	(d)		274,675
Total assets		1,396,419			20,639,082	(e)		22,035,501

	For the Three Months Ended March 31, 2013

	Total Segments			Consolidation Adjustments and Reconciling Items			Consolidated Results
Revenues	$	208,248	(1)	$	(100,711	)(a)	$	107,537
Expenses		116,608	(2)		96,459	(b)		213,067
Other income		22,410	(3)		330,704	(c)		353,114
Economic net income / Income before taxes		114,050			133,534	(d)		247,584
Total assets		1,329,285			23,898,471	(e)		25,227,756

(1): Segment revenues consist of management fees, administrative fees and other income, as well as realized and unrealized performance fees.

	March 31, 2014		March 31, 2013

Management fees	$	139,861	$	108,630
Administrative fees and other income		1,473		205
Performance fees—realized		23,338		18,050
Performance fees—unrealized		40,092		81,363

Total segment revenue	$	204,764	$	208,248

(2): Segment expenses consist of compensation and benefits, and general, administrative and other expenses, as well as realized and unrealized performance fee expenses.

	March 31, 2014		March 31, 2013

Compensation and benefits	$	62,697	$	45,833
General, administrative and other expenses		11,877		7,773
Performance fee compensation expense—realized		16,007		7,245
Performance fee compensation expense—unrealized		24,718		55,757

Total segment expense	$	115,299	$	116,608

(3): Segment other income consists of realized and unrealized investment income and expenses, interest and other income and interest expenses.

	March 31, 2014			March 31, 2013

Investment income (loss)—realized	$	19,282		$	19,577
Investment income (loss)—unrealized		2,952			3,350
Interest and other income		3,145			1,908
Interest expense		(1,639	)		(2,425	)

Net investment income	$	23,740		$	22,410

(a): The revenues adjustment principally represents management and performance fees earned from Consolidated Funds which were eliminated in consolidation to arrive at Ares consolidated revenues.

	March 31, 2014			March 31, 2013

Consolidated Fund income eliminated in consolidation	$	(73,578	)	$	(105,166	)
Administrative fees and other income attributable to OMG		5,392			4,455
Performance fee reclass(1)		(2,950	)		—

Total consolidated adjustments and reconciling items	$	(71,136	)	$	(100,711	)

(1): Related to performance fees for AREA Sponsor Holdings LLC, an investment pool. Changes in value of this investment are reflected within other income (expense) in the Company's Combined and Consolidated Statements of Operations.

(b): The expenses adjustment represents the addition of expenses of the Consolidated Funds to the Ares unconsolidated expenses, depreciation expense, equity-based compensation and expenses associated with acquisitions and corporate actions necessary to arrive at Ares consolidated expenses.

	March 31, 2014			March 31, 2013

Consolidated Fund expenses added in consolidation	$	40,637		$	122,345
Consolidated Fund expenses eliminated in consolidation		(31,700	)		(61,237	)
OMG expenses		41,192			24,636
Acquisition related expenses		1,421			750
Equity compensation expense		5,339			6,310
Income tax expenses(1)		—			41
Placement fees and underwriting costs		1,052			82
Amortization of intangibles		8,831			2,299
Depreciation expense		2,059			1,233

Total consolidation adjustments and reconciling items	$	68,831		$	96,459

(1): Relates to local income taxes paid by subsidiary operating entities included in general, administrative and other expenses.

(c): The other income adjustment represents the addition of net investment income (loss) and net interest income (expense) to arrive at Ares consolidated other income.

	March 31, 2014			March 31, 2013

Other income from Consolidated Funds eliminated in consolidation, net	$	(22,630	)	$	(12,985	)
Consolidated Funds other income added in consolidation, net		321,117			343,689
Performance fee reclass(1)		2,950			—

Total consolidation adjustments and reconciling items	$	301,437		$	330,704

(1): Related to performance fees for AREA Sponsor Holdings LLC. Changes in value of this investment are reflected within other (income) expense in the Company's Combined and Consolidated Statements of Operations.

(d): The reconciliation of income before taxes as reported in the Combined and Consolidated Statements of Operations to economic net income, to fee related earnings, to performance related earnings and to distributable earnings consists of the following:

	March 31, 2014			March 31, 2013

*Economic net income*
Income before taxes	$	274,675		$	247,584

Adjustments
Amortization of intangibles		8,831			2,299
Depreciation expense		2,059			1,233
Equity compensation expenses		5,339			6,310
Income tax expense(1)		—			41
Acquisition-related expenses		1,421			750
Placement fees and underwriting costs		1,052			82
OMG expenses, net		35,800			20,181
Income of non-controlling interests in Consolidated Funds		(225,181	)		(148,591	)
Income tax expense (benefit) of non-controlling interests in Consolidated Funds		9,209			(15,839	)

Economic net income	$	113,205		$	114,050


*Fee related earnings*
Income before taxes	$	274,675		$	247,584

Adjustments
Amortization of intangibles		8,831			2,299
Depreciation expense		2,059			1,233
Equity compensation expenses		5,339			6,310
Income tax expense(1)		—			41
Acquisition-related expenses		1,421			750
Placement fees and underwriting costs		1,052			82
OMG expenses, net		35,800			20,181
Income of non-controlling interests in Consolidated Funds		(225,181	)		(148,591	)
Income tax (expense) benefit of non-controlling interests in Consolidated Funds		9,209			(15,839	)

Total consolidation adjustments and reconciling items		(161,470	)		(133,534	)

Economic net income		113,205			114,050

Total performance fee income—realized		(23,338	)		(18,050	)
Total performance fee income—unrealized		(40,092	)		(81,363	)
Total performance fee expense—realized		16,007			7,245
Total performance fee expense—unrealized		24,718			55,757
Net investment income		(23,740	)		(22,410	)

Fee related earnings	$	66,760		$	55,229


Management fees	$	139,861		$	108,630
Administrative fees and other income		1,473			205
Compensation and benefits		(62,697	)		(45,833	)
General, administrative and other expenses		(11,877	)		(7,773	)

Fee related earnings	$	66,760		$	55,229

	March 31, 2014			March 31, 2013

*Performance related earnings:*
Income before taxes	$	274,675		$	247,584

Adjustments
Amortization of intangibles		8,831			2,299
Depreciation expense		2,059			1,233
Equity compensation expenses		5,339			6,310
Income tax expense(1)		—			41
Acquisition-related expenses		1,421			750
Placement fees and underwriting costs		1,052			82
OMG expenses, net		35,800			20,181
Income of non-controlling interests in Consolidated Funds		(225,181	)		(148,591	)
Income tax expense (benefit) of non-controlling interests in Consolidated Funds		9,209			(15,839	)

Economic net income		113,205			114,050

Total management fees	$	(139,861	)	$	(108,630	)
Administrative fees and other income		(1,473	)		(205	)
Compensation and benefits		62,697			45,833
General, administrative and other expenses		11,877			7,773

Performance related earnings	$	46,445		$	58,821


Total performance fee income—realized	$	23,338		$	18,050
Total performance fee income—unrealized		40,092			81,363
Total performance fee expense—realized		(16,007	)		(7,245	)
Total performance fee expense—unrealized		(24,718	)		(55,757	)
Net investment income		23,740			22,410

Performance related earnings	$	46,445		$	58,821

(1): Relates to local income taxes paid by subsidiary operating entities included in general, administrative and other expenses.

	March 31, 2014			March 31, 2013

*Distributable Earnings*
Income before taxes	$	274,675		$	247,584

Adjustments
Amortization of intangibles		8,831			2,299
Equity compensation expenses		5,339			6,310
OMG distributable loss(1)		37,512			20,472
Income of non-controlling interests in Consolidated Funds		(225,181	)		(148,591	)
Income tax (expense) benefit of non-controlling interests in Consolidated Funds		9,209			(15,839	)
Unrealized performance fee		(40,092	)		(81,363	)
Unrealized performance fee compensation expense		24,718			55,757
Unrealized investment and other loss		(2,952	)		(3,350	)

Distributable Earnings	$	92,059		$	83,279


Fee related earnings	$	66,760		$	55,229
Performance fees—realized		23,338			18,050
Performance fee compensation expense—realized		(16,007	)		(7,245	)
Other income realized, net		20,788			19,060

Net performance fee—realized		28,119			29,865
Less:
One-time acquisition costs		—			(750	)
Income tax expense(2)		—			(41	)
Placement fees and underwriting costs		(1,052	)		(82	)
Non-cash depreciation and amortization(3)		(1,768	)		(942	)

Distributable earnings	$	92,059		$	83,279

(1): Represents OMG distributable earnings which includes depreciation expense.
(2): Relates to local income taxes paid by subsidiary operating entities included in general, administrative and other expenses.
(3): Depreciation and amortization is reduced by the amounts attributed to OMG equal to $291 and $291 for the periods ended March 31, 2014 and 2013, respectively.

(e): The reconciliation of total segment assets to total assets reported in the Combined and Consolidated Statements of Financial Condition consists of the following:

	March 31, 2014			March 31, 2013

Total assets from Consolidated Funds eliminated in consolidation	$	(791,639	)	$	(829,629	)
Total assets from Consolidated Funds added in consolidation		21,420,284			24,718,656
OMG assets		10,437			9,444

Total consolidation adjustments and reconciling items	$	20,639,082		$	23,898,471