14. SEGMENT REPORTING

The Company operates through its distinct operating segments. In 2016, the Company revised its reportable segments by combining two of its segments into a single segment to reflect a change in how the Company is managed. The previously disclosed Tradable Credit Group segment and the Direct Lending Group segment have been combined into a single Credit Group segment. This change was made to more effectively manage the Company’s broad array of credit products and to better position the Credit Group to capitalize on future growth opportunities. The Company has presented its reportable segments for the three and six months ended June 30, 2015 in conformity with the three and six months ended June 30, 2016 presentation.

The Company’s three revised operating segments are:

Credit Group: The Company’s Credit Group is a leading manager of credit strategies across the non-investment grade credit universe in the U.S. and Europe, with approximately $62.1 billion of assets under management and approximately 133 funds as of June 30, 2016. The Credit Group offers a range of credit strategies across the liquid and illiquid spectrum, including syndicated loans, high yield bonds, credit opportunities, special situations, structured credit investments and U.S. and European direct lending. The Credit Group provides solutions for traditional fixed income investors seeking to access the syndicated loans and high yield bond markets and capitalize on opportunities across traded corporate credit. It additionally provides investors access to directly originated fixed and floating rate credit assets and the ability to capitalize on illiquidity premiums across the credit spectrum. The Credit Group’s syndicated loans strategy (formerly known as the bank loan strategy) focuses on liquid, traded non-investment grade secured loans to corporate issuers. The high yield bond strategy seeks to deliver a diversified portfolio of liquid, traded non-investment grade corporate bonds, including secured, unsecured and subordinated debt instruments. Credit opportunities is a “go anywhere” strategy seeking to capitalize on market inefficiencies and relative value opportunities across the capital structure. The special situations strategy seeks to invest opportunistically across a broad spectrum of distressed or mispriced investments, including corporate debt, rescue capital, private asset-backed investments, post-reorganization securities and non-performing portfolios. The structured credit strategy (formerly known as the asset-backed strategy) invests across the capital structures of syndicated collateralized loan obligation vehicles (CLOs) and in directly-originated asset-backed instruments comprised of diversified portfolios of consumer and commercial assets. The Company is one of the largest self-originating direct lenders to the U.S. and European middle markets, providing one-stop financing solutions for small-to-medium sized companies, which we believe are increasingly underserved by traditional lenders. The Credit Group conducts its U.S. corporate lending activities primarily through ARCC, the largest business development company as of March 31, 2016, by both market capitalization and total assets. In addition, the Credit Group manages a commercial finance business that provides asset-based and cash flow loans to small and middle-market companies, as well as asset-based facilities to specialty finance companies. The Credit Group’s European direct lending platform is one of the most significant participants in the European middle-market, focusing on self-originated investments in illiquid middle-market credits.

Private Equity Group: The Company’s Private Equity Group has approximately $23.0 billion of assets under management as of June 30, 2016, broadly categorizing its investment strategies as corporate private equity and U.S. power and energy infrastructure. The group manages five corporate private equity commingled funds focused on North America and Europe, one commingled China growth fund, five commingled funds and six related co-investment vehicles focused on U.S. power and energy infrastructure as of June 30, 2016. In its North American and European flexible capital strategy, the Company targets opportunistic majority or shared-control investments in businesses with strong franchises and attractive growth opportunities in North America and Europe. The China growth capital strategy focuses on privately negotiated, minority growth equity investments in China in companies that operate in industries the Company believes will be the primary drivers of China’s economic growth over the next decade. The U.S. power and energy infrastructure strategy targets U.S. energy infrastructure-related assets across the power generation, transmission and midstream sectors, seeking attractive risk-adjusted equity returns with current cash flow and capital appreciation.

Real Estate Group: The Company’s Real Estate Group manages comprehensive public and private equity and debt strategies, with approximately $10.1 billion of assets under management across approximately 48 funds as of June 30, 2016. Real Estate equity strategies focus on applying hands-on value creation initiatives to mismanaged and capital-starved assets, as well as new development, ultimately selling stabilized assets back into the market. The Real Estate Group manages both a value-add strategy and an opportunistic strategy. The value-add strategy seeks to create value by buying assets at attractive valuations and through active asset management of income-producing property types across the U.S. and Western Europe. The opportunistic strategy focuses on manufacturing core assets through development, redevelopment and fixing distressed capital structures across major property types in the U.S. and Europe. The Company’s debt strategies leverage the Real Estate Group’s diverse sources of capital to directly originate and manage commercial mortgage investments on properties that range from stabilized to requiring hands-on value creation. In addition to managing private debt funds, the Real Estate Group makes debt investments through a publicly traded commercial mortgage REIT, ACRE.

The Company has an Operations Management Group (the “OMG”) that consists of five 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 OMG’s expenses are not allocated to the Company’s three reportable segments but the Company does consider the cost structure of the OMG when evaluating its financial performance.

Economic net income (“ENI”), a non-GAAP measure, is an operating metric used by management to evaluate total operating performance, a decision tool for deployment of resources, and an assessment of the performance of our business segments. ENI differs from net income by excluding (a) income tax expense, (b) operating results of our Consolidated Funds, (c) depreciation and amortization expense, (d) placement fees and underwriting costs (e) the effects of changes arising from corporate actions, and (f) certain other items that we believe are not indicative of our total operating performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with mergers and acquisitions and capital transactions, and expenses incurred in connection with corporate reorganization.

Fee related earnings (“FRE”), a non-GAAP measure, refers to a component of ENI that is used to assess core operating performance by determining whether recurring revenue, primarily consisting of management fees, is sufficient to cover operating expenses and to generate profits. FRE differs from income before taxes computed in accordance with GAAP as it adjusts for the items included in the calculation of ENI and excludes performance fees, performance fee compensation, investment income from our Consolidated Funds and non-consolidated funds and certain other items that we believe are not indicative our performance.

Performance related earnings (“PRE”) , a non-GAAP measure, is used to assess our investment performance net of performance fee compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance fees, performance fee compensation and total investment and other income earned from our Consolidated Funds and non-consolidated funds.

Distributable earnings (“DE”), a non-GAAP measure, is an operating metric that assesses our performance without the effects of our consolidated funds and the impact of unrealized income and expenses, which generally fluctuate with fair value changes. Among other things, this metric also is used to assist in determining amounts potentially available for distribution. However, the declaration, payment, and determination of the amount of distributions to unitholders, if any, is at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Distributable earnings is calculated as the sum of Fee Related Earnings, realized performance fees, realized performance fee compensation, realized net investment and other income, and is reduced by 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 before taxes computed in accordance with GAAP as it is typically presented before giving effect to unrealized performance fees, unrealized performance fee compensation, unrealized net investment income, amortization of intangibles, and equity compensation expense. DE is presented prior to the effect of income taxes, unless otherwise noted.

These measures supplement and should be considered in addition to, and not in lieu of, the Condensed Consolidated Statements of Operations prepared in accordance with GAAP.

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, for the three months ended June 30, 2016:


			Private		Real						Total
	Credit		Equity		Estate		Total				Stand
	Group		Group		Group		Segments		OMG		Alone
Management fees (Credit Group includes ARCC Part I Fees of $28,999)	$	110,770	$	35,612	$	16,230	$	162,612	$	—	$	162,612
Other fees(1)		550		334		435		1,319		—		1,319
Compensation and benefits		(45,479)		(13,191)		(10,165)		(68,835)		(28,218)		(97,053)
General, administrative and other expenses		(6,609)		(2,925)		(2,399)		(11,933)		(15,380)		(27,313)
Fee related earnings		59,232		19,830		4,101		83,163		(43,598)		39,565
Performance fees—realized		16,024		62,779		2,801		81,604		—		81,604
Performance fees—unrealized		16,603		105,450		1,261		123,314		—		123,314
Performance fee compensation—realized		(754)		(50,224)		(53)		(51,031)		—		(51,031)
Performance fee compensation—unrealized		(14,755)		(84,337)		(1,773)		(100,865)		—		(100,865)
Net performance fees		17,118		33,668		2,236		53,022		—		53,022
Investment income (loss)—realized		123		3,003		695		3,821		(31)		3,790
Investment income (loss)—unrealized		7,032		420		(1,067)		6,385		(11,904)		(5,519)
Interest and other investment income		8,098		8,206		36		16,340		(19)		16,321
Interest expense		(2,450)		(1,397)		(272)		(4,119)		(709)		(4,828)
Net investment income (loss)		12,803		10,232		(608)		22,427		(12,663)		9,764
Performance related earnings		29,921		43,900		1,628		75,449		(12,663)		62,786
Economic net income	$	89,153	$	63,730	$	5,729	$	158,612	$	(56,261)	$	102,351
Distributable earnings	$	76,074	$	41,130	$	8,374	$	125,578	$	(48,758)	$	76,820

(1) For the three months ending June 30, 2016, the Company presented compensation and benefits expenses and general, administrative and other expenses net of the administrative fees earned from certain funds. As a result, for the three months ended June 30, 2016, $6.0 million and $0.5 million of administrative fees have been reclassified from other fees to compensation and benefits expenses and general, administrative and other expenses, respectively.

The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the three months ended June 30, 2015:


			Private		Real						Total
	Credit		Equity		Estate		Total				Stand
	Group		Group		Group		Segments		OMG		Alone
Management fees (Credit Group includes ARCC Part I Fees of $29,250)	$	108,180	$	36,373	$	15,934	$	160,487	$	—	$	160,487
Other fees(1)		99		36		731		866		—		866
Compensation and benefits		(43,036)		(11,226)		(9,992)		(64,254)		(21,811)		(86,065)
General, administrative and other expenses		(6,825)		(3,200)		(3,709)		(13,734)		(15,067)		(28,801)
Fee related earnings		58,418		21,983		2,964		83,365		(36,878)		46,487
Performance fees—realized		40,081		18,878		102		59,061		—		59,061
Performance fees—unrealized		(26,175)		41,863		3,886		19,574		—		19,574
Performance fee compensation—realized		(22,617)		(15,102)		—		(37,719)		—		(37,719)
Performance fee compensation—unrealized		16,151		(33,795)		(1,181)		(18,825)		—		(18,825)
Net performance fees		7,440		11,844		2,807		22,091		—		22,091
Investment income (loss)—realized		5,903		3,105		255		9,263		—		9,263
Investment income (loss)—unrealized		(6,533)		2,085		953		(3,495)		—		(3,495)
Interest and other investment income		3,933		1,330		18		5,281		—		5,281
Interest expense		(1,736)		(1,658)		(260)		(3,654)		—		(3,654)
Net investment income (loss)		1,567		4,862		966		7,395		—		7,395
Performance related earnings		9,007		16,706		3,773		29,486		—		29,486
Economic net income	$	67,425	$	38,689	$	6,737	$	112,851	$	(36,878)	$	75,973
Distributable earnings	$	81,605	$	28,242	$	2,090	$	111,937	$	(38,981)	$	72,956

(1) For the three months ending June 30, 2015, the Company presented compensation and benefits expenses and general, administrative and other expenses net of the administrative fees earned from certain funds. As a result, for the three months ended June 30, 2015, $5.3 million and $0.9 million of administrative fees have been reclassified from other fees to compensation and benefits expenses and general, administrative and other expenses, respectively.

The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the six months ended June 30, 2016:


			Private		Real						Total
	Credit		Equity		Estate		Total				Stand
	Group		Group		Group		Segments		OMG		Alone
Management fees (Credit Group includes ARCC Part I Fees of $57,624)	$	220,211	$	72,094	$	32,975	$	325,280	$	—	$	325,280
Other fees(1)		659		674		693		2,026		—		2,026
Compensation and benefits		(89,393)		(25,358)		(20,879)		(135,630)		(57,208)		(192,838)
General, administrative and other expenses		(11,660)		(5,829)		(5,701)		(23,190)		(32,665)		(55,855)
Fee related earnings		119,817		41,581		7,088		168,486		(89,873)		78,613
Performance fees—realized		22,202		62,779		2,972		87,953		—		87,953
Performance fees—unrealized		(12,724)		93,307		5,383		85,966		—		85,966
Performance fee compensation—realized		(2,737)		(50,224)		(53)		(53,014)		—		(53,014)
Performance fee compensation—unrealized		1,850		(75,396)		(4,006)		(77,552)		—		(77,552)
Net performance fees		8,591		30,466		4,296		43,353		—		43,353
Investment income (loss)—realized		285		2,891		563		3,739		(88)		3,651
Investment income (loss)—unrealized		3,025		(7,325)		1,732		(2,568)		(11,519)		(14,087)
Interest and other investment income		15,677		8,115		928		24,720		(68)		24,652
Interest expense		(4,898)		(2,802)		(546)		(8,246)		(1,437)		(9,683)
Net investment income (loss)		14,089		879		2,677		17,645		(13,112)		4,533
Performance related earnings		22,680		31,345		6,973		60,998		(13,112)		47,886
Economic net income	$	142,497	$	72,926	$	14,061	$	229,484	$	(102,985)	$	126,499
Distributable earnings	$	144,157	$	60,735	$	11,717	$	216,609	$	(98,508)	$	118,101

(1) For the six months ending June 30, 2016, the Company presented compensation and benefits expenses and general, administrative and other expenses net of the administrative fees earned from certain funds. As a result, for the six months ended June 30, 2016, $11.8 million and $1.6 million of administrative fees have been reclassified from other fees to compensation and benefits expenses and general, administrative and other expenses, respectively.

The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the six months ended June 30, 2015:


			Private		Real						Total
	Credit		Equity		Estate		Total				Stand
	Group		Group		Group		Segments		OMG		Alone
Management fees (Credit Group includes ARCC Part I Fees of $58,292)	$	216,528	$	72,962	$	33,313	$	322,803	$	—	$	322,803
Other fees(1)		197		49		1,585		1,831		—		1,831
Compensation and benefits		(85,601)		(23,547)		(20,123)		(129,271)		(45,445)		(174,716)
General, administrative and other expenses		(13,950)		(6,318)		(6,253)		(26,521)		(29,288)		(55,809)
Fee related earnings		117,174		43,146		8,522		168,842		(74,733)		94,109
Performance fees—realized		75,295		19,303		102		94,700		—		94,700
Performance fees—unrealized		(45,376)		129,194		4,206		88,024		—		88,024
Performance fee compensation—realized		(43,621)		(15,442)		—		(59,063)		—		(59,063)
Performance fee compensation—unrealized		30,682		(103,776)		(779)		(73,873)		—		(73,873)
Net performance fees		16,980		29,279		3,529		49,788		—		49,788
Investment income (loss)—realized		14,521		7,277		387		22,185		—		22,185
Investment income (loss)—unrealized		(9,902)		643		1,149		(8,110)		—		(8,110)
Interest and other investment income		2,407		5,815		47		8,269		—		8,269
Interest expense		(3,470)		(3,338)		(530)		(7,338)		—		(7,338)
Net investment income (loss)		3,556		10,397		1,053		15,006		—		15,006
Performance related earnings		20,536		39,676		4,582		64,794		—		64,794
Economic net income	$	137,710	$	82,822	$	13,104	$	233,636	$	(74,733)	$	158,903
Distributable earnings	$	157,312	$	55,328	$	5,472	$	218,112	$	(77,861)	$	140,251

(1) For the six months ending June 30, 2015, the Company presented compensation and benefits expenses and general, administrative and other expenses net of the administrative fees earned from certain funds. As a result, for the six months ended June 30, 2015, $10.5 million and $2.1 million of administrative fees have been reclassified from other fees to compensation and benefits expenses and general, administrative and other expenses, respectively.

The following table presents the components of the Company’s operating segments’ revenue, expenses and other income (loss):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Segment Revenues
Management fees (includes ARCC Part I Fees of $28,999, $57,624 and $29,250, $58,292 for the three and six months ended June 30, 2016 and 2015, respectively)	$	162,612	$	160,487	$	325,280	$	322,803
Other fees		1,319		866		2,026		1,831
Performance fees—realized		81,604		59,061		87,953		94,700
Performance fees—unrealized		123,314		19,574		85,966		88,024
Total segment revenues	$	368,849	$	239,988	$	501,225	$	507,358
Segment Expenses
Compensation and benefits	$	68,835	$	64,254	$	135,630	$	129,271
General, administrative and other expenses		11,933		13,734		23,190		26,521
Performance fee compensation—realized		51,031		37,719		53,014		59,063
Performance fee compensation—unrealized		100,865		18,825		77,552		73,873
Total segment expenses	$	232,664	$	134,532	$	289,386	$	288,728
Other Income (Expense)
Investment income (loss)—realized	$	3,821	$	9,263		3,739		22,185
Investment income (loss)—unrealized		6,385		(3,495)		(2,568)		(8,110)
Interest and other investment income		16,340		5,281		24,720		8,269
Interest expense		(4,119)		(3,654)		(8,246)		(7,338)
Total other income	$	22,427	$	7,395	$	17,645	$	15,006

The following table reconciles segment revenue to Ares consolidated revenues:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Total segment revenue	$	368,849	$	239,988	$	501,225	$	507,358
Consolidated Fund revenue eliminated in consolidation		(4,842)		(2,972)		(7,453)		(5,831)
Other fees(1)		6,544		6,167		13,366		12,552
Performance fees reclass(2)		(1,016)		(2,019)		(1,588)		(3,010)
Total consolidated adjustments and reconciling items		686		1,176		4,325		3,711
Total consolidated revenue	$	369,535	$	241,164	$	505,550	$	511,069

(1)

Represents administrative fees that are presented in administrative and other fees in the Company’s Condensed Consolidated Statements of Operations and are netted against the respective expenses for segment reporting.

(2)

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 Condensed Consolidated Statements of Operations.

The following table reconciles segment expenses to Ares consolidated expenses:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Total segment expenses	$	232,664	$	134,532	$	289,386	$	288,728
Consolidated Fund expenses added in consolidation		5,288		7,614		11,267		22,973
Consolidated Fund expenses eliminated in consolidation		(4,589)		(4,005)		(10,341)		(8,691)
Other fees(1)		6,544		6,167		13,366		12,552
OMG expenses		43,598		36,878		89,873		74,733
Acquisition and merger-related expenses		85		3,526		353		5,750
Equity compensation expense		9,536		7,798		18,709		15,719
Placement fees and underwriting costs		1,754		1,462		2,684		4,507
Amortization of intangibles		7,121		16,646		14,384		27,538
Depreciation expense		1,934		1,951		3,792		3,223
Total consolidation adjustments and reconciling items		71,271		78,037		144,087		158,304
Total consolidated expenses	$	303,935	$	212,569	$	433,473	$	447,032

(1)

The following table reconciles segment other income (expense) to Ares consolidated other income:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Total other income	$	22,427	$	7,395	$	17,645	$	15,006
Consolidated Funds other income (expense) added in consolidation, net		7,168		22,667		(15,635)		20,084
Other income (expense) from Consolidated Funds eliminated in consolidation, net		(566)		(3,124)		11,673		1,875
OMG other expense		(12,663)		—		(13,112)		—
Performance fee reclass(1)		1,016		2,019		1,588		3,010
Other non-cash expense		24		(1)		(204)		(11)
Total consolidation adjustments and reconciling items		(5,021)		21,561		(15,690)		24,958
Total consolidated other income (expense)	$	17,406	$	28,956	$	1,955	$	39,964

(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 Condensed Consolidated Statements of Operations.

The following table presents the reconciliation of income before taxes as reported in the Condensed Consolidated Statements of Operations to segment results of ENI, FRE, PRE and DE:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2016		2015		2016		2015
Economic net income
Income before taxes	$	83,006	$	57,551	$	74,032	$	104,001
Adjustments:
Amortization of intangibles		7,121		16,646		14,384		27,538
Depreciation expense		1,934		1,951		3,792		3,223
Equity compensation expenses		9,536		7,798		18,709		15,719
Acquisition and merger-related expenses		61		3,526		557		5,750
Placement fees and underwriting costs		1,754		1,462		2,684		4,507
OMG expenses, net		56,261		36,878		102,985		74,733
Other non-cash expense		—		1		—		11
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations		(1,061)		(12,962)		12,341		(1,846)
Total consolidation adjustments and reconciling items		75,606		55,300		155,452		129,635
Economic net income		158,612		112,851		229,484		233,636
Total performance fees income - realized		(81,604)		(59,061)		(87,953)		(94,700)
Total performance fees income - unrealized		(123,314)		(19,574)		(85,966)		(88,024)
Total performance fee compensation - realized		51,031		37,719		53,014		59,063
Total performance fee compensation - unrealized		100,865		18,825		77,552		73,873
Total investment income		(22,427)		(7,395)		(17,645)		(15,006)
Fee related earnings		83,163		83,365		168,486		168,842
Performance fees—realized		81,604		59,061		87,953		94,700
Performance fee compensation—realized		(51,031)		(37,719)		(53,014)		(59,063)
Investment and other income realized, net		14,657		10,890		18,828		23,116
Additional adjustments:
Dividend equivalent(1)		(552)		(717)		(1,236)		(1,401)
One-time acquisition costs(1)		(12)		253		(282)		(471)
Income tax expense(1)		(249)		(391)		(481)		(867)
Non-cash items		683		(253)		847		(409)
Placement fees and underwriting costs(1)		(1,747)		(1,463)		(2,685)		(4,507)
Depreciation and amortization(1)		(938)		(1,089)		(1,807)		(1,828)
Distributable earnings	$	125,578	$	111,937	$	216,609	$	218,112
Performance related earnings
Economic net income	$	158,612	$	112,851	$	229,484	$	233,636
Less: fee related earnings		(83,163)		(83,365)		(168,486)		(168,842)
Performance related earnings	$	75,449	$	29,486	$	60,998	$	64,794

(1)

Certain costs are reduced by the amounts attributable to OMG, which is excluded from segment results.