EQUITY COMPENSATION

Ares Employee Participation LLC Interests

The following summarizes the grant date fair value associated with each equity award issued prior to the Company's IPO that occurred on May 1, 2014, as well as the expense recognized related to these awards for the year ended December 31, 2014:



			Compensation Expense, Net of Forfeitures			Unrecognized Compensation Expenses(1)
	Grant Date Fair Value		For the Year Ended December 31, 2014			As of April 30, 2014
AEP I Profit Interest	$	38,400	$	—		$	—
AEP II Profit Interests	33,423		14,714			12,709
AEP IV Profit Interests	10,657		10,657			10,657
AEP VI Profit Interests	9,047		9,047			9,047
Exchanged AEP Awards	68,607		—			—
Indicus:
Membership Interest	20,700		11,913			10,532
Profit Interest	5,464		(3,871		)	—
AREA Membership Interest	25,381		20,678			17,555
Total	$	211,679	$	63,138		$	60,500

(1) On May 1, 2014, the unrecognized compensation expenses associated with awards granted prior to the IPO were recognized as the vesting of these awards was accelerated. These amounts are included in the compensation expenses presented above.

Conversion and Vesting of AEP awards

On May 1, 2014, in connection with the Reorganization, certain existing interests held by APMC, on behalf of certain of our Co-Founders and senior professionals under Ares Employee Participation ("AEP") plans, that represent less than a full equity interest in the Predecessors were converted into AOG Units and were immediately vested and expensed in full. There was no change in the fair value of these converted interests as a result of the acceleration in vesting; however, the Indicus Profit Interest was cancelled. In connection with this cancellation, the Company reversed expense of $4.3 million. As a result, the Company recognized a one‑time compensation expense of $56.2 million related to the vesting and cancellation of the converted awards in the year ended December 31, 2014.

Ares Management, L.P. 2014 Equity Incentive Plan

In 2014, the Company adopted the 2014 Equity Incentive Plan. Under the 2014 Equity Incentive Plan, the Company granted options to acquire 24,835,227 common units, 4,936,051 restricted units to be settled in common units and 686,395 phantom common units to be settled in cash. Based on a formula as defined in the 2014 Equity Incentive Plan, the total number of units available to be issued under the 2014 Equity Incentive Plan resets and may increase on January 1 each year. Accordingly, on January 1, 2016, the total number of units available for issuance under the 2014 Equity Incentive Plan increased to 31,995,344 units. During the year ended December 31, 2016, a total of 1,420,147 options and restricted units, net of forfeitures and vesting, were issued, and as of December 31, 2016, 30,397,280 units remain available for issuance.

Generally, unvested phantom units, restricted units and options are forfeited upon termination of employment in accordance with the 2014 Equity Incentive Plan. The Company recognizes forfeitures as a reversal of previously recognized compensation expense in the period they occur.

Equity-based compensation expense, net of forfeitures is included in the following table:



	For the Year Ended December 31,				Period from May 1, 2014 through December 31, 2014
	2016		2015		Period from May 1, 2014 through December 31, 2014
Restricted units	$	21,894	$	14,035	$	8,826
Options	15,450		16,575		9,869
Phantom units	1,721		1,634		1,396
Equity-based compensation expense	$	39,065	$	32,244	$	20,091

Restricted Units

Each restricted unit represents an unfunded, unsecured right of the holder to receive a common unit on a specific date. The restricted units generally vest and are settled in common units either (i) at a rate of one‑third per year, beginning on the third anniversary of the grant date, (ii) in their entirety on the fifth anniversary of the grant date, or (iii) at a rate of one quarter per year, beginning on the first anniversary of the grant date. Compensation expense associated with restricted units is recognized on a straight-line basis over the requisite service period of the award.

The holders of restricted units generally have the right to receive as current compensation an amount in cash equal to (i) the amount of any distribution paid with respect to a common unit multiplied by (ii) the number of restricted units held at the time such distributions are declared (“Distribution Equivalent”). During the year ended December 31, 2016, the Company declared four quarterly distributions of $0.20, $0.15, $0.28 and $0.20 per common unit to common unitholders of record at the close of business on March 14, May 24, August 23, and November 21, respectively. For the year ended December 31, 2016, Distribution Equivalents were made to the holders of restricted units in the aggregate amount of $6.1 million, which are presented as distributions within the Consolidated Statement of Changes in Equity until forfeited, at which time the cumulative payments are reclassified to compensation and benefits expense in the Consolidated Statements of Operations.

The following table presents unvested restricted units’ activity during the year ended December 31, 2016:



	Restricted Units		Weighted Average Grant Date Fair Value Per Unit
Balance - January 1, 2016	4,657,761		$	18.01
Granted	3,988,873		14.58
Vested	(47,729	)	17.32
Forfeited	(540,533	)	16.95
Balance - December 31, 2016	8,058,372		$	16.38

The total compensation expense expected to be recognized in all future periods associated with the restricted units is approximately $82.7 million as of December 31, 2016 and is expected to be recognized over the remaining weighted average period of 3.05 years.

Options

Each option entitles the holders to purchase from the Company, upon exercise thereof, one common unit at the stated exercise price. The term of the options is generally ten years, beginning on the grant date. The options generally vest at a rate of one-third per year, beginning on the third anniversary of the grant date. Compensation expense associated with these options is being recognized on a straight-line basis over the requisite service period of the respective award. As of December 31, 2016, there was $40.5 million of total unrecognized compensation expense that is expected to be recognized over the remaining weighted average period of 2.32 years.

A summary of unvested options activity during the year ended December 31, 2016 is presented below:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Life (in years)	Aggregate Intrinsic Value
Balance - January 1, 2016	24,082,415		$	18.99	8.34
Granted	—		—		—
Vested	(153,449	)	19.00		7.29
Forfeited	(1,827,027	)	19.00		—
December 31, 2016	22,101,939		$	18.99	7.35	$	4,586
Exercisable at December 31, 2016	130,200		$	19.00	7.29	$	26

Aggregate intrinsic value represents the value of the Company’s closing unit price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options exercisable or expected to vest.

The fair value of an award is affected by the Company’s unit price on the date of grant as well as other assumptions including the estimated volatility of the Company’s unit price over the term of the awards and the estimated period of time that management expects employees to hold their unit options. The estimated period of time that management expects employees to hold their options was estimated as the midpoint between the vesting date and maturity date.

The fair value of each option granted during each year is measured on the date of the grant using the Black‑Scholes option pricing model and the following weighted average assumptions:



	For the Year Ended December 31,		Period from May 1, 2014 through December 31, 2014
	2016(2)	2015	Period from May 1, 2014 through December 31, 2014
Risk-free interest rate	N/A	1.71% to 1.80%	2.06% to 2.22%
Weighted average expected dividend yield	N/A	5.00%	5.00%
Expected volatility factor(1)	N/A	35.00% to 36.00%	34.00% to 35.00%
Expected life in years	N/A	6.66 to 7.49	6.92 to 7.00

(1) Expected volatility is based on comparable companies using daily stock prices.

(2) There were no new options granted during the year ended December 31, 2016.

Phantom Units

Each phantom unit represents an unfunded, unsecured right of the holder to receive an amount in cash per phantom unit equal to the average closing price of a common unit for the 15 trading days immediately prior to, and the 15 trading days immediately following, the vesting date. The phantom units will vest in equal installments over five years at the anniversaries of the IPO date. The phantom units are accounted for as liability awards with compensation expense being recognized on a straight-line basis based on the number of unvested units. Forfeitures will reduce the expenses in the period in which the forfeiture occurs.

A summary of unvested phantom units’ activity during the year ended December 31, 2016 is presented below:



	Phantom Units		Weighted Average Grant Date Fair Value Per Unit		Phantom Units	Weighted Average Grant Date Fair Value Per Unit
Balance - January 1	418,115		$	19.00	610,711	$	19.00
Vested	(98,733	)	19.00		(116,802)	19.00
Forfeited	(53,244	)	19.00		(75,794)	19.00
Balance - December 31	266,138		$	19.00	418,115	$	19.00

The fair value of the awards is remeasured at each reporting period and was $19.20 per unit as of December 31, 2016. Based on the fair value of the awards at December 31, 2016, $4.0 million of unrecognized compensation expense in connection with phantom units outstanding is expected to be recognized over a weighted average period of 2.33 years. For the year ended December 31, 2016, the Company paid $1.4 million to settle vested phantom units.

Adoption of ASU 2016-09

The Company adopted ASU 2016-09 effective January 1, 2016 using a modified retrospective approach and recorded a cumulative-effect adjustment with the following impact to beginning equity:



	Partners' Capital			Non-Controlling Interest in AOG Entities			Redeemable Interest in AOG Entities
Balance at December 31, 2015	$	251,537		$	397,883		$	23,505
Retained earnings	(3,357		)	(5,470		)	(38		)
Paid-in-capital - equity compensation	3,767			6,138			43
Distributions - dividend equivalent	(410		)	(668		)	(5		)
Balance at December 31, 2015 (as adjusted)	$	251,537		$	397,883		$	23,505