SEGMENT REPORTING

The Company operates through its three distinct operating segments. During the quarter ended March 31, 2017, the Company reclassified certain expenses from OMG to its operating segments. Historical results have been modified to conform to the current period presentation.

The Company’s three 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 $65.2 billion of assets under management and 139 funds as of March 31, 2017. The Credit Group offers a range of credit strategies across the liquid and illiquid spectrum, including syndicated loans, high yield bonds, credit opportunities, 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 capitalizes 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 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 structured credit 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 has one of the largest self-originating direct lending platforms in the U.S. and European middle markets, providing one-stop financing solutions for small-to-medium sized companies, which the Company believes are increasingly underserved by traditional lenders. The Credit Group conducts its U.S. direct lending activities primarily through ARCC, the largest business development company as of March 31, 2017, 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 $24.7 billion of assets under management as of March 31, 2017, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of March 31, 2017 the group managed five corporate private equity commingled funds focused on North America and Europe and two focused on greater China, five commingled funds and six related co-investment vehicles focused on U.S. power and energy infrastructure and five special situations funds. 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 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. 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.

Real Estate Group: The Company’s Real Estate Group manages comprehensive public and private equity and debt strategies, with approximately $9.9 billion of assets under management across 41 funds as of March 31, 2017. 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 properties 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 properties 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/corporate strategy, 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.

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

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 the Company’s business segments. ENI differs from net income by excluding (a) income tax expense, (b) operating results of the 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 the Company believes are not indicative of its 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 the Consolidated Funds and non-consolidated funds and certain other items that the Company believes are not indicative of its core operating performance.

Performance related earnings (“PRE”), a non-GAAP measure, is used to assess the Company’s 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 the Consolidated Funds and non-consolidated funds.

Distributable earnings (“DE”), a non-GAAP measure, is an operating metric that assesses the Company’s performance without the effects of the 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 the Company’s Board of Directors, which may change the 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 attributable to Ares Holdings, Inc. and to distributions made to the Company’s preferred unitholders, unless otherwise noted.

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 March 31, 2017:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total Stand Alone
Management fees (Credit Group includes ARCC Part I Fees of $33,257)	$	121,347		$	39,819		$	15,615		$	176,781		$	—		$	176,781
Other fees	4,503			340			(9		)	4,834			—			4,834
Compensation and benefits	(51,342		)	(13,218		)	(9,736		)	(74,296		)	(26,314		)	(100,610		)
General, administrative and other expenses	(7,966		)	(4,198		)	(2,731		)	(14,895		)	(19,388		)	(34,283		)
Fee related earnings	66,542			22,743			3,139			92,424			(45,702		)	46,722
Performance fees—realized	8,778			—			27			8,805			—			8,805
Performance fees—unrealized	2,936			32,237			14,088			49,261			—			49,261
Performance fee compensation—realized	(5,285		)	—			(16		)	(5,301		)	—			(5,301		)
Performance fee compensation—unrealized	(1,458		)	(25,505		)	(8,438		)	(35,401		)	—			(35,401		)
Net performance fees	4,971			6,732			5,661			17,364			—			17,364
Investment income—realized	318			579			1,783			2,680			1,859			4,539
Investment income (loss)—unrealized	4,589			8,546			(444		)	12,691			(1,407		)	11,284
Interest and other investment income (expense)	(19		)	152			(181		)	(48		)	874			826
Interest expense	(2,458		)	(1,513		)	(432		)	(4,403		)	(476		)	(4,879		)
Net investment income	2,430			7,764			726			10,920			850			11,770
Performance related earnings	7,401			14,496			6,387			28,284			850			29,134
Economic net income	$	73,943		$	37,239		$	9,526		$	120,708		$	(44,852	)	$	75,856
Distributable earnings	$	64,272		$	21,914		$	3,113		$	89,299		$	(48,390	)	$	40,909

The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the three months ended March 31, 2016:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total Stand Alone
Management fees (Credit Group includes ARCC Part I Fees of $28,625)	$	107,247		$	38,676		$	16,745		$	162,668		$	—		$	162,668
Other fees(1)	109			340			258			707			—			707
Compensation and benefits	(43,909		)	(14,364		)	(11,235		)	(69,508		)	(26,277		)	(95,785		)
General, administrative and other expenses	(5,310		)	(3,240		)	(3,441		)	(11,991		)	(16,551		)	(28,542		)
Fee related earnings	58,137			21,412			2,327			81,876			(42,828		)	39,048
Performance fees—realized	6,178			—			171			6,349			—			6,349
Performance fees—unrealized	(29,047		)	(12,423		)	4,122			(37,348		)	—			(37,348		)
Performance fee compensation—realized	(1,983		)	—			—			(1,983		)	—			(1,983		)
Performance fee compensation—unrealized	16,437			9,109			(2,233		)	23,313			—			23,313
Net performance fees	(8,415		)	(3,314		)	2,060			(9,669		)	—			(9,669		)
Investment income (loss)—realized	82			(32		)	(132		)	(82		)	(57		)	(139		)
Investment income (loss)—unrealized	(1,595		)	(10,157		)	2,799			(8,953		)	385			(8,568		)
Interest and other investment income (expense)	7,579			(91		)	892			8,380			(49		)	8,331
Interest expense	(2,448		)	(1,405		)	(274		)	(4,127		)	(728		)	(4,855		)
Net investment income (loss)	3,618			(11,685		)	3,285			(4,782		)	(449		)	(5,231		)
Performance related earnings	(4,797		)	(14,999		)	5,345			(14,451		)	(449		)	(14,900		)
Economic net income	$	53,340		$	6,413		$	7,672		$	67,425		$	(43,277	)	$	24,148
Distributable earnings	$	66,473		$	18,371		$	2,678		$	87,522		$	(46,241	)	$	41,281

(1)

During 2016, the Company changed its presentation of compensation and benefits expenses and general, administrative and other expenses to reflect these expenses net of the administrative fees earned from certain funds. As a result, for the three months ended March 31, 2016, $5.7 million and $1.1 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 (expense):



	For the Three Months Ended March 31,
	2017			2016
Segment Revenues
Management fees (includes ARCC Part I Fees of $33,257 and $28,625 for the three months ended March 31, 2017 and 2016, respectively)	$	176,781		$	162,668
Other fees	4,834			707
Performance fees—realized	8,805			6,349
Performance fees—unrealized	49,261			(37,348		)
Total segment revenues	$	239,681		$	132,376
Segment Expenses
Compensation and benefits	$	74,296		$	69,508
General, administrative and other expenses	14,895			11,991
Performance fee compensation—realized	5,301			1,983
Performance fee compensation—unrealized	35,401			(23,313		)
Total segment expenses	$	129,893		$	60,169
Other Income (Expense)
Investment income (loss)—realized	$	2,680		$	(82	)
Investment income (loss)—unrealized	12,691			(8,953		)
Interest and other investment income (expense)	(48		)	8,380
Interest expense	(4,403		)	(4,127		)
Total other income (expense)	$	10,920		$	(4,782	)

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Three Months Ended March 31,
	2017			2016
Total segment revenue	$	239,681		$	132,376
Revenue of Consolidated Funds eliminated in consolidation	(7,606		)	(2,611		)
Administrative fees(1)	9,606			6,822
Performance fees reclass(2)	(24		)	(572		)
Total consolidated adjustments and reconciling items	1,976			3,639
Total consolidated revenue	$	241,657		$	136,015


(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 March 31,
	2017			2016
Total segment expenses	$	129,893		$	60,169
Expenses of Consolidated Funds added in consolidation	10,509			5,979
Expenses of Consolidated Funds eliminated in consolidation	(6,598		)	(5,752		)
Administrative fees(1)	9,606			6,822
OMG expenses	45,702			42,828
Acquisition and merger-related expenses	275,336			268
Equity compensation expense	15,089			9,173
Placement fees and underwriting costs	3,439			930
Amortization of intangibles	5,275			7,263
Depreciation expense	3,216			1,858
Total consolidation adjustments and reconciling items	361,574			69,369
Total consolidated expenses	$	491,467		$	129,538


(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.

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



	For the Three Months Ended March 31,
	2017			2016
Total other income (expense)	$	10,920		$	(4,782	)
Other income (expense) from Consolidated Funds added in consolidation, net	38,445			(22,803		)
Other income (expense) from Consolidated Funds eliminated in consolidation, net	(10,605		)	12,239
OMG other expense	850			(449		)
Performance fee reclass(1)	24			572
Changes in fair value of contingent consideration	20,248			(228		)
Offering costs	(660		)	—
Total consolidation adjustments and reconciling items	48,302			(10,669		)
Total consolidated other income (expense)	$	59,222		$	(15,451	)


(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 March 31,
	2017			2016
Economic net income
Loss before taxes	$	(190,588	)	$	(8,974	)
Adjustments:
Amortization of intangibles	5,275			7,263
Depreciation expense	3,216			1,858
Equity compensation expenses	15,089			9,173
Acquisition and merger-related expenses	255,088			496
Placement fees and underwriting costs	3,439			930
OMG expenses, net	44,852			43,277
Offering costs	660			—
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(16,323		)	13,402
Total consolidation adjustments and reconciling items	311,296			76,399
Economic net income	120,708			67,425
Total performance fees income - realized	(8,805		)	(6,349		)
Total performance fees income - unrealized	(49,261		)	37,348
Total performance fee compensation - realized	5,301			1,983
Total performance fee compensation - unrealized	35,401			(23,313		)
Total investment income	(10,920		)	4,782
Fee related earnings	92,424			81,876
Performance fees—realized	8,805			6,349
Performance fee compensation—realized	(5,301		)	(1,983		)
Investment and other income (expense) realized, net	1,385			4,171
Additional adjustments:
Dividend equivalent(1)	(2,681		)	(684		)
One-time acquisition costs(1)	(12		)	(270		)
Income tax expense(1)	(226		)	(232		)
Non-cash items	(186		)	164
Placement fees and underwriting costs(1)	(3,439		)	(938		)
Depreciation and amortization(1)	(1,470		)	(931		)
Distributable earnings	$	89,299		$	87,522
Performance related earnings
Economic net income	$	120,708		$	67,425
Less: fee related earnings	(92,424		)	(81,876		)
Performance related earnings	$	28,284		$	(14,451	)


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