SEGMENT REPORTING

The Company operates through its three distinct operating segments. During the six months ended June 30, 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 $67.4 billion of assets under management and 139 funds as of June 30, 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 June 30, 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 $25.8 billion of assets under management as of June 30, 2017, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of June 30, 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 three 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 $10.8 billion of assets under management across 43 funds as of June 30, 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 real estate investment trust, 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 June 30, 2017:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $19,143)	$	112,654		$	56,427		$	16,479		$	185,560		$	—		$	185,560
Other fees	5,663			338			19			6,020			—			6,020
Compensation and benefits	(44,754		)	(18,388		)	(9,714		)	(72,856		)	(30,990		)	(103,846		)
General, administrative and other expenses	(7,949		)	(4,345		)	(3,091		)	(15,385		)	(18,961		)	(34,346		)
Fee related earnings	65,614			34,032			3,693			103,339			(49,951		)	53,388
Performance fees—realized	7,883			64,780			1,467			74,130			—			74,130
Performance fees—unrealized	5,093			228,747			29,789			263,629			—			263,629
Performance fee compensation—realized	(1,898		)	(50,914		)	(161		)	(52,973		)	—			(52,973		)
Performance fee compensation—unrealized	(6,079		)	(184,021		)	(18,632		)	(208,732		)	—			(208,732		)
Net performance fees	4,999			58,592			12,463			76,054			—			76,054
Investment income—realized	2,525			2,717			373			5,615			1,340			6,955
Investment income (loss)—unrealized	(3,450		)	25,354			1,134			23,038			(2,728		)	20,310
Interest and other investment income (expense)	2,958			1,983			1,534			6,475			225			6,700
Interest expense	(3,065		)	(1,397		)	(429		)	(4,891		)	(463		)	(5,354		)
Net investment income (loss)	(1,032		)	28,657			2,612			30,237			(1,626		)	28,611
Performance related earnings	3,967			87,249			15,075			106,291			(1,626		)	104,665
Economic net income	$	69,581		$	121,281		$	18,768		$	209,630		$	(51,577	)	$	158,053
Distributable earnings	$	67,010		$	47,973		$	4,747		$	119,730		$	(50,038	)	$	69,692

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:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $28,999)	$	109,141		$	37,241		$	16,230		$	162,612		$	—		$	162,612
Other fees	550			334			435			1,319			—			1,319
Compensation and benefits	(45,937		)	(15,495		)	(10,633		)	(72,065		)	(24,988		)	(97,053		)
General, administrative and other expenses	(6,799		)	(3,324		)	(2,511		)	(12,634		)	(14,679		)	(27,313		)
Fee related earnings	56,955			18,756			3,521			79,232			(39,667		)	39,565
Performance fees—realized	16,024			62,779			2,801			81,604			—			81,604
Performance fees—unrealized	16,351			105,702			1,261			123,314			—			123,314
Performance fee compensation—realized	(754		)	(50,224		)	(53		)	(51,031		)	—			(51,031		)
Performance fee compensation—unrealized	(14,604		)	(84,488		)	(1,773		)	(100,865		)	—			(100,865		)
Net performance fees	17,017			33,769			2,236			53,022			—			53,022
Investment income (loss)—realized	(280		)	3,406			695			3,821			(31		)	3,790
Investment income (loss)—unrealized	5,391			2,061			(1,067		)	6,385			(11,904		)	(5,519		)
Interest and other investment income (expense)	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)	10,759			12,276			(608		)	22,427			(12,663		)	9,764
Performance related earnings	27,776			46,045			1,628			75,449			(12,663		)	62,786
Economic net income	$	84,731		$	64,801		$	5,149		$	154,681		$	(52,330	)	$	102,351
Distributable earnings	$	73,342		$	40,310		$	7,781		$	121,433		$	(44,613	)	$	76,820

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, 2017:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $52,400)	$	234,001		$	96,246		$	32,094		$	362,341		$	—		$	362,341
Other fees	10,166			678			10			10,854			—			10,854
Compensation and benefits	(96,096		)	(31,606		)	(19,450		)	(147,152		)	(57,304		)	(204,456		)
General, administrative and other expenses	(15,915		)	(8,543		)	(5,822		)	(30,280		)	(38,349		)	(68,629		)
Fee related earnings	132,156			56,775			6,832			195,763			(95,653		)	100,110
Performance fees—realized	16,661			64,780			1,494			82,935			—			82,935
Performance fees—unrealized	8,029			260,984			43,877			312,890			—			312,890
Performance fee compensation—realized	(7,183		)	(50,914		)	(177		)	(58,274		)	—			(58,274		)
Performance fee compensation—unrealized	(7,537		)	(209,526		)	(27,070		)	(244,133		)	—			(244,133		)
Net performance fees	9,970			65,324			18,124			93,418			—			93,418
Investment income—realized	2,843			3,296			2,156			8,295			3,199			11,494
Investment income (loss)—unrealized	1,139			33,900			690			35,729			(4,135		)	31,594
Interest and other investment income	2,939			2,135			1,353			6,427			1,099			7,526
Interest expense	(5,523		)	(2,910		)	(861		)	(9,294		)	(939		)	(10,233		)
Net investment income (loss)	1,398			36,421			3,338			41,157			(776		)	40,381
Performance related earnings	11,368			101,745			21,462			134,575			(776		)	133,799
Economic net income	$	143,524		$	158,520		$	28,294		$	330,338		$	(96,429	)	$	233,909
Distributable earnings	$	131,282		$	69,887		$	7,860		$	209,029		$	(98,428	)	$	110,601

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:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $57,624)	$	216,388		$	75,917		$	32,975		$	325,280		$	—		$	325,280
Other fees	659			674			693			2,026			—			2,026
Compensation and benefits	(89,846		)	(29,859		)	(21,868		)	(141,573		)	(51,265		)	(192,838		)
General, administrative and other expenses	(12,109		)	(6,564		)	(5,952		)	(24,625		)	(31,230		)	(55,855		)
Fee related earnings	115,092			40,168			5,848			161,108			(82,495		)	78,613
Performance fees—realized	22,202			62,779			2,972			87,953			—			87,953
Performance fees—unrealized	(12,696		)	93,279			5,383			85,966			—			85,966
Performance fee compensation—realized	(2,737		)	(50,224		)	(53		)	(53,014		)	—			(53,014		)
Performance fee compensation—unrealized	1,833			(75,379		)	(4,006		)	(77,552		)	—			(77,552		)
Net performance fees	8,602			30,455			4,296			43,353			—			43,353
Investment income (loss)—realized	(198		)	3,374			563			3,739			(88		)	3,651
Investment income (loss)—unrealized	3,796			(8,096		)	1,732			(2,568		)	(11,519		)	(14,087		)
Interest and other investment income (expense)	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)	14,377			591			2,677			17,645			(13,112		)	4,533
Performance related earnings	22,979			31,046			6,973			60,998			(13,112		)	47,886
Economic net income	$	138,071		$	71,214		$	12,821		$	222,106		$	(95,607	)	$	126,499
Distributable earnings	$	139,815		$	58,681		$	10,459		$	208,955		$	(90,854	)	$	118,101

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



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Segment Revenues
Management fees (includes ARCC Part I Fees of $19,143, $52,400 and $28,999, $57,624 for the three and six months ended June 30, 2017 and 2016, respectively)	$	185,560		$	162,612		$	362,341		$	325,280
Other fees	6,020			1,319			10,854			2,026
Performance fees—realized	74,130			81,604			82,935			87,953
Performance fees—unrealized	263,629			123,314			312,890			85,966
Total segment revenues	$	529,339		$	368,849		$	769,020		$	501,225
Segment Expenses
Compensation and benefits	$	72,856		$	72,065		$	147,152		$	141,573
General, administrative and other expenses	15,385			12,634			30,280			24,625
Performance fee compensation—realized	52,973			51,031			58,274			53,014
Performance fee compensation—unrealized	208,732			100,865			244,133			77,552
Total segment expenses	$	349,946		$	236,595		$	479,839		$	296,764
Other Income (Expense)
Investment income (loss)—realized	$	5,615		$	3,821		$	8,295		$	3,739
Investment income (loss)—unrealized	23,038			6,385			35,729			(2,568		)
Interest and other investment income (expense)	6,475			16,340			6,427			24,720
Interest expense	(4,891		)	(4,119		)	(9,294		)	(8,246		)
Total other income (expense)	$	30,237		$	22,427		$	41,157		$	17,645

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Total segment revenue	$	529,339		$	368,849		$	769,020		$	501,225
Revenue of Consolidated Funds eliminated in consolidation	(4,310		)	(4,842		)	(11,916		)	(7,453		)
Administrative fees(1)	9,132			6,544			18,738			13,366
Performance fees reclass(2)	(217		)	(1,016		)	(241		)	(1,588		)
Revenue of non-controlling interests in consolidated subsidiaries(3)	(54		)	—			(54		)	—
Total consolidated adjustments and reconciling items	4,551			686			6,527			4,325
Total consolidated revenue	$	533,890		$	369,535		$	775,547		$	505,550


(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.


(3)	Adjustments for administrative fees reimbursed and other revenue items attributable to certain of our joint venture partners.

The following table reconciles segment expenses to Ares consolidated expenses:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Total segment expenses	$	349,946		$	236,595		$	479,839		$	296,764
Expenses of Consolidated Funds added in consolidation	8,825			5,288			19,334			11,267
Expenses of Consolidated Funds eliminated in consolidation	(4,303		)	(4,589		)	(10,901		)	(10,341		)
Administrative fees(1)	9,132			6,544			18,738			13,366
OMG expenses	49,951			39,667			95,653			82,495
Acquisition and merger-related expenses	724			85			276,060			353
Equity compensation expense	18,917			9,536			34,006			18,709
Placement fees and underwriting costs	6,383			1,754			9,822			2,684
Amortization of intangibles	5,274			7,121			10,549			14,384
Depreciation expense	2,774			1,934			5,990			3,792
Expenses of non-controlling interests in consolidated subsidiaries(2)	574			—			574			—
Total consolidation adjustments and reconciling items	98,251			67,340			459,825			136,709
Total consolidated expenses	$	448,197		$	303,935		$	939,664		$	433,473


(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)	Adjustments to eliminate costs being borne by certain of our joint venture partners.

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,
	2017			2016			2017			2016
Total other income (expense)	$	30,237		$	22,427		$	41,157		$	17,645
Other income (expense) from Consolidated Funds added in consolidation, net	(3,150		)	7,168			35,295			(15,635		)
Other income (expense) from Consolidated Funds eliminated in consolidation, net	3,731			(566		)	(6,874		)	11,673
Other income of non-controlling interests in consolidated subsidiaries(1)	5			—			5			—
OMG other expense	(1,626		)	(12,663		)	(776		)	(13,112		)
Performance fee reclass(2)	217			1,016			241			1,588
Changes in fair value of contingent consideration	(32		)	24			20,216			(204		)
Offering costs	5			—			(655		)	—
Total consolidation adjustments and reconciling items	(850		)	(5,021		)	47,452			(15,690		)
Total consolidated other income	$	29,387		$	17,406		$	88,609		$	1,955


(1)	Adjustments to eliminate costs being borne by certain of our joint venture partners.


(2)	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,
	2017			2016			2017			2016
Economic net income
Income (loss) before taxes	$	115,080		$	83,006		$	(75,508	)	$	74,032
Adjustments:
Amortization of intangibles	5,274			7,121			10,549			14,384
Depreciation expense	2,774			1,934			5,990			3,792
Equity compensation expenses	18,917			9,536			34,006			18,709
Acquisition and merger-related expenses	756			61			255,844			557
Placement fees and underwriting costs	6,383			1,754			9,822			2,684
OMG expenses, net	51,577			52,330			96,429			95,607
Offering costs	(5		)	—			655			—
(Income) loss before taxes of non-controlling interests in consolidated subsidiaries(1)	623			—			623			—
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations	8,251			(1,061		)	(8,072		)	12,341
Total consolidation adjustments and reconciling items	94,550			71,675			405,846			148,074
Economic net income	209,630			154,681			330,338			222,106
Total performance fees income - realized	(74,130		)	(81,604		)	(82,935		)	(87,953		)
Total performance fees income - unrealized	(263,629		)	(123,314		)	(312,890		)	(85,966		)
Total performance fee compensation - realized	52,973			51,031			58,274			53,014
Total performance fee compensation - unrealized	208,732			100,865			244,133			77,552
Total investment income	(30,237		)	(22,427		)	(41,157		)	(17,645		)
Fee related earnings	103,339			79,232			195,763			161,108
Performance fees—realized	74,130			81,604			82,935			87,953
Performance fee compensation—realized	(52,973		)	(51,031		)	(58,274		)	(53,014		)
Investment and other income (expense) realized, net	4,522			14,657			5,907			18,828
Additional adjustments:
Dividend equivalent(2)	(1,520		)	(706		)	(4,201		)	(1,390		)
One-time acquisition costs(2)	(11		)	(12		)	(23		)	(282		)
Income tax expense(2)	(381		)	(249		)	(607		)	(481		)
Non-cash items	322			683			136			847
Placement fees and underwriting costs(2)	(6,383		)	(1,747		)	(9,822		)	(2,685		)
Depreciation and amortization(2)	(1,315		)	(998		)	(2,785		)	(1,929		)
Distributable earnings	$	119,730		$	121,433		$	209,029		$	208,955
Performance related earnings
Economic net income	$	209,630		$	154,681		$	330,338		$	222,106
Less: fee related earnings	(103,339		)	(79,232		)	(195,763		)	(161,108		)
Performance related earnings	$	106,291		$	75,449		$	134,575		$	60,998


(1)	Adjustments to eliminate costs being borne by certain of our joint venture partners.


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