SEGMENT REPORTING

The Company operates through its three distinct operating segments. During the nine months ended September 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 $70.5 billion of assets under management and 142 funds as of September 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 composed 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 Company provides investors access to these capabilities through several vehicles, including commingled funds, separately managed accounts and a publicly traded vehicle. The Credit Group conducts its U.S. direct lending activities primarily through ARCC, the largest business development company as of September 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 $24.6 billion of assets under management as of September 30, 2017, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of September 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 $10.6 billion of assets under management across 42 funds as of September 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 September 30, 2017:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $24,036)	$	120,178		$	51,313		$	17,137		$	188,628		$	—		$	188,628
Other fees	5,668			449			27			6,144			—			6,144
Compensation and benefits	(46,551		)	(19,256		)	(11,398		)	(77,205		)	(27,577		)	(104,782		)
General, administrative and other expenses	(6,851		)	(4,655		)	(2,125		)	(13,631		)	(18,380		)	(32,011		)
Fee related earnings	72,444			27,851			3,641			103,936			(45,957		)	57,979
Performance fees—realized	3,296			173,304			2,389			178,989			—			178,989
Performance fees—unrealized	33,033			(142,822		)	20,366			(89,423		)	—			(89,423		)
Performance fee compensation—realized	(1,466		)	(138,657		)	(856		)	(140,979		)	—			(140,979		)
Performance fee compensation—unrealized	(19,820		)	114,395			(12,233		)	82,342			—			82,342
Net performance fees	15,043			6,220			9,666			30,929			—			30,929
Investment income—realized	6,206			14,268			1,997			22,471			18			22,489
Investment income (loss)—unrealized	(1,123		)	(8,421		)	(767		)	(10,311		)	4,357			(5,954		)
Interest and other investment income (expense)	(540		)	1,129			716			1,305			26			1,331
Interest expense	(3,277		)	(1,229		)	(396		)	(4,902		)	(441		)	(5,343		)
Net investment income	1,266			5,747			1,550			8,563			3,960			12,523
Performance related earnings	16,309			11,967			11,216			39,492			3,960			43,452
Economic net income	$	88,753		$	39,818		$	14,857		$	143,428		$	(41,997	)	$	101,431
Distributable earnings	$	73,120		$	75,809		$	4,736		$	153,665		$	(53,214	)	$	100,451

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



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $33,260)	$	115,794		$	35,183		$	17,819		$	168,796		$	—		$	168,796
Other fees	280			309			162			751			—			751
Compensation and benefits	(45,222		)	(16,697		)	(9,459		)	(71,378		)	(25,960		)	(97,338		)
General, administrative and other expenses	(7,274		)	(3,925		)	(2,289		)	(13,488		)	(13,386		)	(26,874		)
Fee related earnings	63,578			14,870			6,233			84,681			(39,346		)	45,335
Performance fees—realized	22,422			108,245			2,170			132,837			—			132,837
Performance fees—unrealized	11,152			16,569			4,647			32,368			—			32,368
Performance fee compensation—realized	(7,241		)	(86,537		)	—			(93,778		)	—			(93,778		)
Performance fee compensation—unrealized	(11,686		)	(13,387		)	(4,322		)	(29,395		)	—			(29,395		)
Net performance fees	14,647			24,890			2,495			42,032			—			42,032
Investment income (loss)—realized	588			11,267			(151		)	11,704			(20,005		)	(8,301		)
Investment income—unrealized	5,460			7,066			6,211			18,737			15,979			34,716
Interest and other investment income	5,940			417			714			7,071			15			7,086
Interest expense	(1,831		)	(1,399		)	(242		)	(3,472		)	(664		)	(4,136		)
Net investment income (loss)	10,157			17,351			6,532			34,040			(4,675		)	29,365
Performance related earnings	24,804			42,241			9,027			76,072			(4,675		)	71,397
Economic net income	$	88,382		$	57,111		$	15,260		$	160,753		$	(44,021	)	$	116,732
Distributable earnings	$	81,542		$	45,481		$	6,408		$	133,431		$	(66,696	)	$	66,735

The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the nine months ended September 30, 2017:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $76,436)	$	354,179		$	147,559		$	49,231		$	550,969		$	—		$	550,969
Other fees	15,834			1,127			37			16,998			—			16,998
Compensation and benefits	(142,647		)	(50,862		)	(30,848		)	(224,357		)	(84,881		)	(309,238		)
General, administrative and other expenses	(22,766		)	(13,198		)	(7,947		)	(43,911		)	(56,729		)	(100,640		)
Fee related earnings	204,600			84,626			10,473			299,699			(141,610		)	158,089
Performance fees—realized	19,957			238,084			3,883			261,924			—			261,924
Performance fees—unrealized	41,062			118,162			64,243			223,467			—			223,467
Performance fee compensation—realized	(8,649		)	(189,571		)	(1,033		)	(199,253		)	—			(199,253		)
Performance fee compensation—unrealized	(27,357		)	(95,131		)	(39,303		)	(161,791		)	—			(161,791		)
Net performance fees	25,013			71,544			27,790			124,347			—			124,347
Investment income—realized	9,049			17,564			4,153			30,766			3,217			33,983
Investment income (loss)—unrealized	16			25,479			(77		)	25,418			222			25,640
Interest and other investment income	2,399			3,264			2,069			7,732			1,125			8,857
Interest expense	(8,800		)	(4,139		)	(1,257		)	(14,196		)	(1,380		)	(15,576		)
Net investment income	2,664			42,168			4,888			49,720			3,184			52,904
Performance related earnings	27,677			113,712			32,678			174,067			3,184			177,251
Economic net income	$	232,277		$	198,338		$	43,151		$	473,766		$	(138,426	)	$	335,340
Distributable earnings	$	204,402		$	145,696		$	12,596		$	362,694		$	(151,642	)	$	211,052

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



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $90,884)	$	332,182		$	111,100		$	50,794		$	494,076		$	—		$	494,076
Other fees	939			983			855			2,777			—			2,777
Compensation and benefits	(135,068		)	(46,556		)	(31,327		)	(212,951		)	(77,225		)	(290,176		)
General, administrative and other expenses	(19,383		)	(10,489		)	(8,241		)	(38,113		)	(44,616		)	(82,729		)
Fee related earnings	178,670			55,038			12,081			245,789			(121,841		)	123,948
Performance fees—realized	44,624			171,024			5,142			220,790			—			220,790
Performance fees—unrealized	(1,544		)	109,848			10,030			118,334			—			118,334
Performance fee compensation—realized	(9,978		)	(136,761		)	(53		)	(146,792		)	—			(146,792		)
Performance fee compensation—unrealized	(9,853		)	(88,766		)	(8,328		)	(106,947		)	—			(106,947		)
Net performance fees	23,249			55,345			6,791			85,385			—			85,385
Investment income (loss)—realized	390			14,641			412			15,443			(20,093		)	(4,650		)
Investment income (loss)—unrealized	9,256			(1,030		)	7,943			16,169			4,460			20,629
Interest and other investment income (expense)	21,617			8,532			1,642			31,791			(53		)	31,738
Interest expense	(6,729		)	(4,201		)	(788		)	(11,718		)	(2,101		)	(13,819		)
Net investment income (loss)	24,534			17,942			9,209			51,685			(17,787		)	33,898
Performance related earnings	47,783			73,287			16,000			137,070			(17,787		)	119,283
Economic net income	$	226,453		$	128,325		$	28,081		$	382,859		$	(139,628	)	$	243,231
Distributable earnings	$	221,357		$	104,162		$	16,867		$	342,386		$	(157,550	)	$	184,836

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Segment Revenues
Management fees (includes ARCC Part I Fees of $24,036, $76,436 and $33,260, $90,884 for the three and nine months ended September 30, 2017 and 2016, respectively)	$	188,628		$	168,796		$	550,969		$	494,076
Other fees	6,144			751			16,998			2,777
Performance fees—realized	178,989			132,837			261,924			220,790
Performance fees—unrealized	(89,423		)	32,368			223,467			118,334
Total segment revenues	$	284,338		$	334,752		$	1,053,358		$	835,977
Segment Expenses
Compensation and benefits	$	77,205		$	71,378		$	224,357		$	212,951
General, administrative and other expenses	13,631			13,488			43,911			38,113
Performance fee compensation—realized	140,979			93,778			199,253			146,792
Performance fee compensation—unrealized	(82,342		)	29,395			161,791			106,947
Total segment expenses	$	149,473		$	208,039		$	629,312		$	504,803
Other Income (Expense)
Investment income—realized	$	22,471		$	11,704		$	30,766		$	15,443
Investment income (loss)—unrealized	(10,311		)	18,737			25,418			16,169
Interest and other investment income	1,305			7,071			7,732			31,791
Interest expense	(4,902		)	(3,472		)	(14,196		)	(11,718		)
Total other income	$	8,563		$	34,040		$	49,720		$	51,685

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Total segment revenue	$	284,338		$	334,752		$	1,053,358		$	835,977
Revenue of Consolidated Funds eliminated in consolidation	(6,822		)	(5,986		)	(18,738		)	(13,439		)
Administrative fees(1)	7,352			6,618			26,090			19,984
Performance fees reclass(2)	(1,187		)	76			(1,428		)	(1,512		)
Revenue of non-controlling interests in consolidated subsidiaries(3)	(10		)	—			(64		)	—
Total consolidated adjustments and reconciling items	(667		)	708			5,860			5,033
Total consolidated revenue	$	283,671		$	335,460		$	1,059,218		$	841,010


(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 September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Total segment expenses	$	149,473		$	208,039		$	629,312		$	504,803
Expenses of Consolidated Funds added in consolidation	25,862			16,068			45,196			27,334
Expenses of Consolidated Funds eliminated in consolidation	(6,823		)	(5,980		)	(17,724		)	(16,320		)
Administrative fees(1)	7,352			6,618			26,090			19,984
OMG expenses	45,957			39,346			141,610			121,841
Acquisition and merger-related expenses	2,818			79			278,878			432
Equity compensation expense	18,091			8,476			52,097			27,185
Placement fees and underwriting costs	4,495			2,202			14,317			4,886
Amortization of intangibles	3,651			6,378			14,200			20,762
Depreciation expense	3,468			2,148			9,458			5,940
Expenses of non-controlling interests in consolidated subsidiaries(2)	(217		)	—			357			—
Total consolidation adjustments and reconciling items	104,654			75,335			564,479			212,044
Total consolidated expenses	$	254,127		$	283,374		$	1,193,791		$	716,847


(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 September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Total other income	$	8,563		$	34,040		$	49,720		$	51,685
Other income from Consolidated Funds added in consolidation, net	55,227			30,181			90,522			14,545
Other income (expense) from Consolidated Funds eliminated in consolidation, net	(9,973		)	(5,549		)	(16,847		)	6,125
Other income of non-controlling interests in consolidated subsidiaries	9			—			14			—
OMG other expense	3,960			(4,675		)	3,184			(17,787		)
Performance fee reclass(1)	1,187			(76		)	1,428			1,512
Changes in fair value of contingent consideration	(60		)	17,690			20,156			17,486
Other non-cash expense	—			1,728			—			1,728
Offering costs	(33		)	—			(688		)	—
Total consolidation adjustments and reconciling items	50,317			39,299			97,769			23,609
Total consolidated other income	$	58,880		$	73,339		$	147,489		$	75,294


(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 September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Economic net income
Income before taxes	$	88,424		$	125,425		$	12,916		$	199,457
Adjustments:
Amortization of intangibles	3,651			6,378			14,200			20,762
Depreciation expense	3,468			2,148			9,458			5,940
Equity compensation expenses	18,091			8,476			52,097			27,185
Acquisition and merger-related expenses	2,878			(17,611		)	258,722			(17,054		)
Placement fees and underwriting costs	4,495			2,202			14,317			4,886
OMG expenses, net	41,997			44,021			138,426			139,628
Offering costs	33			—			688			—
Other non-cash expense	—			(1,728		)	—			(1,728		)
(Income) loss before taxes of non-controlling interests in consolidated subsidiaries	(216		)	—			407			—
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(19,393		)	(8,558		)	(27,465		)	3,783
Total consolidation adjustments and reconciling items	55,004			35,328			460,850			183,402
Economic net income	143,428			160,753			473,766			382,859
Total performance fees income - realized	(178,989		)	(132,837		)	(261,924		)	(220,790		)
Total performance fees income - unrealized	89,423			(32,368		)	(223,467		)	(118,334		)
Total performance fee compensation - realized	140,979			93,778			199,253			146,792
Total performance fee compensation - unrealized	(82,342		)	29,395			161,791			106,947
Total investment income	(8,563		)	(34,040		)	(49,720		)	(51,685		)
Fee related earnings	103,936			84,681			299,699			245,789
Performance fees—realized	178,989			132,837			261,924			220,790
Performance fee compensation—realized	(140,979		)	(93,778		)	(199,253		)	(146,792		)
Investment and other income realized, net	21,160			14,777			27,067			33,605
Additional adjustments:
Dividend equivalent(1)	(3,540		)	(1,649		)	(7,741		)	(3,039		)
One-time acquisition costs(1)	(12		)	(12		)	(35		)	(294		)
Income tax expense(1)	(343		)	(292		)	(950		)	(773		)
Non-cash items	397			36			533			883
Placement fees and underwriting costs(1)	(4,495		)	(2,209		)	(14,317		)	(4,894		)
Depreciation and amortization(1)	(1,448		)	(960		)	(4,233		)	(2,889		)
Distributable earnings	$	153,665		$	133,431		$	362,694		$	342,386
Performance related earnings
Economic net income	$	143,428		$	160,753		$	473,766		$	382,859
Less: fee related earnings	(103,936		)	(84,681		)	(299,699		)	(245,789		)
Performance related earnings	$	39,492		$	76,072		$	174,067		$	137,070


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