SEGMENT REPORTING

The Company operates through its three distinct operating segments. In 2017, the Company reclassified certain expenses from OMG to its operating segments. The Company has modified historical results to conform with its current 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 $71.7 billion of assets under management and 139 funds as of December 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 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 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. corporate lending activities primarily through ARCC, the largest business development company as of December 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 $24.5 billion of assets under management as of December 31, 2017, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of December 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 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 $10.2 billion of assets under management across 42 funds as of December 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 cost 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.

Realized income (“RI”), a non-GAAP measure, is an operating metric used by management to evaluate performance of the business based on tangible operating performance and the contribution of each of the business segments to that performance, while removing the fluctuations of unrealized income and expenses, which may or may not be eventually realized at the levels presented and whose realizations depend more on future outcomes than current business operations. RI differs from net income by excluding (a) income tax expense, (b) operating results of our Consolidated Funds, (c) depreciation and amortization expense, (d) the effects of changes arising from corporate actions, (e) unrealized gains and losses related to performance fees and investment performance and (e) certain other items that we believe are not indicative of our tangible operating performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with mergers, acquisitions and capital transactions, placement fees and underwriting costs and expenses incurred in connection with corporate reorganization.

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 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 year ended December 31, 2017:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $105,467)	$	481,466		$	198,498		$	64,861		$	744,825		$	—		$	744,825
Other fees	20,830			1,495			106			22,431			—			22,431
Compensation and benefits	(192,022		)	(68,569		)	(39,586		)	(300,177		)	(113,558		)	(413,735		)
General, administrative and other expenses	(33,308		)	(17,561		)	(10,519		)	(61,388		)	(75,143		)	(136,531		)
Fee related earnings	276,966			113,863			14,862			405,691			(188,701		)	216,990
Performance fees—realized	21,087			287,092			9,608			317,787			—			317,787
Performance fees—unrealized	54,196			191,559			80,160			325,915			—			325,915
Performance fee compensation—realized	(9,218		)	(228,774		)	(4,338		)	(242,330		)	—			(242,330		)
Performance fee compensation—unrealized	(35,284		)	(153,148		)	(48,960		)	(237,392		)	—			(237,392		)
Net performance fees	30,781			96,729			36,470			163,980			—			163,980
Investment income—realized	7,102			22,625			5,534			35,261			3,880			39,141
Investment income—unrealized	5,480			38,754			2,626			46,860			8,627			55,487
Interest and other investment income	5,660			3,906			2,495			12,061			1,267			13,328
Interest expense	(12,405		)	(5,218		)	(1,650		)	(19,273		)	(1,946		)	(21,219		)
Net investment income	5,837			60,067			9,005			74,909			11,828			86,737
Performance related earnings	36,618			156,796			45,475			238,889			11,828			250,717
Economic net income	$	313,584		$	270,659		$	60,337		$	644,580		$	(176,873	)	$	467,707
Realized income	$	293,724		$	192,814		$	24,527		$	511,065		$	(185,625	)	$	325,440
Distributable earnings	$	268,737		$	187,733		$	19,189		$	475,659		$	(204,024	)	$	271,635
Total assets	$	837,562		$	1,255,454		$	306,463		$	2,399,479		$	119,702		$	2,519,181

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



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $121,181)	$	444,664		$	147,790		$	66,997		$	659,451		$	—		$	659,451
Other fees(1)	9,953			1,544			854			12,351			—			12,351
Compensation and benefits	(182,901		)	(61,276		)	(41,091		)	(285,268		)	(99,447		)	(384,715		)
General, administrative and other expenses	(28,539		)	(14,679		)	(10,603		)	(53,821		)	(60,916		)	(114,737		)
Fee related earnings	243,177			73,379			16,157			332,713			(160,363		)	172,350
Performance fees—realized	51,435			230,162			11,401			292,998			—			292,998
Performance fees—unrealized	22,851			188,287			17,334			228,472			—			228,472
Performance fee compensation—realized	(11,772		)	(184,072		)	(2,420		)	(198,264		)	—			(198,264		)
Performance fee compensation—unrealized	(26,109		)	(149,956		)	(13,517		)	(189,582		)	—			(189,582		)
Net performance fees	36,405			84,421			12,798			133,624			—			133,624
Investment income (loss)—realized	4,928			18,773			931			24,632			(14,606		)	10,026
Investment income (loss)—unrealized	11,848			(613		)	5,418			16,653			(2,197		)	14,456
Interest and other investment income	26,119			16,579			1,661			44,359			149			44,508
Interest expense	(8,609		)	(5,589		)	(1,056		)	(15,254		)	(2,727		)	(17,981		)
Net investment income (loss)	34,286			29,150			6,954			70,390			(19,381		)	51,009
Performance related earnings	70,691			113,571			19,752			204,014			(19,381		)	184,633
Economic net income	$	313,868		$	186,950		$	35,909		$	536,727		$	(179,744	)	$	356,983
Realized income	$	301,706		$	149,544		$	26,611		$	477,861		$	(177,533	)	$	300,328
Distributable earnings	$	294,814		$	144,140		$	21,594		$	460,548		$	(196,242	)	$	264,306
Total assets	$	650,435		$	1,218,412		$	232,862		$	2,101,709		$	74,383		$	2,176,092

The following table presents the financial results for the Company’s operating segments, as well as the OMG, for the year ended December 31, 2015:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $121,491)	$	432,769		$	152,104		$	66,045		$	650,918		$	—		$	650,918
Other fees	414			1,406			2,779			4,599			—			4,599
Compensation and benefits	(174,262		)	(56,859		)	(42,632		)	(273,753		)	(86,869		)	(360,622		)
General, administrative and other expenses	(30,322		)	(15,647		)	(15,766		)	(61,735		)	(56,168		)	(117,903		)
Fee related earnings	228,599			81,004			10,426			320,029			(143,037		)	176,992
Performance fees—realized	87,583			24,849			9,516			121,948			—			121,948
Performance fees—unrealized	(71,341		)	87,809			15,179			31,647			—			31,647
Performance fee compensation—realized	(44,110		)	(19,255		)	(1,826		)	(65,191		)	—			(65,191		)
Performance fee compensation—unrealized	36,659			(74,598		)	(8,553		)	(46,492		)	—			(46,492		)
Net performance fees	8,791			18,805			14,316			41,912			—			41,912
Investment income—realized	13,274			6,840			2,658			22,772			(23		)	22,749
Investment income (loss)—unrealized	(15,731		)	(13,205		)	1,522			(27,414		)	52			(27,362		)
Interest and other investment income	10,429			6,166			259			16,854			379			17,233
Interest expense	(7,075		)	(5,936		)	(977		)	(13,988		)	(1,158		)	(15,146		)
Net investment income (loss)	897			(6,135		)	3,462			(1,776		)	(750		)	(2,526		)
Performance related earnings	9,688			12,670			17,778			40,136			(750		)	39,386
Economic net income	$	238,287		$	93,674		$	28,204		$	360,165		$	(143,787	)	$	216,378
Realized income	$	288,700		$	93,668		$	20,056		$	402,424		$	(143,839	)	$	258,585
Distributable earnings	$	279,630		$	88,767		$	14,831		$	383,228		$	(152,639	)	$	230,589
Total assets	$	530,758		$	927,758		$	186,058		$	1,644,574		$	96,637		$	1,741,211

(1)

For the year ended December 31, 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 year ended December 31, 2015, $21.6 million and $4.4 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 Year Ended December 31,
	2017			2016			2015
Segment Revenues
Management fees (includes ARCC Part I Fees of $105,467, $121,181 and $121,491 for the years ended December 31, 2017, 2016 and 2015, respectively)	$	744,825		$	659,451		$	650,918
Other fees	22,431			12,351			4,599
Performance fees—realized	317,787			292,998			121,948
Performance fees—unrealized	325,915			228,472			31,647
Total segment revenues	$	1,410,958		$	1,193,272		$	809,112
Segment Expenses
Compensation and benefits	$	300,177		$	285,268		$	273,753
General, administrative and other expenses	61,388			53,821			61,735
Performance fee compensation—realized	242,330			198,264			65,191
Performance fee compensation—unrealized	237,392			189,582			46,492
Total segment expenses	$	841,287		$	726,935		$	447,171
Other Income (Expense)
Investment income—realized	$	35,261		$	24,632		$	22,772
Investment income (loss)—unrealized	46,860			16,653			(27,414		)
Interest and other investment income	12,061			44,359			16,854
Interest expense	(19,273		)	(15,254		)	(13,988		)
Total other income (expense)	$	74,909		$	70,390		$	(1,776	)

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Year Ended December 31,
	2017			2016			2015
Total segment revenue	$	1,410,958		$	1,193,272		$	809,112
Revenue of Consolidated Funds eliminated in consolidation	(27,498		)	(18,522		)	(13,279		)
Administrative fees(1)	34,049			26,934			26,007
Performance fees reclass(2)	(1,936		)	(2,479		)	(7,398		)
Revenue of non-controlling interests in consolidated subsidiaries(3)	(74		)	—			—
Total consolidated adjustments and reconciling items	4,541			5,933			5,330
Total consolidated revenue	$	1,415,499		$	1,199,205		$	814,442


(1)	Represents administrative fees that are presented in administrative, transaction and other fees in the Company’s 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 in the Company’s Consolidated Statements of Operations.


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

The following table reconciles segment expenses to Ares consolidated expenses:



	For the Year Ended December 31,
	2017			2016			2015
Total segment expenses	$	841,287		$	726,935		$	447,171
Expenses of Consolidated Funds added in consolidation	65,501			42,520			36,417
Expenses of Consolidated Funds eliminated in consolidation	(26,481		)	(21,447		)	(18,312		)
Administrative fees(1)	34,049			26,934			26,007
OMG expenses	188,701			160,363			143,037
Acquisition and merger-related expenses	280,055			773			40,482
Equity compensation expense	69,711			39,065			32,244
Placement fees and underwriting costs	19,765			6,424			8,825
Amortization of intangibles	17,850			26,638			46,227
Depreciation expense	12,631			8,215			6,942
Expenses of non-controlling interests in consolidated subsidiaries(2)	1,689			—			—
Total consolidation adjustments and reconciling items	663,471			289,485			321,869
Total consolidated expenses	$	1,504,758		$	1,016,420		$	769,040


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


(2)	Costs being borne by certain of our joint venture partners.

The following table reconciles segment other income to Ares consolidated other income:



	For the Year Ended December 31,
	2017			2016			2015
Net investment income (loss)	$	74,909		$	70,390		$	(1,776	)
Other income from Consolidated Funds added in consolidation, net	154,869			37,388			13,695
Other income (expense) from Consolidated Funds eliminated in consolidation, net	(25,646		)	4,856			12,007
Other income of non-controlling interests in consolidated subsidiaries(2)	24			—			—
OMG other expense	11,828			(19,381		)	(750		)
Performance fee reclass(1)	1,936			2,479			7,398
Change in value of contingent consideration	20,156			17,675			21,064
Merger related expenses	—			—			(15,446		)
Other non-cash expense	1,730			1,728			(110		)
Offering costs	(688		)	—			—
Total consolidation adjustments and reconciling items	164,209			44,745			37,858
Total consolidated other income	$	239,118		$	115,135		$	36,082


(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 Consolidated Statements of Operations.


(2)	Costs being borne by certain of our joint venture partners.

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



	For the Year Ended December 31,
	2017			2016			2015
Economic net income
Income before taxes	$	149,859		$	297,920		$	81,484
Adjustments:
Amortization of intangibles	17,850			26,638			46,227
Depreciation expense	12,631			8,215			6,942
Equity compensation expenses	69,711			39,065			32,244
Acquisition and merger-related expenses	259,899			(16,902		)	34,864
Placement fees and underwriting costs	19,765			6,424			8,825
OMG expenses, net	176,873			179,744			143,787
Offering costs	688			—			—
Other non-cash expense	(1,730		)	(1,728		)	110
Expense of non-controlling interests in Consolidated subsidiaries(2)	1,739			—			—
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(62,705		)	(2,649		)	5,682
Total consolidation adjustments and reconciling items	494,721			238,807			278,681
Economic net income	644,580			536,727			360,165
Total performance fees income - unrealized	(325,915		)	(228,472		)	(31,647		)
Total performance fee compensation - unrealized	237,392			189,582			46,492
Total investment (income) loss - unrealized	(44,992		)	(19,976		)	27,414
Realized income	511,065			477,861			402,424
Total performance fees income - realized	(317,787		)	(292,998		)	(121,948		)
Total performance fee compensation - realized	242,330			198,264			65,191
Total investment (income) loss - realized	(29,917		)	(50,414		)	(25,638		)
Fee related earnings	405,691			332,713			320,029
Performance fees—realized	317,787			292,998			121,948
Performance fee compensation—realized	(242,330		)	(198,264		)	(65,191		)
Investment and other income realized, net	29,913			50,415			25,638
Additional adjustments:
Dividend equivalent(1)	(12,427		)	(4,181		)	(2,688		)
One-time acquisition costs(1)	(118		)	(457		)	(1,553		)
Income tax expense(1)	(1,677		)	(3,199		)	(1,462		)
Non-cash items	720			870			(758		)
Placement fees and underwriting costs(1)	(16,324		)	(6,431		)	(8,817		)
Depreciation(1)	(5,576		)	(3,916		)	(3,918		)
Distributable earnings	$	475,659		$	460,548		$	383,228
Performance related earnings
Economic net income	$	644,580		$	536,727		$	360,165
Less: fee related earnings	(405,691		)	(332,713		)	(320,029		)
Performance related earnings	$	238,889		$	204,014		$	40,136


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


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

The reconciliation of total segment assets to total assets reported in the Consolidated Statements of Financial Condition consists of the following:



	For the Year Ended December 31,
	2017			2016			2015
Total segment assets	$	2,399,479		$	2,101,709		$	1,644,574
Total assets from Consolidated Funds added in Consolidation	6,231,245			3,822,010			2,760,419
Total assets from the Company eliminated in Consolidation	(186,904		)	(168,390		)	(180,222		)
Operating Management Group assets	119,702			74,383			96,637
Total consolidated adjustments and reconciling items	6,164,043			3,728,003			2,676,834
Total consolidated assets	$	8,563,522		$	5,829,712		$	4,321,408