SEGMENT REPORTING

The Company operates through its three distinct operating segments. During the three months ended March 31, 2018, 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 $77.3 billion of assets under management and 145 funds as of March 31, 2018. 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 March 31, 2018, 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 $24.3 billion of assets under management as of March 31, 2018, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of March 31, 2018 the group managed five corporate private equity commingled funds focused on North America and Europe and three 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 $10.9 billion of assets under management across 41 funds as of March 31, 2018. 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) the effects of changes arising from corporate actions, and (e) 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, underwriting costs, and expenses incurred in connection with corporate reorganization. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE and RI for the current period.

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 income, performance related 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 related compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance income, performance related 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 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 income and investment performance and (e) certain other items that we believe are not indicative of our 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, underwriting costs and expenses incurred in connection with corporate reorganization. Beginning in 2018, placement fees are no longer excluded but are amortized to match the period over which management fees are recognized. This change had an immaterial impact to FRE and RI for the current period. Prior to the introduction of RI, management used distributable earnings for this evaluation. Management believes RI is a more appropriate metric to evaluate the Company's current business operations.

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, 2018:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $28,417)	$	131,766		$	49,887		$	15,173		$	196,826		$	—		$	196,826
Other fees	5,730			340			3			6,073			—			6,073
Compensation and benefits	(50,280		)	(19,199		)	(7,639		)	(77,118		)	(30,606		)	(107,724		)
General, administrative and other expenses	(9,629		)	(4,041		)	(2,432		)	(16,102		)	(18,616		)	(34,718		)
Fee related earnings	77,587			26,987			5,105			109,679			(49,222		)	60,457
Performance income—realized	5,071			4,398			13,638			23,107			—			23,107
Performance income—unrealized	16,092			21,066			(2,040		)	35,118			—			35,118
Performance related compensation—realized	(3,088		)	(3,560		)	(8,221		)	(14,869		)	—			(14,869		)
Performance related compensation—unrealized	7,176			(18,694		)	509			(11,009		)	—			(11,009		)
Net performance income	25,251			3,210			3,886			32,347			—			32,347
Investment income—realized	771			671			3,350			4,792			838			5,630
Investment income (loss)—unrealized	(269		)	(4,150		)	(1,232		)	(5,651		)	1,231			(4,420		)
Interest and other investment income	2,196			329			1,017			3,542			1,247			4,789
Interest expense	(4,673		)	(1,228		)	(420		)	(6,321		)	(548		)	(6,869		)
Net investment income (loss)	(1,975		)	(4,378		)	2,715			(3,638		)	2,768			(870		)
Performance related earnings	23,276			(1,168		)	6,601			28,709			2,768			31,477
Economic net income	$	100,863		$	25,819		$	11,706		$	138,388		$	(46,454	)	$	91,934
Realized income	$	78,857		$	27,327		$	13,669		$	119,853		$	(47,780	)	$	72,073

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
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	(51,703		)	(13,218		)	(9,736		)	(74,657		)	(25,953		)	(100,610		)
General, administrative and other expenses	(8,041		)	(4,198		)	(2,731		)	(14,970		)	(19,313		)	(34,283		)
Fee related earnings	66,106			22,743			3,139			91,988			(45,266		)	46,722
Performance income—realized	8,778			—			27			8,805			—			8,805
Performance income—unrealized	2,936			32,237			14,088			49,261			—			49,261
Performance related compensation—realized	(5,285		)	—			(16		)	(5,301		)	—			(5,301		)
Performance related compensation—unrealized	(1,458		)	(25,505		)	(8,438		)	(35,401		)	—			(35,401		)
Net performance income	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	$	73,507		$	37,239		$	9,526		$	120,272		$	(44,416	)	$	75,856
Realized income	$	69,945		$	22,345		$	4,588		$	96,878		$	(43,205	)	$	53,673

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,
	2018			2017
Segment Revenues
Management fees (includes ARCC Part I Fees of $28,417 and $33,257 for the three months ended March 31, 2018 and 2017, respectively)	$	196,826		$	176,781
Other fees	6,073			4,834
Performance income—realized	23,107			8,805
Performance income—unrealized	35,118			49,261
Total segment revenues	$	261,124		$	239,681
Segment Expenses
Compensation and benefits	$	77,118		$	74,657
General, administrative and other expenses	16,102			14,970
Performance related compensation—realized	14,869			5,301
Performance related compensation—unrealized	11,009			35,401
Total segment expenses	$	119,098		$	130,329
Other Income (Expense)
Investment income—realized	$	4,792		$	2,680
Investment income (loss)—unrealized	(5,651		)	12,691
Interest and other investment income (expense)	3,542			(48		)
Interest expense	(6,321		)	(4,403		)
Total other income (expense)	$	(3,638	)	$	10,920

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Three Months Ended March 31,
	2018			2017
Total segment revenue	$	261,124		$	239,681
Revenue of Consolidated Funds eliminated in consolidation	(5,110		)	(18,188		)
Administrative fees(1)	6,412			9,606
Performance income reclass(2)	975			(24		)
Principal investment income	2,708			13,169
Revenue of non-controlling interests in consolidated subsidiaries(3)	(20		)	—
Total consolidated adjustments and reconciling items	4,965			4,563
Total consolidated revenue	$	266,089		$	244,244


(1)	Represents administrative fees that are presented in administrative, transaction 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 income 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 attributable to certain of our joint venture partners.

The following table reconciles segment expenses to Ares consolidated expenses:



	For the Three Months Ended March 31,
	2018			2017
Total segment expenses	$	119,098		$	130,329
Expenses of Consolidated Funds added in consolidation	8,629			10,509
Expenses of Consolidated Funds eliminated in consolidation	(7,313		)	(6,598		)
Administrative fees(1)	6,412			9,606
OMG expenses	49,222			45,266
Acquisition and merger-related expenses	(319		)	275,336
Equity compensation expense	21,087			15,089
Placement fees and underwriting costs	1,664			3,439
Amortization of intangibles	3,287			5,275
Depreciation expense	3,889			3,216
Expenses of non-controlling interests in consolidated subsidiaries(2)	627			—
Total consolidation adjustments and reconciling items	87,185			361,138
Total consolidated expenses	$	206,283		$	491,467


(1)	Represents administrative fees that are presented in administrative, transaction and other fees in the Company’s Condensed 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 (expense) to Ares consolidated other income:



	For the Three Months Ended March 31,
	2018			2017
Total other income (expense)	$	(3,638	)	$	10,920
Other income from Consolidated Funds added in consolidation, net	7,252			38,445
Other expense from Consolidated Funds eliminated in consolidation, net	(459		)	(23		)
Other income of non-controlling interests in consolidated subsidiaries	7			—
OMG other expense	2,768			850
Performance income reclass(1)	(975		)	24
Principal investment income	(2,708		)	(13,169		)
Changes in value of contingent consideration	—			20,248
Other non-cash expense	(7		)	—
Offering costs	—			(660		)
Total consolidation adjustments and reconciling items	5,878			45,715
Total consolidated other income	$	2,240		$	56,635


(1)	Related to performance income 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, RI, FRE and PRE:



	For the Three Months Ended March 31,
	2018			2017
Economic net income
Income (loss) before taxes	$	62,046		$	(190,588	)
Adjustments:
Amortization of intangibles	3,287			5,275
Depreciation expense	3,889			3,216
Equity compensation expenses	21,087			15,089
Acquisition and merger-related expenses	(319		)	255,088
Placement fees and underwriting costs	1,664			3,439
OMG expenses, net	46,454			44,416
Offering costs	—			660
Other non-cash expense	7			—
Expense of non-controlling interests in consolidated subsidiaries(1)	640			—
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(367		)	(16,323		)
Total consolidation adjustments and reconciling items	76,342			310,860
Economic net income	138,388			120,272
Total performance income - unrealized	(35,118		)	(49,261		)
Total performance related compensation - unrealized	11,009			35,401
Total investment (income) loss - unrealized	5,574			(9,534		)
Realized income	119,853			96,878
Total performance income - realized	(23,107		)	(8,805		)
Total performance related compensation - realized	14,869			5,301
Total investment income - realized	(1,936		)	(1,386		)
Fee related earnings	109,679			91,988
Performance related earnings
Economic net income	$	138,388		$	120,272
Less: fee related earnings	(109,679		)	(91,988		)
Performance related earnings	$	28,709		$	28,284


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