SEGMENT REPORTING

The Company operates through its three distinct operating segments. During the six months ended June 30, 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 $86.9 billion of assets under management and 152 funds as of June 30, 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 June 30, 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 $23.6 billion of assets under management as of June 30, 2018, broadly categorizing its investment strategies as corporate private equity, U.S. power and energy infrastructure and special situations. As of June 30, 2018 the group managed five corporate private equity commingled funds focused on North America and Europe and three focused on greater China, six 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 43 funds as of June 30, 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 OMG that consists of six 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 (f) 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 June 30, 2018:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $29,866)	$	135,848		$	49,318		$	17,138		$	202,304		$	—		$	202,304
Other fees	6,877			337			7			7,221			—			7,221
Compensation and benefits	(51,892		)	(18,672		)	(8,768		)	(79,332		)	(31,059		)	(110,391		)
General, administrative and other expenses	(11,041		)	(4,175		)	(2,391		)	(17,607		)	(19,489		)	(37,096		)
Fee related earnings	79,792			26,808			5,986			112,586			(50,548		)	62,038
Performance income—realized	41,672			80,415			521			122,608			—			122,608
Performance income—unrealized	(4,568		)	(133,605		)	13,830			(124,343		)	—			(124,343		)
Performance related compensation—realized	(23,577		)	(64,311		)	7			(87,881		)	—			(87,881		)
Performance related compensation—unrealized	2,759			106,912			(8,785		)	100,886			—			100,886
Net performance income	16,286			(10,589		)	5,573			11,270			—			11,270
Investment income (loss)—realized	595			9,016			(250		)	9,361			798			10,159
Investment income (loss)—unrealized	1,617			290			(525		)	1,382			2,866			4,248
Interest and other investment income (expense)	3,428			3,039			(1,218		)	5,249			623			5,872
Interest expense	(3,596		)	(1,440		)	(452		)	(5,488		)	(588		)	(6,076		)
Net investment income (loss)	2,044			10,905			(2,445		)	10,504			3,699			14,203
Performance related earnings	18,330			316			3,128			21,774			3,699			25,473
Economic net income	$	98,122		$	27,124		$	9,114		$	134,360		$	(46,849	)	$	87,511
Realized income	$	97,921		$	53,408		$	6,479		$	157,808		$	(49,754	)	$	108,054

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	(45,160		)	(18,388		)	(9,714		)	(73,262		)	(30,584		)	(103,846		)
General, administrative and other expenses	(8,048		)	(4,345		)	(3,091		)	(15,484		)	(18,862		)	(34,346		)
Fee related earnings	65,109			34,032			3,693			102,834			(49,446		)	53,388
Performance income—realized	7,883			64,780			1,467			74,130			—			74,130
Performance income—unrealized	5,093			228,747			29,789			263,629			—			263,629
Performance related compensation—realized	(1,898		)	(50,914		)	(161		)	(52,973		)	—			(52,973		)
Performance related compensation—unrealized	(6,079		)	(184,021		)	(18,632		)	(208,732		)	—			(208,732		)
Net performance income	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	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	$	69,076		$	121,281		$	18,768		$	209,125		$	(51,072	)	$	158,053
Realized income	$	73,181		$	50,151		$	5,181		$	128,513		$	(48,346	)	$	80,167

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, 2018:




	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $58,283)	$	267,614		$	99,205		$	32,311		$	399,130		$	—		$	399,130
Other fees	12,607			677			10			13,294			—			13,294
Compensation and benefits	(102,172		)	(37,871		)	(16,407		)	(156,450		)	(61,665		)	(218,115		)
General, administrative and other expenses	(20,670		)	(8,216		)	(4,823		)	(33,709		)	(38,105		)	(71,814		)
Fee related earnings	157,379			53,795			11,091			222,265			(99,770		)	122,495
Performance fees—realized	46,743			84,813			14,159			145,715			—			145,715
Performance fees—unrealized	11,524			(112,539		)	11,790			(89,225		)	—			(89,225		)
Performance fee compensation—realized	(26,665		)	(67,871		)	(8,214		)	(102,750		)	—			(102,750		)
Performance fee compensation—unrealized	9,935			88,218			(8,276		)	89,877			—			89,877
Net performance fees	41,537			(7,379		)	9,459			43,617			—			43,617
Investment income—realized	1,366			9,687			3,100			14,153			1,636			15,789
Investment income (loss)—unrealized	1,348			(3,860		)	(1,757		)	(4,269		)	4,097			(172		)
Interest and other investment income (expense)	5,624			3,368			(201		)	8,791			1,870			10,661
Interest expense	(8,269		)	(2,668		)	(872		)	(11,809		)	(1,136		)	(12,945		)
Net investment income	69			6,527			270			6,866			6,467			13,333
Performance related earnings	41,606			(852		)	9,729			50,483			6,467			56,950
Economic net income	$	198,985		$	52,943		$	20,820		$	272,748		$	(93,303	)	$	179,445
Realized income	$	176,778		$	80,735		$	20,148		$	277,661		$	(97,534	)	$	180,127

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	(96,863		)	(31,606		)	(19,450		)	(147,919		)	(56,537		)	(204,456		)
General, administrative and other expenses	(16,089		)	(8,543		)	(5,822		)	(30,454		)	(38,175		)	(68,629		)
Fee related earnings	131,215			56,775			6,832			194,822			(94,712		)	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	$	142,583		$	158,520		$	28,294		$	329,397		$	(95,488	)	$	233,909
Realized income	$	143,126		$	72,496		$	9,769		$	225,391		$	(91,551	)	$	133,840

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,
	2018			2017			2018			2017
Segment Revenues
Management fees (includes ARCC Part I Fees of $29,866, $58,283 and $19,143, $52,400 for the three and six months ended June 30, 2018 and 2017, respectively)	$	202,304		$	185,560		$	399,130		$	362,341
Other fees	7,221			6,020			13,294			10,854
Performance income—realized	122,608			74,130			145,715			82,935
Performance income—unrealized	(124,343		)	263,629			(89,225		)	312,890
Total segment revenues	$	207,790		$	529,339		$	468,914		$	769,020
Segment Expenses
Compensation and benefits	$	79,332		$	73,262		$	156,450		$	147,919
General, administrative and other expenses	17,607			15,484			33,709			30,454
Performance related compensation—realized	87,881			52,973			102,750			58,274
Performance related compensation—unrealized	(100,886		)	208,732			(89,877		)	244,133
Total segment expenses	$	83,934		$	350,451		$	203,032		$	480,780
Other Income (Expense)
Investment income—realized	$	9,361		$	5,615		$	14,153		$	8,295
Investment income (loss)—unrealized	1,382			23,038			(4,269		)	35,729
Interest and other investment income	5,249			6,475			8,791			6,427
Interest expense	(5,488		)	(4,891		)	(11,809		)	(9,294		)
Total segment other income	$	10,504		$	30,237		$	6,866		$	41,157

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Total segment revenue	$	207,790		$	529,339		$	468,914		$	769,020
Revenue of Consolidated Funds eliminated in consolidation	(25,123		)	(169		)	(30,233		)	(18,357		)
Administrative fees(1)	6,770			9,132			13,182			18,738
Performance income reclass(2)	31			(217		)	1,006			(241		)
Principal investment income	14,722			34,166			17,430			47,335
Revenue of non-controlling interests in consolidated subsidiaries(3)	(27		)	(54		)	(47		)	(54		)
Total consolidated adjustments and reconciling items	(3,627		)	42,858			1,338			47,421
Total consolidated revenue	$	204,163		$	572,197		$	470,252		$	816,441


(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 June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Total segment expenses	$	83,934		$	350,451		$	203,032		$	480,780
Expenses of Consolidated Funds added in consolidation	47,382			8,825			56,011			19,334
Expenses of Consolidated Funds eliminated in consolidation	(12,270		)	(4,303		)	(19,583		)	(10,901		)
Administrative fees(1)	6,770			9,132			13,182			18,738
OMG expenses	50,548			49,446			99,770			94,712
Acquisition and merger-related expenses	47			724			(272		)	276,060
Equity compensation expense	22,507			18,917			43,594			34,006
Placement fees and underwriting costs	1,852			6,383			3,516			9,822
Amortization of intangibles	3,285			5,274			6,572			10,549
Depreciation expense	4,426			2,774			8,315			5,990
Other expenses(3)	11,836			—			11,836			—
Expenses of non-controlling interests in consolidated subsidiaries(2)	700			574			1,327			574
Total consolidation adjustments and reconciling items	137,083			97,746			224,268			458,884
Total consolidated expenses	$	221,017		$	448,197		$	427,300		$	939,664


(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.


(3)	Includes $11.8 million payment to ARCC for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018.

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,
	2018			2017			2018			2017
Total segment other income	$	10,504		$	30,237		$	6,866		$	41,157
Other income (expense) from Consolidated Funds added in consolidation, net	69,193			(3,150		)	76,445			35,295
Other expense from Consolidated Funds eliminated in consolidation, net	993			(410		)	534			(433		)
Other income of non-controlling interests in consolidated subsidiaries	8			5			15			5
OMG other income (expense)	3,699			(1,626		)	6,467			(776		)
Performance income reclass(1)	(31		)	217			(1,006		)	241
Principal investment income	(14,722		)	(34,166		)	(17,430		)	(47,335		)
Changes in value of contingent consideration	—			(32		)	—			20,216
Other non-cash expense	(1,715		)	—			(1,722		)	—
Offering costs	(3		)	5			(3		)	(655		)
Total consolidation adjustments and reconciling items	57,422			(39,157		)	63,300			6,558
Total consolidated other income	$	67,926		$	(8,920	)	$	70,166		$	47,715


(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 June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Economic net income
Income (loss) before taxes	$	51,072		$	115,080		$	113,118		$	(75,508	)
Adjustments:
Amortization of intangibles	3,285			5,274			6,572			10,549
Depreciation expense	4,426			2,774			8,315			5,990
Equity compensation expenses	22,507			18,917			43,594			34,006
Acquisition and merger-related expenses	47			756			(272		)	255,844
Placement fees and underwriting costs	1,852			6,383			3,516			9,822
OMG expenses, net	46,849			51,072			93,303			95,488
Offering costs	3			(5		)	3			655
Other expense(2)	13,551			—			13,558			—
Expense of non-controlling interests in consolidated subsidiaries(1)	719			623			1,359			623
(Income) loss before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(9,951		)	8,251			(10,318		)	(8,072		)
Total consolidation adjustments and reconciling items	83,288			94,045			159,630			404,905
Economic net income	134,360			209,125			272,748			329,397
Total performance income - unrealized	124,343			(263,629		)	89,225			(312,890		)
Total performance related compensation - unrealized	(100,886		)	208,732			(89,877		)	244,133
Total investment (income) loss - unrealized	(9		)	(25,715		)	5,565			(35,249		)
Realized income	157,808			128,513			277,661			225,391
Total performance income - realized	(122,608		)	(74,130		)	(145,715		)	(82,935		)
Total performance related compensation - realized	87,881			52,973			102,750			58,274
Total investment income - realized	(10,495		)	(4,522		)	(12,431		)	(5,908		)
Fee related earnings	112,586			102,834			222,265			194,822
Performance related earnings
Economic net income	$	134,360		$	209,125		$	272,748		$	329,397
Less: fee related earnings	(112,586		)	(102,834		)	(222,265		)	(194,822		)
Performance related earnings	$	21,774		$	106,291		$	50,483		$	134,575


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


(2)	Includes $11.8 million payment to ARCC for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018.