SEGMENT REPORTING

The Company operates through its three distinct operating segments. During the nine months ended September 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 $91.5 billion of AUM and 155 funds as of September 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 September 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 $23.0 billion of AUM as of September 30, 2018, broadly categorizing its investment strategies as corporate private equity, infrastructure and power and special opportunities. As of September 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 infrastructure and power and two special opportunities 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 infrastructure and power strategy targets 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 opportunities 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 public and private equity and debt strategies, with approximately $10.6 billion of AUM across 42 funds as of September 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 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.

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.

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.

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.

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.

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, 2018:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $33,377)	$	145,414		$	48,287		$	19,961		$	213,662		$	—		$	213,662
Other fees	3,656			206			10			3,872			—			3,872
Compensation and benefits	(54,994		)	(17,443		)	(10,733		)	(83,170		)	(32,202		)	(115,372		)
General, administrative and other expenses	(10,731		)	(5,866		)	(2,856		)	(19,453		)	(18,292		)	(37,745		)
Fee related earnings	83,345			25,184			6,382			114,911			(50,494		)	64,417
Performance income—realized	1,729			52,729			17,110			71,568			—			71,568
Performance related compensation—realized	(1,113		)	(42,045		)	(16,865		)	(60,023		)	—			(60,023		)
Investment income—realized	1,063			8,104			6,846			16,013			22			16,035
Interest and other investment income—realized	1,604			1,032			486			3,122			442			3,564
Interest expense	(1,527		)	(1,577		)	(417		)	(3,521		)	(622		)	(4,143		)
Realized income	85,101			43,427			13,542			142,070			(50,652		)	91,418
Performance income—unrealized	26,867			(109,024		)	44,158			(37,999		)	—			(37,999		)
Performance related compensation—unrealized	(17,997		)	87,086			(26,672		)	42,417			—			42,417
Investment income (loss)—unrealized	2,524			(25,725		)	(2,920		)	(26,121		)	5,247			(20,874		)
Interest and other investment income—unrealized	770			40			(45		)	765			(10		)	755
Economic net income	$	97,265		$	(4,196	)	$	28,063		$	121,132		$	(45,415	)	$	75,717
Performance related earnings	$	13,920		$	(29,380	)	$	21,681		$	6,221		5,079			$	11,300

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	(46,822		)	(19,256		)	(11,398		)	(77,476		)	(27,306		)	(104,782		)
General, administrative and other expenses	(6,925		)	(4,655		)	(2,125		)	(13,705		)	(18,306		)	(32,011		)
Fee related earnings	72,099			27,851			3,641			103,591			(45,612		)	57,979
Performance income—realized	3,296			173,304			2,389			178,989			—			178,989
Performance related compensation—realized	(1,466		)	(138,657		)	(856		)	(140,979		)	—			(140,979		)
Investment income—realized	6,206			14,268			1,997			22,471			18			22,489
Interest and other investment income—realized	2,435			1,080			76			3,591			119			3,710
Interest expense	(3,277		)	(1,229		)	(396		)	(4,902		)	(441		)	(5,343		)
Realized income	79,293			76,617			6,851			162,761			(45,916		)	116,845
Performance income—unrealized	33,033			(142,822		)	20,366			(89,423		)	—			(89,423		)
Performance related compensation—unrealized	(19,820		)	114,395			(12,233		)	82,342			—			82,342
Investment income (loss)—unrealized	(1,123		)	(8,421		)	(767		)	(10,311		)	4,357			(5,954		)
Interest and other investment income—unrealized	(2,975		)	49			640			(2,286		)	(93		)	(2,379		)
Economic net income	88,408			39,818			14,857			143,083			(41,652		)	101,431
Performance related earnings	$	16,309		$	11,967		$	11,216		$	39,492		$	3,960		$	43,452

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, 2018:




	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $91,660)	$	413,028		$	147,492		$	52,272		$	612,792		$	—		$	612,792
Other fees	16,263			883			20			17,166			—			17,166
Compensation and benefits	(157,166		)	(55,314		)	(27,140		)	(239,620		)	(93,867		)	(333,487		)
General, administrative and other expenses	(31,401		)	(14,082		)	(7,679		)	(53,162		)	(56,397		)	(109,559		)
Fee related earnings	240,724			78,979			17,473			337,176			(150,264		)	186,912
Performance income—realized	48,472			137,542			31,269			217,283			—			217,283
Performance related compensation—realized	(27,778		)	(109,916		)	(25,079		)	(162,773		)	—			(162,773		)
Investment income—realized	2,429			17,791			9,946			30,166			1,658			31,824
Interest and other investment income—realized	7,828			4,011			1,370			13,209			2,178			15,387
Interest expense	(9,796		)	(4,245		)	(1,289		)	(15,330		)	(1,758		)	(17,088		)
Realized income	261,879			124,162			33,690			419,731			(148,186		)	271,545
Performance income—unrealized	38,391			(221,563		)	55,948			(127,224		)	—			(127,224		)
Performance related compensation—unrealized	(8,062		)	175,304			(34,948		)	132,294			—			132,294
Investment income (loss)—unrealized	3,872			(29,585		)	(4,677		)	(30,390		)	9,344			(21,046		)
Interest and other investment income—unrealized	170			429			(1,130		)	(531		)	124			(407		)
Economic net income	296,250			48,747			48,883			393,880			(138,718		)	255,162
Performance related earnings	$	55,526		$	(30,232	)	$	31,410		$	56,704		$	11,546		$	68,250

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	(143,685		)	(50,862		)	(30,848		)	(225,395		)	(83,843		)	(309,238		)
General, administrative and other expenses	(23,014		)	(13,198		)	(7,947		)	(44,159		)	(56,481		)	(100,640		)
Fee related earnings	203,314			84,626			10,473			298,413			(140,324		)	158,089
Performance income—realized	19,957			238,084			3,883			261,924			—			261,924
Performance related compensation—realized	(8,649		)	(189,571		)	(1,033		)	(199,253		)	—			(199,253		)
Investment income—realized	9,049			17,564			4,153			30,766			3,217			33,983
Interest and other investment income—realized	7,548			2,549			401			10,498			1,020			11,518
Interest expense	(8,800		)	(4,139		)	(1,257		)	(14,196		)	(1,380		)	(15,576		)
Realized income	222,419			149,113			16,620			388,152			(137,467		)	250,685
Performance income—unrealized	41,062			118,162			64,243			223,467			—			223,467
Performance related compensation—unrealized	(27,357		)	(95,131		)	(39,303		)	(161,791		)	—			(161,791		)
Investment income (loss)—unrealized	16			25,479			(77		)	25,418			222			25,640
Interest and other investment income—unrealized	(5,149		)	715			1,668			(2,766		)	105			(2,661		)
Economic net income	230,991			198,338			43,151			472,480			(137,140		)	335,340
Performance related earnings	$	27,677		$	113,712		$	32,678		$	174,067		$	3,184		$	177,251

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Segment Revenues
Management fees (includes ARCC Part I Fees of $33,377, $91,660 and $24,036, $76,436 for the three and nine months ended September 30, 2018 and 2017, respectively)	$	213,662		$	188,628		$	612,792		$	550,969
Other fees	3,872			6,144			17,166			16,998
Performance income—realized	71,568			178,989			217,283			261,924
Performance income—unrealized	(37,999		)	(89,423		)	(127,224		)	223,467
Total segment revenues	$	251,103		$	284,338		$	720,017		$	1,053,358
Segment Expenses
Compensation and benefits	$	83,170		$	77,476		$	239,620		$	225,395
General, administrative and other expenses	19,453			13,705			53,162			44,159
Performance related compensation—realized	60,023			140,979			162,773			199,253
Performance related compensation—unrealized	(42,417		)	(82,342		)	(132,294		)	161,791
Total segment expenses	$	120,229		$	149,818		$	323,261		$	630,598
Segment net investment income (loss)
Investment income—realized	$	16,013		$	22,471		$	30,166		$	30,766
Investment income (loss)—unrealized	(26,121		)	(10,311		)	(30,390		)	25,418
Interest and other investment income	3,887			1,305			12,678			7,732
Interest expense	(3,521		)	(4,902		)	(15,330		)	(14,196		)
Total segment net investment income (loss)	$	(9,742	)	$	8,563		$	(2,876	)	$	49,720

The following table reconciles segment revenue to Ares consolidated revenues:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Total segment revenue	$	251,103		$	284,338		$	720,017		$	1,053,358
Revenue of Consolidated Funds eliminated in consolidation	(8,716		)	(16,465		)	(38,949		)	(34,822		)
Administrative fees(1)	7,084			7,352			20,266			26,090
Performance income reclass(2)	(795		)	(1,187		)	211			(1,428		)
Principal investment income	(7,886		)	14,374			9,544			61,709
Revenue of non-controlling interests in consolidated subsidiaries(3)	(13		)	(10		)	(60		)	(64		)
Total consolidated adjustments and reconciling items	(10,326		)	4,064			(8,988		)	51,485
Total consolidated revenue	$	240,777		$	288,402		$	711,029		$	1,104,843


(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 September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Total segment expenses	$	120,229		$	149,818		$	323,261		$	630,598
Expenses of Consolidated Funds added in consolidation	21,971			25,862			77,982			45,196
Expenses of Consolidated Funds eliminated in consolidation	(9,138		)	(6,823		)	(28,721		)	(17,724		)
Administrative fees(1)	7,084			7,352			20,266			26,090
OMG expenses	50,494			45,612			150,264			140,324
Acquisition and merger-related expenses	253			2,818			(19		)	278,878
Equity compensation expense	23,940			18,091			67,534			52,097
Placement fees and underwriting costs	6,194			4,495			9,710			14,317
Amortization of intangibles	1,245			3,651			7,817			14,200
Depreciation expense	4,102			3,468			12,417			9,458
Other expenses(2)	—			—			11,836			—
Expenses of non-controlling interests in consolidated subsidiaries(3)	814			(217		)	2,141			357
Total consolidation adjustments and reconciling items	106,959			104,309			331,227			563,193
Total consolidated expenses	$	227,188		$	254,127		$	654,488		$	1,193,791


(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)	Nine months ended September 30, 2018 includes an $11.8 million payment made to ARCC during the second quarter of 2018 for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018.


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

The following table reconciles segment net investment income (loss) to Ares consolidated other income:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Total segment net investment income (loss)(1)	$	(9,742	)	$	8,563		$	(2,876	)	$	49,720
Other income from Consolidated Funds added in consolidation, net	34,645			55,227			111,090			90,522
Other expense from Consolidated Funds eliminated in consolidation, net	86			(330		)	620			(763		)
Other income of non-controlling interests in consolidated subsidiaries	8			9			23			14
OMG other income	5,079			3,960			11,546			3,184
Performance income reclass(2)	795			1,187			(211		)	1,428
Principal investment income (loss)	7,886			(14,374		)	(9,544		)	(61,709		)
Changes in value of contingent consideration	—			(60		)	—			20,156
Other non-cash expense	(3		)	—			(1,725		)	—
Offering costs	—			(33		)	(3		)	(688		)
Total consolidation adjustments and reconciling items	48,496			45,586			111,796			52,144
Total consolidated other income	$	38,754		$	54,149		$	108,920		$	101,864


(1)	Comprised of investment income (loss), interest and other investment income, and interest expense.


(2)	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 September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Economic net income
Income before taxes	$	52,343		$	88,424		$	165,461		$	12,916
Adjustments:
Amortization of intangibles	1,245			3,651			7,817			14,200
Depreciation expense	4,102			3,468			12,417			9,458
Equity compensation expenses	23,940			18,091			67,534			52,097
Acquisition and merger-related expenses	253			2,878			(19		)	258,722
Placement fees and underwriting costs	6,194			4,495			9,710			14,317
OMG expenses, net	45,415			41,652			138,718			137,140
Offering costs	—			33			3			688
Other expense(1)	3			—			13,561			—
Expense of non-controlling interests in consolidated subsidiaries(2)	819			(216		)	2,178			407
Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(13,182		)	(19,393		)	(23,500		)	(27,465		)
Total consolidation adjustments and reconciling items	68,789			54,659			228,419			459,564
Economic net income	121,132			143,083			393,880			472,480
Total performance income - unrealized	37,999			89,423			127,224			(223,467		)
Total performance related compensation - unrealized	(42,417		)	(82,342		)	(132,294		)	161,791
Total investment (income) loss - unrealized	25,356			12,597			30,921			(22,652		)
Realized income	142,070			162,761			419,731			388,152
Total performance income - realized	(71,568		)	(178,989		)	(217,283		)	(261,924		)
Total performance related compensation - realized	60,023			140,979			162,773			199,253
Total investment income - realized	(15,614		)	(21,160		)	(28,045		)	(27,068		)
Fee related earnings	114,911			103,591			337,176			298,413
Performance related earnings
Economic net income	$	121,132		$	143,083		$	393,880		$	472,480
Less: fee related earnings	(114,911		)	(103,591		)	(337,176		)	(298,413		)
Performance related earnings	$	6,221		$	39,492		$	56,704		$	174,067


(1)	Nine months ended September 30, 2018 includes an $11.8 million payment made to ARCC during the second quarter of 2018 for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018.


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