SEGMENT REPORTING

9 Months Ended

Sep. 30, 2019

The Company operates through its three distinct operating segments. During the nine months ended September 30, 2019, 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 $106.3 billion of AUM and 173 funds as of September 30, 2019. The Credit Group offers a range of credit strategies across the liquid and illiquid spectrum, including syndicated loans, high yield bonds, credit opportunities, alternative 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 borrowers. 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 alternative credit strategy seeks investment opportunities that fall outside of traditional, well-defined markets such as corporate debt, real estate and private equity. Alternative credit investments include certain structural features designed to protect value and minimize loss such as asset security, seniority, covenants, and cash flow prioritization. These investments include asset-backed securities, specialty assets, real assets, and structured credit. 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, 2019, by both market capitalization and total assets. 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. 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.

Private Equity Group: The Company’s Private Equity Group has approximately $25.5 billion of AUM as of September 30, 2019, broadly categorizing its investment strategies as corporate private equity, infrastructure and power, special opportunities and energy opportunities. As of September 30, 2019 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 infrastructure and power, three commingled special opportunities funds and the Company's first energy opportunities fund. In its North American and European flexible capital corporate private equity 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, midstream sectors and renewables 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. The energy opportunities strategy targets investments in the energy industry where its flexible capital can provide attractive risk-adjusted returns while mitigating commodity risk.

Real Estate Group: The Company’s Real Estate Group manages comprehensive equity and debt strategies, with approximately $12.5 billion of AUM across 46 funds as of September 30, 2019. 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 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, strategy and relationship management, 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.

Segment Profit Measures: These measures supplement and should be considered in addition to, and not in lieu of, the Condensed Consolidated Statements of Operations prepared in accordance with GAAP.

Fee related earnings (“FRE”) 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 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”) 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 the 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 the Company believes are not indicative of 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 from RI but are amortized to match the period over which management fees are recognized. 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 September 30, 2019:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $38,786)	$	178,447		$	54,543		$	26,988		$	259,978		$	—		$	259,978
Other fees	5,174			141			28			5,343			—			5,343
Compensation and benefits	(67,770		)	(19,226		)	(14,523		)	(101,519		)	(34,061		)	(135,580		)
General, administrative and other expenses	(12,789		)	(5,532		)	(3,341		)	(21,662		)	(21,405		)	(43,067		)
Fee related earnings	103,062			29,926			9,152			142,140			(55,466		)	86,674
Performance income—realized	1,037			—			6,277			7,314			—			7,314
Performance related compensation—realized	(630		)	—			(1,412		)	(2,042		)	—			(2,042		)
Realized net performance income	407			—			4,865			5,272			—			5,272
Investment income—realized	114			47			2,015			2,176			—			2,176
Interest and other investment income (expense) —realized	6,964			435			1,588			8,987			(11		)	8,976
Interest expense	(1,561		)	(1,628		)	(967		)	(4,156		)	(535		)	(4,691		)
Realized net investment income (loss)	5,517			(1,146		)	2,636			7,007			(546		)	6,461
Realized income	$	108,986		$	28,780		$	16,653		$	154,419		$	(56,012	)	$	98,407

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	(55,239		)	(17,443		)	(10,733		)	(83,415		)	(31,957		)	(115,372		)
General, administrative and other expenses	(10,921		)	(5,866		)	(2,856		)	(19,643		)	(18,102		)	(37,745		)
Fee related earnings	82,910			25,184			6,382			114,476			(50,059		)	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		)
Realized net performance income	616			10,684			245			11,545			—			11,545
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 net investment income (loss)	1,140			7,559			6,915			15,614			(158		)	15,456
Realized income	$	84,666		$	43,427		$	13,542		$	141,635		$	(50,217	)	$	91,418

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, 2019:



	Credit Group			Private Equity Group			Real Estate Group			Total Segments			OMG			Total
Management fees (Credit Group includes ARCC Part I Fees of $116,336)	$	513,760		$	158,101		$	67,408		$	739,269		$	—		$	739,269
Other fees	12,179			141			709			13,029			—			13,029
Compensation and benefits	(193,083		)	(61,713		)	(35,735		)	(290,531		)	(100,716		)	(391,247		)
General, administrative and other expenses	(39,675		)	(14,501		)	(9,996		)	(64,172		)	(61,911		)	(126,083		)
Fee related earnings	293,181			82,028			22,386			397,595			(162,627		)	234,968
Performance income—realized	38,921			62,492			10,468			111,881			—			111,881
Performance related compensation—realized	(22,857		)	(49,993		)	(3,638		)	(76,488		)	—			(76,488		)
Realized net performance income	16,064			12,499			6,830			35,393			—			35,393
Investment income—realized	662			12,013			7,041			19,716			—			19,716
Interest and other investment income (expense) —realized	14,500			4,047			4,812			23,359			(13		)	23,346
Interest expense	(5,368		)	(6,239		)	(3,136		)	(14,743		)	(1,330		)	(16,073		)
Realized net investment income (loss)	9,794			9,821			8,717			28,332			(1,343		)	26,989
Realized income	$	319,039		$	104,348		$	37,933		$	461,320		$	(163,970	)	$	297,350

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	(158,204		)	(55,314		)	(27,140		)	(240,658		)	(92,829		)	(333,487		)
General, administrative and other expenses	(32,069		)	(14,082		)	(7,679		)	(53,830		)	(55,729		)	(109,559		)
Fee related earnings	239,018			78,979			17,473			335,470			(148,558		)	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		)
Realized net performance income	20,694			27,626			6,190			54,510			—			54,510
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 net investment income	461			17,557			10,027			28,045			2,078			30,123
Realized income	$	260,173		$	124,162		$	33,690		$	418,025		$	(146,480	)	$	271,545

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Segment revenues
Management fees (includes ARCC Part I Fees of $38,786, $116,336 and $33,377, $91,660 for the three and nine months ended September 30, 2019 and 2018, respectively)	$	259,978		$	213,662		$	739,269		$	612,792
Other fees	5,343			3,872			13,029			17,166
Performance income—realized	7,314			71,568			111,881			217,283
Total segment revenues	$	272,635		$	289,102		$	864,179		$	847,241
Segment expenses
Compensation and benefits	$	101,519		$	83,415		$	290,531		$	240,658
General, administrative and other expenses	21,662			19,643			64,172			53,830
Performance related compensation—realized	2,042			60,023			76,488			162,773
Total segment expenses	$	125,223		$	163,081		$	431,191		$	457,261
Segment realized net investment income
Investment income—realized	$	2,176		$	16,013		$	19,716		$	30,166
Interest and other investment income- realized	8,987			3,122			23,359			13,209
Interest expense	(4,156		)	(3,521		)	(14,743		)	(15,330		)
Total segment realized net investment income	$	7,007		$	15,614		$	28,332		$	28,045

The following table reconciles the Company's consolidated revenues to segment revenue:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Total consolidated revenue	$	466,490		$	240,777		$	1,328,509		$	711,029
Performance (income) loss-unrealized	(181,174		)	37,999			(426,411		)	127,224
Management fees of Consolidated Funds eliminated in consolidation	8,780			9,138			25,928			24,721
Incentive fees of Consolidated Funds eliminated in consolidation	—			—			5,184			4,000
Principal investment (income) loss of Consolidated Funds eliminated in consolidation	2,476			(422		)	(656		)	10,228
Administrative fees(1)	(9,649		)	(7,084		)	(22,853		)	(20,266		)
Performance income (loss) reclass(2)	(27		)	795			553			(211		)
Principal investment (income) loss	(13,865		)	7,886			(45,336		)	(9,544		)
Net (revenue) expense of non-controlling interests in consolidated subsidiaries	(396		)	13			(739		)	60
Total consolidation adjustments and reconciling items	(193,855		)	48,325			(464,330		)	136,212
Total segment revenue	$	272,635		$	289,102		$	864,179		$	847,241


(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 net realized and unrealized gains (losses) on investments in the Company’s Condensed Consolidated Statements of Operations.

The following table reconciles the Company's consolidated expenses to segment expenses:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Total consolidated expenses	$	395,701		$	227,188		$	1,100,509		$	654,488
Performance related compensation-unrealized	(137,174		)	42,417			(311,936		)	132,294
Expenses of Consolidated Funds added in consolidation	(19,664		)	(21,971		)	(61,977		)	(77,982		)
Expenses of Consolidated Funds eliminated in consolidation	8,780			9,138			31,112			28,721
Administrative fees(1)	(9,649		)	(7,084		)	(22,853		)	(20,266		)
OMG expenses	(55,466		)	(50,059		)	(162,627		)	(148,558		)
Acquisition and merger-related expense	(4,777		)	(253		)	(10,757		)	19
Equity compensation expense	(22,393		)	(23,940		)	(73,974		)	(67,534		)
Unamortized placement fees	(4,366		)	(6,194		)	(17,319		)	(9,710		)
Depreciation and amortization expense(2)	(24,564		)	(5,347		)	(35,609		)	(20,234		)
Other expense(3)	—			—			—			(11,836		)
Expense of non-controlling interests in consolidated subsidiaries	(1,205		)	(814		)	(3,378		)	(2,141		)
Total consolidation adjustments and reconciling items	(270,478		)	(64,107		)	(669,318		)	(197,227		)
Total segment expenses	$	125,223		$	163,081		$	431,191		$	457,261


(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)	2019 period includes a $20.0 million non-cash impairment charge on certain intangible assets


(3)	2018 period 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 the Company's consolidated other income to segment realized net investment income:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Total consolidated other income	$	32,787		$	38,754		$	95,919		$	108,920
Investment (income) loss - unrealized	(4,138		)	26,121			(12,703		)	30,390
Interest and other investment (income) loss - unrealized	3,044			(765		)	3,394			531
Other expense from Consolidated Funds added in consolidation, net	(37,070		)	(34,645		)	(101,285		)	(111,090		)
Other income from Consolidated Funds eliminated in consolidation, net	(1,124		)	(86		)	(1,214		)	(620		)
OMG other (income) expense	87			(5,079		)	(71		)	(11,546		)
Performance (income) loss reclass(1)	27			(795		)	(553		)	211
Principal investment income (loss)	13,865			(7,886		)	45,336			9,544
Other (income) expense, net	(461		)	3			(460		)	1,728
Other income of non-controlling interests in consolidated subsidiaries	(10		)	(8		)	(31		)	(23		)
Total consolidation adjustments and reconciling items	(25,780		)	(23,140		)	(67,587		)	(80,875		)
Total segment realized net investment income	$	7,007		$	15,614		$	28,332		$	28,045


(1)	Related to performance income for AREA Sponsor Holdings LLC. Changes in value of this investment are reflected within net realized and unrealized gains (losses) on investments 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 RI and FRE:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Income before taxes	$	103,576		$	52,343		$	323,919		$	165,461
Adjustments:
Depreciation and amortization expense(1)	24,564			5,347			35,609			20,234
Equity compensation expense	22,393			23,940			73,974			67,534
Acquisition and merger-related expense	4,777			253			10,757			(19		)
Unamortized placement fees	4,366			6,194			17,319			9,710
OMG expense, net	55,553			44,980			162,556			137,012
Other (income) expense, net(2)	(461		)	3			(460		)	13,564
Net expense of non-controlling interests in consolidated subsidiaries	799			819			2,608			2,178
Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(16,054		)	(13,182		)	(41,178		)	(23,500		)
Total performance (income) loss - unrealized	(181,174		)	37,999			(426,411		)	127,224
Total performance related compensation - unrealized	137,174			(42,417		)	311,936			(132,294		)
Total investment (income) loss - unrealized	(1,094		)	25,356			(9,309		)	30,921
Realized income	154,419			141,635			461,320			418,025
Total performance income - realized	(7,314		)	(71,568		)	(111,881		)	(217,283		)
Total performance related compensation - realized	2,042			60,023			76,488			162,773
Total investment income - realized	(7,007		)	(15,614		)	(28,332		)	(28,045		)
Fee related earnings	$	142,140		$	114,476		$	397,595		$	335,470


(1)	2019 period includes a $20.0 million non-cash impairment charge on certain intangible assets

(2)

2018 period 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.