| SEGMENT REPORTING | 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 Total 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 Total 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 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 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 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 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 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. |
