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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            

Commission File No. 001‑36429
ARES MANAGEMENT, L.P.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
80‑0962035
(I.R.S. Employer
Identification Number)
2000 Avenue of the Stars, 12th Floor, Los Angeles, CA 90067
(Address of principal executive office) (Zip Code)
(310) 201‑4100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non‑accelerated filer ¨
(Do not check if a
smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ¨  No x
The number of common units representing limited partner interests outstanding as of July 28, 2017 was 82,145,734.

 



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TABLE OF CONTENTS
 
 
 
    
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Forward‑Looking Statements
This report contains forward‑looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward‑looking statements by the use of forward‑looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. The forward‑looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Such forward‑looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. Some of these factors are described in this report and in our Annual report on Form 10-K for the year ended December 31, 2016, under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the risk factors and other cautionary statements that are included in this report and in our other periodic filings. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these forward‑looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Therefore, you should not place undue reliance on these forward‑looking statements. Any forward‑looking statement speaks only as of the date on which it is made. We do not undertake any obligation to publicly update or review any forward‑looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Under generally accepted accounting principles in the United States (“GAAP”), we are required to consolidate (a) entities other than limited partnerships and entities similar to limited partnerships in which we hold a majority voting interest or have majority ownership and control over the operational, financial and investing decisions of that entity, including Ares‑affiliates and affiliated funds and co‑investment entities, for which we are presumed to have controlling financial interests, and (b) entities that we concluded are variable interest entities (“VIEs”), including limited partnerships and collateralized loan obligations, for which we are deemed to be the primary beneficiary. When an entity is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the entity in our consolidated financial statements on a gross basis, subject to eliminations from consolidation, including the elimination of the management fees, performance fees and other fees that we earn from the entity. However, the presentation of performance fee compensation and other expenses associated with generating such revenues is not affected by the consolidation process. In addition, as a result of the consolidation process, the net income attributable to third‑party investors in consolidated entities is presented as net income attributable to redeemable interests and non‑controlling interests in Consolidated Funds in our Condensed Consolidated Statements of Operations.

In this form, in addition to presenting our results on a consolidated basis in accordance with GAAP, we present revenues, expenses and other results on a (i) “segment basis,” which deconsolidates these entities and therefore shows the results of our reportable segments without giving effect to the consolidation of the entities and (ii) “Stand Alone basis,” which shows the results of our reportable segments on a combined segment basis together with our Operations Management Group. In addition to our three segments, we have an Operations Management Group (the “OMG”) that consists of five independent, shared resource groups to support our reportable 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. The OMG’s expenses are not allocated to our three reportable segments but we consider the cost structure of the OMG when evaluating our financial performance. This information constitutes non‑GAAP financial information within the meaning of Regulation G, as promulgated by the SEC. Our management uses this information to assess the performance of our reportable segments and our OMG, and we believe that this information enhances the ability of unitholders to analyze our performance. For more information, see “Notes to the Condensed Consolidated Financial Statements - Note 14. Segment Reporting.”

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Glossary
When used in this report, unless the context otherwise requires:
“ARCC Part I Fees” refers to a quarterly performance fee on the investment income from Ares Capital Corporation (NASDAQ: ARCC) (“ARCC”);

“Ares Operating Group Unit” or an “AOG Unit” refer to, collectively, a partnership unit in each of the Ares Operating Group entities;

“assets under management” or “AUM” refers to the assets we manage. For our funds other than CLOs, our AUM represents the sum of the net asset value of such funds, the drawn and undrawn debt (at the fund‑level including amounts subject to restrictions) and uncalled committed capital (including commitments to funds that have yet to commence their investment periods). For our funds that are CLOs, our AUM represents subordinated notes (equity) plus all drawn and undrawn debt tranches;

“CLOs” refers to “our funds” which are structured as collateralized loan obligations;

“Consolidated Funds” refers collectively to certain Ares‑ affiliated funds, related co‑investment entities and certain CLOs that are required under GAAP to be consolidated in our consolidated financial statements;

“Co‑Founders” refers to Michael Arougheti, David Kaplan, John Kissick, Antony Ressler and Bennett Rosenthal;

“Credit Facility” refers to the revolving credit facility of the Ares Operating Group;

“distributable earnings” or “DE”, a non-GAAP measure, is an operating metric that assesses our performance without the effects of our consolidated funds and the impact of unrealized income and expenses, which generally fluctuate with fair value changes. Among other things, this metric also is used to assist in determining amounts potentially available for distribution. However, the declaration, payment, and determination of the amount of distributions to unitholders, if any, is at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Distributable earnings is calculated as the sum of fee related earnings, realized performance fees, realized performance fee compensation, realized net investment and other income, and is reduced by expenses arising from transaction costs associated with acquisitions, placement fees and underwriting costs, expenses incurred in connection with corporate reorganization and depreciation. Distributable earnings differs from income before taxes computed in accordance with GAAP as it is typically presented before giving effect to unrealized performance fees, unrealized performance fee compensation, unrealized net investment income, amortization of intangibles, and equity compensation expense. DE is presented prior to the effect of income taxes attributable to Ares Holdings, Inc. and to distributions made to our preferred unitholders, unless otherwise noted;

“economic net income” or “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 our business segments. ENI 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, and (e) certain other items that we believe are not indicative of our total 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, placement fees and underwriting costs and expenses incurred in connection with corporate reorganization;

“fee paying AUM” or “FPAUM” refers to the AUM on which we directly earn management fees. Fee paying AUM is equal to the sum of all the individual fee bases of our funds that directly contribute to our management fees;

“fee related earnings” or “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 fees, performance fee compensation, investment income from our Consolidated Funds and non-consolidated funds and certain other items that we believe are not indicative of our core operating performance;


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“Holdco Members” refers to Messrs. Arougheti, Kaplan, Ressler, Rosenthal and deVeer;

“Incentive generating AUM” or “IGAUM” refers to the AUM of our funds that are currently generating, on a realized or unrealized basis, performance fee revenue. It generally represents the NAV of our funds for which we are entitled to receive a performance fee, excluding capital committed by us and our professionals (which generally is not subject to a performance fee). With respect to ARCC, only ARCC Part II Fees can be generated from IGAUM;

“Incentive eligible AUM” or “IEAUM” refers to the AUM of our funds that are eligible to produce performance fee revenue, regardless of whether or not they are currently generating performance fees. It generally represents the NAV plus uncalled equity of our funds for which we are entitled to receive a performance fee, excluding capital committed by us and our professionals (which generally is not subject to a performance fee);

“management fees” refers to fees we earn for advisory services provided to our funds, which are generally based on a defined percentage of fair value of assets, total commitments, invested capital, net asset value, net investment income, total assets or par value of the investment portfolios managed by us and also include ARCC Part I Fees that are classified as management fees as they are predictable and recurring in nature, not subject to contingent repayment and generally cash‑settled each quarter;

“net inflows of capital” refers to net new commitments during the period, including equity and debt commitments and gross inflows into our open-ended managed accounts and sub-advised accounts, as well as equity offerings by our publicly traded vehicles minus redemptions from our open-ended funds, managed accounts and sub-advised accounts.

“net performance fees” refers to performance fees net of performance fee compensation, which is the portion of the performance fees earned from certain funds that is payable to professionals;

“our funds” refers to the funds, alternative asset companies, co-investment vehicles and other entities and accounts that are managed or co‑managed by the Ares Operating Group, and which are structured to pay fees. It also includes funds managed by Ivy Hill Asset Management, L.P., a wholly owned portfolio company of ARCC, and a registered investment adviser;

“permanent capital” refers to capital of our funds that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, which funds currently consist of ARCC, Ares Commercial Real Estate Corporation (“ACRE”) and Ares Dynamic Credit Allocation Fund, Inc. (“ARDC”). Such funds may be required, or elect, to return all or a portion of capital gains and investment income;

“performance fees” refers to fees we earn based on the performance of a fund, which are generally based on certain specific hurdle rates as defined in the fund’s investment management or partnership agreements and may be either an incentive fee or carried interest;

“performance related earnings” or “PRE”, a non-GAAP measure, is used to assess our investment performance net of performance fee compensation. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance fees, performance fee compensation and total investment and other income that we earn from our Consolidated Funds and non-consolidated funds;

“SEC” refers to the Securities and Exchange Commission;

“Senior Notes” or the "AFC Notes" refers to senior notes of a wholly owned subsidiary of Ares Holding;

“Term Loans” refers to term loans of a wholly owned subsidiary of AM LLC.

Many of the terms used in this report, including AUM, FPAUM, ENI, FRE, PRE and DE, may not be comparable to similarly titled measures used by other companies. In addition, our definitions of AUM and FPAUM are not based on any definition of AUM or FPAUM that is set forth in the agreements governing the investment funds that we manage and may differ from definitions of AUM or FPAUM set forth in other agreements to which we are a party. Further, ENI, FRE, PRE and DE are not measures of performance calculated in accordance with GAAP. We use ENI, FRE, PRE and DE as measures of operating performance, not as measures of liquidity. ENI, FRE, PRE and DE should not be considered in isolation or as substitutes for

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operating income, net income, operating cash flows, or other income or cash flow statement data prepared in accordance with GAAP. The use of ENI, FRE, PRE and DE without consideration of related GAAP measures is not adequate due to the adjustments described above. Our management compensates for these limitations by using ENI, FRE, PRE and DE as supplemental measures to our GAAP results. We present these measures to provide a more complete understanding of our performance as our management measures it. Amounts and percentages throughout this report may reflect rounding adjustments and consequently totals may not appear to sum.


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PART I—FINANCIAL INFORMATION
Item 1.  Financial Statements

Ares Management, L.P. 
Condensed Consolidated Statements of Financial Condition 
(Amounts in Thousands, Except Unit Data)
 
As of June 30,
 
As of December 31,
 
2017
 
2016
 
(unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
137,256

 
$
342,861

Investments (includes fair value investments of $577,280 and $448,336 at June 30, 2017 and December 31, 2016, respectively)
598,681

 
468,471

Performance fees receivable
1,082,775

 
759,099

Due from affiliates
157,372

 
162,936

Deferred tax asset, net
39,080

 
6,731

Other assets
101,520

 
65,565

Intangible assets, net
47,766

 
58,315

Goodwill
143,824

 
143,724

Assets of Consolidated Funds:
 
 
 
Cash and cash equivalents
424,652

 
455,280

Investments, at fair value
3,441,802

 
3,330,203

Due from affiliates
5,503

 
3,592

Dividends and interest receivable
6,797

 
8,479

Receivable for securities sold
52,494

 
21,955

Other assets
4,927

 
2,501

Total assets
$
6,244,449

 
$
5,829,712

Liabilities
 
 
 
Accounts payable, accrued expenses and other liabilities
$
84,745

 
$
83,336

Accrued compensation
89,100

 
131,736

Due to affiliates
23,891

 
17,564

Performance fee compensation payable
844,789

 
598,050

Debt obligations
510,856

 
305,784

Liabilities of Consolidated Funds:
 
 
 
Accounts payable, accrued expenses and other liabilities
33,638

 
21,056

Payable for securities purchased
231,634

 
208,742

CLO loan obligations, at fair value
3,093,598

 
3,031,112

Fund borrowings
83,725

 
55,070

Total liabilities
4,995,976

 
4,452,450

Commitments and contingencies

 

Preferred equity (12,400,000 units issued and outstanding at June 30, 2017 and December 31, 2016)
298,761

 
298,761

Non-controlling interest in Consolidated Funds
345,462

 
338,035

Non-controlling interest in Ares Operating Group entities
333,641

 
447,615

Controlling interest in Ares Management, L.P. :
 

 
 

Partners' Capital (82,131,000 units and 80,814,732 units issued and outstanding at June 30, 2017 and at December 31, 2016, respectively)
278,012

 
301,790

Accumulated other comprehensive loss, net of tax
(7,403
)
 
(8,939
)
Total controlling interest in Ares Management, L.P
270,609

 
292,851

Total equity
1,248,473

 
1,377,262

Total liabilities and equity
$
6,244,449

 
$
5,829,712


See accompanying notes to the condensed consolidated financial statements.

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Ares Management, L.P. 
Condensed Consolidated Statements of Operations  
(Amounts in Thousands, Except Unit Data)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Management fees (includes ARCC Part I Fees of $19,143, $52,400 and $28,999, $57,624 for the three and six months ended June 30, 2017 and 2016, respectively)
$
180,768

 
$
158,521

 
$
352,813

 
$
316,954

Performance fees
338,024

 
203,151

 
393,196

 
173,204

Administrative and other fees
15,098

 
7,863

 
29,538

 
15,392

Total revenues
533,890

 
369,535

 
775,547

 
505,550

Expenses
 
 
 
 
 
 
 
Compensation and benefits
131,219

 
112,654

 
255,558

 
223,333

Performance fee compensation
261,705

 
151,896

 
302,407

 
130,566

General, administrative and other expenses
50,751

 
38,686

 
98,089

 
78,648

Transaction support expense

 

 
275,177

 

Expenses of the Consolidated Funds
4,522

 
699

 
8,433

 
926

Total expenses
448,197

 
303,935

 
939,664

 
433,473

Other income (expense)
 
 
 
 
 
 
 
Investment income and net interest income (expense) (includes interest expense of $5,354, $10,233 and $4,828, $9,683 for the three and six months ended June 30, 2017 and 2016, respectively)
(2,252
)
 
4,993

 
(4,387
)
 
1,634

Other income, net
2,822

 
5,673

 
19,318

 
10,914

Net realized and unrealized gain (loss) on investments
30,079

 
(3,151
)
 
32,734

 
1,991

Investment income and net interest income of the Consolidated Funds (includes interest expense of $26,875, $58,197 and $18,607, $41,056 for the three and six months ended June 30, 2017 and 2016, respectively)
11,451

 
9,690

 
21,621

 
17,022

Net realized and unrealized gain (loss) on investments of the Consolidated Funds
(12,713
)
 
201

 
19,323

 
(29,606
)
Total other income
29,387

 
17,406

 
88,609

 
1,955

Income (loss) before taxes
115,080

 
83,006

 
(75,508
)

74,032

Income tax expense (benefit)
1,253

 
(4,434
)
 
(33,011
)
 
231

Net income (loss)
113,827

 
87,440

 
(42,497
)
 
73,801

Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds
(8,647
)
 
1,054

 
7,208

 
(10,925
)
Less: Net income attributable to redeemable interests in Ares Operating Group entities

 
339

 

 
349

Less: Net income (loss) attributable to non-controlling interests in Ares Operating Group entities
72,596

 
48,473

 
(58,449
)
 
49,893

Net income attributable to Ares Management, L.P.
49,878

 
37,574

 
8,744


34,484

Less: Preferred equity distributions paid
5,425

 

 
10,850

 

Net income (loss) attributable to Ares Management, L.P. common unitholders
$
44,453

 
$
37,574

 
$
(2,106
)

$
34,484

Net income (loss) attributable to Ares Management, L.P. per common unit:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.46

 
$
(0.04
)
 
$
0.42

Diluted
$
0.53

 
$
0.46

 
$
(0.04
)
 
$
0.42

Weighted-average common units:
 
 
 
 
 
 
 
Basic
81,829,086

 
80,715,723

 
81,469,967

 
80,699,387

Diluted
84,319,882

 
82,332,193

 
81,469,967

 
81,752,468

Distribution declared and paid per common unit
$
0.13

 
$
0.15

 
$
0.41

 
$
0.35



Substantially all revenue is earned from affiliated funds of the Company. See accompanying notes to the condensed consolidated financial statements.  

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Ares Management, L.P. 
Condensed Consolidated Statements of Comprehensive Income  
(Amounts in Thousands)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
113,827

 
$
87,440

 
$
(42,497
)
 
$
73,801

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,029

 
(7,628
)
 
5,471

 
(10,325
)
Total comprehensive income (loss)
115,856

 
79,812

 
(37,026
)
 
63,476

Less: Comprehensive income (loss) attributable to non-controlling interests in Consolidated Funds
(8,818
)
 
1,054

 
7,038

 
(10,925
)
Less: Comprehensive income attributable to redeemable interests in Ares Operating Group entities

 
306

 

 
304

Less: Comprehensive income (loss) attributable to non-controlling interests in Ares Operating Group entities
74,461

 
43,768

 
(54,344
)
 
43,526

Comprehensive income attributable to Ares Management, L.P.
$
50,213


$
34,684

 
$
10,280

 
$
30,571

 
See accompanying notes to the condensed consolidated financial statements.


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Ares Management, L.P.
Condensed Consolidated Statements of Changes in Equity 
(Amounts in Thousands)
(unaudited)


 
Preferred
Equity
 
Partners'
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Non-controlling
Interest in
Ares Operating
Group Entities
 
 
Non-controlling
Interest in Consolidated
Funds
 
Total
Equity
Balance at December 31, 2016
$
298,761

 
$
301,790

 
$
(8,939
)
 
$
447,615

 
 
$
338,035

 
$
1,377,262

Changes in ownership interests

 
(1,068
)
 

 
(13,034
)
 
 

 
(14,102
)
Contributions

 

 

 
1,884

 
 
47,265

 
49,149

Distributions
(10,850
)
 
(33,400
)
 

 
(68,915
)
 
 
(46,876
)
 
(160,041
)
Net income (loss)
10,850

 
(2,106
)
 

 
(58,449
)
 
 
7,208

 
(42,497
)
Currency translation adjustment

 

 
1,536

 
4,105

 
 
(170
)
 
5,471

Equity compensation

 
12,796

 

 
20,435

 
 

 
33,231

Balance at June 30, 2017
$
298,761


$
278,012


$
(7,403
)

$
333,641



$
345,462


$
1,248,473

See accompanying notes to the condensed consolidated financial statements.


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Ares Management, L.P.
Condensed Consolidated Statements of Cash Flows 
(Amounts in Thousands) 
(unaudited)
 
For the Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(42,497
)
 
$
73,801

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
(92,537
)
 
23,103

Adjustments to reconcile net income (loss) to net cash used in operating activities allocable to non-controlling interests in Consolidated Funds
(61,985
)
 
58,401

Cash flows due to changes in operating assets and liabilities
(144,249
)
 
(76,356
)
Cash flows due to changes in operating assets and liabilities allocable to non-controlling interest in Consolidated Funds
37,108

 
(9,924
)
Net cash provided by (used in) operating activities
(304,160
)
 
69,025

Cash flows from investing activities:
 

 
 

Purchase of furniture, equipment and leasehold improvements, net
(21,194
)
 
(5,273
)
Net cash used in investing activities
(21,194
)
 
(5,273
)
Cash flows from financing activities:
 

 
 

Proceeds from credit facility
165,000

 
147,000

Proceeds from term notes
70,009

 

Repayments of credit facility
(30,000
)
 
(257,000
)
Proceeds from the issuance of preferred equity, net of issuance costs

 
298,971

Distributions 
(102,315
)
 
(82,462
)
Preferred equity distributions
(10,850
)
 

Net settlement of vested common units
(13,471
)
 

Stock option exercise
1,036

 

Excess tax benefit related to stock option exercise
81

 

Other financing activities
1,583

 
(569
)
Allocable to non-controlling interest in Consolidated Funds:
 

 
 

Contributions from non-controlling interests in Consolidated Funds
47,265

 
48,122

Distributions to non-controlling interests in Consolidated Funds
(46,876
)
 
(23,228
)
Borrowings under loan obligations by Consolidated Funds
1,314,026

 
750

Repayments under loan obligations by Consolidated Funds
(1,287,425
)
 
(45,612
)
Net cash provided by financing activities
108,063

 
85,972

Effect of exchange rate changes
11,686

 
(6,619
)
Net change in cash and cash equivalents
(205,605
)

143,105

Cash and cash equivalents, beginning of period
342,861

 
121,483

Cash and cash equivalents, end of period
$
137,256

 
$
264,588

 
See accompanying notes to the condensed consolidated financial statements.

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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Dollars in Thousands, Except Share Data and As Otherwise Noted)


1. ORGANIZATION 
Ares Management, L.P. ("the Company"), a Delaware limited partnership, is a leading global alternative asset management firm that operates three distinct but complementary investment groups: the Credit Group, the Private Equity Group and the Real Estate Group. Information about segments should be read together with Note 14, “Segment Reporting.” Subsidiaries of the Company serve as the general partners and/or investment managers to various investment funds and managed accounts within each investment group (the “Ares Funds”), which are generally organized as pass-through entities for income tax purposes. Such subsidiaries provide investment advisory services to the Ares Funds in exchange for management fees. Ares is managed and operated by its general partner, Ares Management GP LLC. Unless the context requires otherwise, references to “Ares” or the “Company” refer to Ares Management, L.P. together with its subsidiaries.
The Company is a holding partnership, and the Company’s sole assets are equity interests in Ares Holdings Inc. (“AHI”), Ares Offshore Holdings, Ltd., and Ares AI Holdings L.P. In this quarterly report, the following of the Company’s subsidiaries are collectively referred to as the “Ares Operating Group”: Ares Offshore Holdings L.P. (“Ares Offshore”), Ares Holdings L.P. (“Ares Holdings”), and Ares Investments L.P. (“Ares Investments”). The Company, indirectly through its wholly owned subsidiaries, is the general partner of each of the Ares Operating Group entities. The Company operates and controls all of the businesses and affairs of and conducts all of its material business activities through the Ares Operating Group.
Non-Controlling Interests in Ares Operating Group Entities
The non-controlling interests in Ares Operating Group (“AOG”) entities represent a component of equity and net income attributable to the owners of the Ares Operating Group Units (“AOG Units”) that are not held directly or indirectly by the Company. These interests are adjusted for contributions to and distributions from AOG during the reporting period and are allocated income from the AOG entities based on their historical ownership percentage for the proportional number of days in the reporting period. 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”) for interim financial information and instructions to the Quarterly Report on Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
The condensed consolidated financial statements include the accounts and activities of the AOG entities, their consolidated subsidiaries and certain Consolidated Funds. These Consolidated Funds include certain Ares-affiliated funds, related co-investment entities and collateralized loan obligations (“CLOs”) (collectively, the “Consolidated Funds”) managed by Ares Management LLC (“AM LLC”) and its wholly owned subsidiaries. Including the results of the Consolidated Funds significantly increases the reported amounts of the assets, liabilities, revenues, expenses and cash flows in the accompanying condensed consolidated financial statements; however, the Consolidated Funds results included herein have no direct effect on the net income attributable to controlling interests or on total controlling equity. Instead, economic ownership interests of the investors in the Consolidated Funds are reflected as non-controlling interests in Consolidated Funds in the accompanying condensed consolidated financial statements. Further, cash flows allocable to non-controlling interest in Consolidated Funds are specifically identifiable in the Condensed Consolidated Statements of Cash Flows. All intercompany balances and transactions have been eliminated upon consolidation.
The Company has reclassified certain prior period amounts to conform to the current year presentation.


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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




Transaction Support Expense
On January 3, 2017, ARCC and American Capital, Ltd. (“ACAS”) consummated a merger transaction valued at approximately $4.2 billion (the "ARCC-ACAS Transaction"). To support the ARCC-ACAS Transaction, the Company, through its subsidiary Ares Capital Management LLC, which serves as the investment adviser to ARCC, paid $275.2 million to ACAS shareholders in accordance with the terms and conditions set forth in the merger agreement.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Financial Accounting Standards Board (“FASB") Accounting Standards Update ("ASU") issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on its condensed consolidated financial statements.
Revenue Recognition:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU provides alternative methods of adoption. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to December 15, 2017 for fiscal years, and interim periods within those years, beginning after that date and permits early adoption of the standard, but not before the original effective date for fiscal years beginning after December 15, 2016. In March, April and May 2016, the FASB issued additional ASUs clarifying certain aspects of ASU 2014-09. The core principle of ASU 2014-09 was not changed by the additional guidance.
During 2016, four ASUs: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, were issued to provide clarification to previously issued revenue recognition guidance (ASU 2014-09) that has not yet been implemented. These updates are required to be adopted with ASU 2014-09, but are not expected to change its application by the Company.
While the Company continues to evaluate the impact of the above revenue recognitions guidance, and cannot currently quantify the impact of the guidance, the Company has begun an assessment of the impact. The assessment includes a detailed review of investment management agreements, establishing which agreements are expected to be in place, and understanding when revenue would be recognized under those agreements. The primary contracts impacted by this standard crystallize revenue on an annual basis but could have elements that prevent annual recognition subject to management’s evaluation of the investment management agreements in consideration of the new standard and its subsequent clarification.

Other Guidance:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of the guidance in ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and liabilities in the balance sheet and disclosing key information. ASU 2016-02 amends previous lease guidance, which required a lessee to categorize and account for leases as either operating leases or capital leases, and instead requires a lessee to recognize a lease liability and a right-of-use asset on the entity’s balance sheet for all leases with terms that exceed one year. The lease liability and right-of-use asset are to be carried at the present value of remaining expected future lease payments. The guidance should be applied using a modified retrospective approach. ASU 2016-02 is effective for public entities for annual reporting periods beginning after December 15, 2018 and interim periods within those reporting periods, with early adoption permitted. The Company is currently compiling all leases and right–of–use terms to evaluate the impact of this guidance on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist with evaluating whether a transaction should be accounted for as an acquisition or a disposal of a business. This ASU provides specific evaluation process, and factors that should be used in this determination. The guidance should be applied prospectively. ASU 2017-01 is effective for

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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




public entities for annual reporting periods beginning after December 15, 2017 and interim periods within those reporting periods, with early adoption permitted. This guidance will not have a material impact on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Currently, goodwill impairment requires an entity to perform a two-step test to determine the amount of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 simplifies the goodwill impairment test by removing Step 2 of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance should be applied prospectively. ASU 2017-04 is effective for public entities for annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods, with early adoption permitted. This guidance will not have a material impact on the Company's condensed consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 clarifies the application of current accounting guidance to the derecognition of nonfinancial assets, including partial sales of nonfinancial assets. This ASU specifies that an entity should allocate the consideration to each distinct asset using the guidance established in ASC 606 on allocating the transaction price to performance obligations. For partial sales of nonfinancial assets, ASU 2017-05 also requires an entity to derecognize a portion of the nonfinancial asset when the entity no longer has a controlling financial interest in the legal entity holding the asset and the entity has transferred control of the asset in accordance with ASC 606. Any noncontrolling or retained interest should be measured at fair value. The guidance should be adopted using either a full or modified retrospective approach. ASU 2017-05 is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods within those reporting periods, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies the application of current accounting guidance to the modification of share-based compensation awards. This ASU specifies that an entity should account for the impact of an award modification in accordance with ASC Topic 718 unless all of the following conditions are met: (i) the fair value of the modified award is the same as the fair value of the original award prior to the modification; (ii) the vesting conditions of the modified award are the same as the original award prior to the modification; and (iii) the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The guidance should be applied prospectively to awards modified on or after the adoption date. ASU 2017-09 is effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods within those reporting periods, with early adoption permitted. This guidance will not have a material impact on the Company's condensed consolidated financial statements.



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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




3. GOODWILL AND INTANGIBLE ASSETS
Finite Lived Intangible Assets, Net
The Company's intangible assets include acquired management contracts, client relationships, a trade name, and the future benefits of managing new assets for existing clients that were recognized at fair value as of their acquisition dates.
The following table summarizes the carrying value, net of accumulated amortization, for the Company's intangible assets:
 
Weighted Average Amortization Period as of June 30, 2017
 
As of June 30,
 
As of December 31,
 
 
2017
 
2016
Management contracts
2.0 years
 
$
67,306

 
$
111,939

Client relationships
11.0 years
 
38,600

 
38,600

Trade name
5.0 years
 
3,200

 
3,200

Intangible assets
 
 
109,106


153,739

Foreign currency translation
 
 

 
(3,205
)
Total intangible assets
 
 
109,106


150,534

Less: accumulated amortization
 
 
(61,340
)
 
(92,219
)
Intangible assets, net
 
 
$
47,766


$
58,315

Amortization expense associated with intangible assets was $5.2 million and $7.1 million for the three months ended June 30, 2017 and 2016, respectively, and $10.5 million and $14.4 million for the six months ended June 30, 2017 and 2016, respectively, and is presented within general, administrative and other expenses within the Condensed Consolidated Statements of Operations. During the first quarter of 2017, the Company removed $41.4 million of intangible assets that were fully amortized.
Goodwill
The following table summarizes the carrying value of the Company's goodwill assets:
 
Credit
 
Private
Equity
 
Real
Estate
 
Total
Balance as of December 31, 2016
$
32,196

 
$
58,600

 
$
52,928


$
143,724

Foreign currency translation

 

 
100

 
100

Balance as of June 30, 2017
$
32,196

 
$
58,600

 
$
53,028

 
$
143,824

There was no impairment of goodwill recorded during the six months ended June 30, 2017 and 2016. The impact of foreign currency translation is reflected within other comprehensive income.

4. INVESTMENTS
The Company’s investments are comprised of: (i) investments presented at fair value as a result of the election of the fair value option or in accordance with investment company accounting, (ii) equity method investments (using equity method or fair value option) and (iii) held-to-maturity investments. 

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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




Fair Value Investments, excluding Equity Method Investments Held at Fair Value 
 
Fair value at
 
Fair value as a
percentage of total investments at
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Private Investment Partnership Interests:
 
 
 
 
 
 
 
AREA Sponsor Holdings, LLC
$
25,711

 
$
28,898

 
4.6
%
 
6.8
%
ACE II Master Fund, L.P. (1)(2)
19,897

 
22,042

 
3.6
%
 
5.2
%
Ares Corporate Opportunities Fund III, L.P.
125,097

 
97,549

 
22.3
%
 
22.9
%
Ares Corporate Opportunities Fund IV, L.P. (2)
43,443

 
37,308

 
7.8
%
 
8.7
%
Resolution Life L.P.
33,410

 
33,410

 
6.0
%
 
7.8
%
Other private investment partnership interests (1)(3)
146,577

 
118,075

 
26.2
%
 
27.7
%
Total private investment partnership interests (cost: $270,555 and $256,638 at June 30, 2017 and December 31, 2016, respectively)
394,135


337,282

 
70.5
%
 
79.1
%
Collateralized loan obligations (cost: $165,706 and $89,743 at June 30, 2017 and December 31, 2016, respectively)(3)
164,807

 
89,111

 
29.3
%
 
20.9
%
Common stock (cost: $1,128 and $124 at June 30, 2017 and December 31, 2016, respectively)(3)
1,234

 
100

 
0.2
%
 
0.0
%
Total fair value investments (cost: $437,389 and $346,505 at June 30, 2017 and December 31, 2016, respectively)
$
560,176


$
426,493







 
(1)
Investment or portion of the investment is denominated in foreign currency; fair value is translated into U.S. dollars at each reporting date.
(2)
Represents underlying security that is held through various legal entities.
(3)
No single issuer or investment had a fair value that exceeded 5% of the Company's total assets.
Equity Method Investments
The Company’s equity method investments include investments that are not consolidated but over which the Company exerts significant influence. The Company's equity method investments, including those where the fair value option was elected, are summarized below:
 
As of June 30,
 
As of December 31,
 
2017
 
2016
Equity method investment
$
3,480

 
$
3,616

Equity method investments at fair value
17,104

 
21,843

Total equity method investments
$
20,584


$
25,459

The material assets of the Company's equity method investments are investments for which long term capital appreciation is expected, the material liabilities are debt instruments collateralized by, or related to, the financing of the assets and net income is primarily comprised of the changes in fair value of these net assets.

Held-to-Maturity Investments
The Company classifies certain investments as held-to-maturity investments when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are reported as investments and are recorded at amortized cost. A summary of the cost and fair value of CLO notes classified as held-to maturity investments is as follows:
 
As of June 30,
 
As of December 31,
 
2017
 
2016
Amortized cost
$
17,921

 
$
16,519

Unrealized gain (loss), net
142

 
(116
)
Fair value
$
18,063

 
$
16,403


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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




Based on the Company's ability and intent to hold the investments until maturity and the underlying credit performance of such investments, the Company has determined that the net unrealized losses are temporary impairments as of December 31, 2016.
There were no sales of held-to-maturity investments during the six months ended June 30, 2017 and 2016. All contractual maturities are greater than 10 years as of June 30, 2017. Actual maturities may differ from contractual maturities because underlying collateral may have the right to call or prepay obligations with or without call or prepayment penalties.
Investments of the Consolidated Funds
Investments held in the Consolidated Funds are summarized below:
 
Fair value at
 
Fair value as a percentage of total investments at
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
United States:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
$
753,922

 
$
665,773

 
21.8
%
 
20.0
%
Consumer staples
45,708

 
64,840

 
1.3
%
 
1.9
%
Energy
74,433

 
45,409

 
2.2
%
 
1.4
%
Financials
162,618

 
139,285

 
4.7
%
 
4.2
%
Healthcare, education and childcare
264,325

 
246,403

 
7.7
%
 
7.4
%
Industrials
142,110

 
149,632

 
4.1
%
 
4.5
%
Information technology
122,366

 
194,394

 
3.6
%
 
5.8
%
Materials
130,831

 
139,994

 
3.8
%
 
4.2
%
Telecommunication services
217,617

 
261,771

 
6.3
%
 
7.9
%
Utilities
40,373

 
47,800

 
1.2
%
 
1.4
%
Total fixed income securities (cost: $1,956,026 and $1,945,977 at June 30, 2017 and December 31, 2016, respectively)
1,954,303


1,955,301

 
56.7
%

58.7
%
Equity securities:
 
 
 
 
 
 
 
Energy
271

 
421

 
0.0
%
 
0.0
%
Partnership and LLC interests
217,740

 
171,696

 
6.3
%
 
5.2
%
Total equity securities (cost: $192,265 and $149,872 at June 30, 2017 and December 31, 2016, respectively)
218,011


172,117

 
6.3
%

5.2
%

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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




 
Fair value at
 
Fair value as a percentage of total investments at
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Europe:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
$
353,662

 
$
274,678

 
10.3
%
 
8.2
%
Consumer staples
53,666

 
39,197

 
1.6
%
 
1.2
%
Financials
54,523

 
28,769

 
1.6
%
 
0.9
%
Healthcare, education and childcare
139,683

 
111,589

 
4.1
%
 
3.4
%
Industrials
84,965

 
118,466

 
2.5
%
 
3.6
%
Information technology
39,657

 
49,507

 
1.2
%
 
1.5
%
Materials
151,706

 
124,629

 
4.4
%
 
3.7
%
Telecommunication services
104,514

 
118,632

 
3.0
%
 
3.6
%
Utilities
12,246

 
4,007

 
0.4
%
 
0.1
%
Total fixed income securities (cost: $1,050,273 and $892,108 at June 30, 2017 and December 31, 2016, respectively)
994,622


869,474

 
29.1
%

26.2
%
Equity securities:
 
 
 
 
 
 
 
Consumer staples
1,645

 
1,517

 
0.0
%
 
0.0
%
Healthcare, education and childcare
45,063

 
41,329

 
1.3
%
 
1.2
%
Telecommunication services

 
24

 
%
 
0.0
%
Total equity securities (cost: $67,199 and $67,290 at June 30, 2017 and December 31, 2016, respectively)
46,708


42,870

 
1.3
%

1.2
%
Asia and other:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
20,587

 
24,244

 
0.6
%
 
0.7
%
Financials

 
1,238

 
%
 
0.0
%
Healthcare, education and childcare

 
10,010

 
%
 
0.3
%
Telecommunication services
11,917

 
8,696

 
0.3
%
 
0.3
%
Total fixed income securities (cost: $32,149 and $46,545 at June 30, 2017 and December 31, 2016, respectively)
32,504


44,188

 
0.9
%

1.3
%
Equity securities:
 
 
 
 
 
 
 
Consumer discretionary
38,843

 
44,642

 
1.1
%
 
1.3
%
Consumer staples
46,746

 
50,101

 
1.4
%
 
1.5
%
Healthcare, education and childcare
44,637

 
32,598

 
1.3
%
 
1.0
%
Industrials
16,578

 
16,578

 
0.5
%
 
0.5
%
Total equity securities (cost: $122,418 and $122,418 at June 30, 2017 and December 31, 2016, respectively)
146,804


143,919

 
4.3
%

4.3
%

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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




 
Fair value at
 
Fair value as a percentage of total investments at
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Canada:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
$
3,277

 
$

 
0.1
%
 
%
Consumer staples
2,764

 
5,256

 
0.1
%
 
0.2
%
Energy
16,488

 
12,830

 
0.5
%
 
0.4
%
Healthcare, education and childcare

 
15,509

 
%
 
0.5
%
Industrials
1,266

 
1,401

 
0.0
%
 
0.0
%
Telecommunication services
10,659

 
13,852

 
0.3
%
 
0.4
%
Total fixed income securities (cost: $34,299 and $48,274 at June 30, 2017 and December 31, 2016, respectively)
34,454


48,848

 
1.0
%

1.5
%
Equity securities:
 
 
 
 
 
 
 
Consumer discretionary
7,532

 
164

 
0.2
%
 
0.0
%
Total equity securities (cost: $17,202 and $408 at June 30, 2017 and December 31, 2016, respectively)
7,532

 
164

 
0.2
%
 
0.0
%
Australia:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
4,347

 
5,627

 
0.1
%
 
0.2
%
Energy
2,517

 
6,046

 
0.1
%
 
0.2
%
Industrials

 
2,926

 
%
 
0.1
%
Utilities

 
21,154

 
%
 
0.6
%
Total fixed income securities (cost: $8,087 and $37,975 at June 30, 2017 and December 31, 2016, respectively)
6,864


35,753

 
0.2
%

1.1
%
Equity securities:
 
 
 
 
 
 
 
Utilities

 
17,569

 
%
 
0.5
%
Total equity securities (cost: $0 and $18,442 at June 30, 2017 and December 31, 2016, respectively)


17,569

 
%

0.5
%
Total fixed income securities
3,022,747

 
2,953,564

 
87.9
%
 
88.8
%
Total equity securities
419,055

 
376,639

 
12.1
%
 
11.2
%
Total investments, at fair value
$
3,441,802


$
3,330,203







At June 30, 2017 and December 31, 2016, no single issuer or investments, including derivative instruments and underlying portfolio investments of the Consolidated Funds, had a fair value that exceeded 5.0% of the Company’s total assets.

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Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




5. FAIR VALUE
Fair Value Measurements
GAAP establishes a hierarchal disclosure framework that prioritizes the inputs used in measuring financial instruments at fair value into three levels based on their market observability. Market price observability is affected by a number of factors, including the type of instrument and the characteristics specific to the instrument. Financial instruments with readily available quoted prices from an active market or for which fair value can be measured based on actively quoted prices generally have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.
Financial assets and liabilities measured and reported at fair value are classified as follows:
Level I—Quoted prices in active markets for identical instruments.
Level II—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in inactive markets; and model‑derived valuations with directly or indirectly observable significant inputs. Level II inputs include prices in markets with few transactions, non-current prices, prices for which little public information exists or prices that vary substantially over time or among brokered market makers. Other inputs include interest rates, yield curves, volatilities, prepayment risks, loss severities, credit risks and default rates.
Level III—Valuations that rely on one or more significant unobservable inputs. These inputs reflect the Company’s assessment of the assumptions that market participants would use to value the instrument based on the best information available.
In some instances, an instrument may fall into more than one level of the fair value hierarchy. In such instances, the instrument’s level within the fair value hierarchy is based on the lowest of the three levels (with Level III being the lowest) that is significant to the fair value measurement. The Company’s assessment of the significance of an input requires judgment and considers factors specific to the instrument. The Company accounts for the transfer of assets into or out of each fair value hierarchy level as of the beginning of the reporting period.
Fair Value of Financial Instruments Held by the Company and Consolidated Funds
The tables below summarize the financial assets and financial liabilities measured at fair value for the Company and Consolidated Funds as of June 30, 2017:
Financial Instruments of the Company
 
Level I 
 
Level II 
 
Level III 
 
Investments
Measured
at NAV
 
Total 
Investments, at fair value
 
 
 
 
 
 
 
 
 
 
Fixed income-collateralized loan obligations
 
$

 
$

 
$
164,807

 
$

 
$
164,807

Equity securities
 
236

 
998

 

 

 
1,234

Partnership interests
 

 

 
33,410

 
377,829

 
411,239

Total investments, at fair value
 
236


998


198,217


377,829


577,280

Derivative assets, at fair value
 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
 

 
384

 

 

 
384

Total derivative assets, at fair value
 


384






384

Total assets, at fair value
 
$
236


$
1,382


$
198,217


$
377,829


$
577,664

Liabilities, at fair value
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
$
(3,737
)
 
$

 
$

 
$
(3,737
)
Total derivative liabilities
 


(3,737
)




 
(3,737
)
Contingent consideration
 

 

 
(1,940
)
 

 
(1,940
)
Total liabilities, at fair value
 
$


$
(3,737
)

$
(1,940
)

$


$
(5,677
)

20

Table of Contents
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




Financial Instruments of the Consolidated Funds
 
Level I 
 
Level II 
 
Level III 
 
Total 
Investments, at fair value
 
 
 
 
 
 
 
 
Fixed income investments:
 
 
 
 
 
 
 
 
Bonds
 
$

 
$
96,698

 
$
8,833

 
$
105,531

Loans
 

 
2,732,616

 
173,466

 
2,906,082

Collateralized loan obligations
 

 
5,856

 
5,280

 
11,136

Total fixed income investments
 


2,835,170


187,579


3,022,749

Equity securities
 
55,039

 

 
146,274

 
201,313

Partnership interests
 

 

 
217,740

 
217,740

Total investments, at fair value
 
55,039


2,835,170


551,593


3,441,802

Derivative assets, at fair value
 
 
 
 
 
 
 
 
Other
 

 

 
2,809

 
2,809

Total derivative assets, at fair value
 




2,809


2,809

Total assets, at fair value
 
$
55,039


$
2,835,170


$
554,402


$
3,444,611

Liabilities, at fair value
 
 
 
 
 
 
 
 
Loan obligations of CLOs
 
$

 
$
(3,093,598
)
 
$

 
$
(3,093,598
)
Total liabilities, at fair value
 
$


$
(3,093,598
)

$


$
(3,093,598
)
The tables below summarize the financial assets and financial liabilities measured at fair value for the Company and Consolidated Funds as of December 31, 2016:
Financial Instruments of the Company
 
Level I 
 
Level II 
 
Level III 
 
Investments
Measured
at NAV
 
Total 
Investments, at fair value
 
 
 
 
 
 
 
 
 
 
Fixed income-collateralized loan obligations
 
$

 
$

 
$
89,111

 
$

 
$
89,111

Equity securities
 
100

 

 

 

 
100

Partnership interests
 

 

 
33,410

 
325,715

 
359,125

Total investments, at fair value
 
100




122,521


325,715


448,336

Derivative assets, at fair value
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
3,171

 

 

 
3,171

Total derivative assets, at fair value
 


3,171






3,171

Total assets, at fair value
 
$
100


$
3,171


$
122,521


$
325,715


$
451,507

Liabilities, at fair value
 
 

 
 

 
 

 
 

 
 

Contingent considerations
 
$

 
$

 
$
(22,156
)
 
$

 
$
(22,156
)
Total liabilities, at fair value
 
$


$


$
(22,156
)

$


$
(22,156
)

21

Table of Contents
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




Financial Instruments of the Consolidated Funds
 
Level I
 
Level II
 
Level III
 
Total
Investments, at fair value
 
 
 
 
 
 
 
 
Fixed income investments:
 
 
 
 
 
 
 
 
Bonds
 
$

 
$
104,886

 
$
37,063

 
$
141,949

Loans
 

 
2,606,423

 
199,217

 
2,805,640

Collateralized loan obligations
 

 

 
5,973

 
5,973

Total fixed income investments
 


2,711,309


242,253


2,953,562

Equity securities
 
56,662

 
17,569

 
130,690

 
204,921

Partnership interests
 

 

 
171,696

 
171,696

Other
 

 
24

 

 
24

Total investments, at fair value
 
56,662


2,728,902


544,639


3,330,203

Derivative assets, at fair value
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
529

 

 
529

Other
 

 

 
291

 
291

Total derivative assets, at fair value
 


529


291


820

Total assets, at fair value
 
$
56,662


$
2,729,431


$
544,930


$
3,331,023

Liabilities, at fair value
 
 
 
 
 
 
 
 
Other derivative liabilities
 
$

 
$

 
$
(2,999
)
 
$
(2,999
)
Loan obligations of CLOs
 

 
(3,031,112
)
 

 
(3,031,112
)
Total liabilities, at fair value
 
$


$
(3,031,112
)

$
(2,999
)

$
(3,034,111
)
The following tables set forth a summary of changes in the fair value of the Level III measurements for the three months ended June 30, 2017:
 
 
Level III Assets
 
Level III Liabilities
Level III Assets and Liabilities of the Company
 
Fixed Income
 
Partnership 
Interests
 
Total
 
Contingent Considerations
Balance, beginning of period
 
$
108,253

 
$
33,410

 
$
141,663

 
$
1,909

Purchases(1)
 
60,242

 

 
60,242

 

Sales(2)
 
(3,324
)
 

 
(3,324
)
 

Realized and unrealized appreciation (depreciation), net
 
(364
)
 

 
(364
)
 
31

Balance, end of period
 
$
164,807


$
33,410


$
198,217


$
1,940

Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date
 
$
(625
)
 
$

 
$
(625
)
 
$
31

Level III Assets of Consolidated Funds
 
Equity Securities
 
Fixed Income
 
Partnership
Interests
 
Derivatives, Net
 
Total
Balance, beginning of period
 
$
142,358

 
$
278,829

 
$
196,690

 
$
845

 
$
618,722

Transfer in
 
444

 
18,356

 

 

 
18,800

Transfer out
 

 
(108,757
)
 

 

 
(108,757
)
Purchases(1)
 

 
56,292

 
50,000

 

 
106,292

Sales(2)
 

 
(60,481
)
 
(30,000
)
 

 
(90,481
)
Settlements, net
 

 

 

 
(888
)
 
(888
)
Amortized discounts/premiums
 

 
(78
)
 

 
(100
)
 
(178
)
Realized and unrealized appreciation, net
 
3,472

 
3,418

 
1,050

 
2,952

 
10,892

Balance, end of period
 
$
146,274


$
187,579


$
217,740


$
2,809


$
554,402

Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date
 
$
3,472

 
$
(277
)
 
$
1,050

 
$
3,145

 
$
7,390

 
(1)
Purchases include paid‑in‑kind interest and securities received in connection with restructurings.

22

Table of Contents
Ares Management, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in Thousands, Except Share Data and As Otherwise Noted)




(2)
Sales include distributions, principal redemptions and securities disposed of in connection with restructurings.
The following tables set forth a summary of changes in the fair value of the Level III measurements for the three months ended June 30, 2016:
 
 
Level III Assets
 
Level III Liabilities
Level III Assets and Liabilities of the Company
 
Fixed Income
 
Partnership 
Interests
 
Total
 
Contingent Considerations
Balance, beginning of period
 
$
54,118

 
$
58,203

 
$
112,321

 
$
41,059

Purchases(1)
 
4

 
1,667

 
1,671

 

Sales(2)
 
(1,517
)
 

 
(1,517
)
 

Realized and unrealized appreciation (depreciation), net
 
1,550

 
(15,124
)
 
(13,574
)
 
(24
)
Balance, end of period
 
$
54,155

 
$
44,746

 
$
98,901

 
$
41,035

Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date
 
$
718

 
$
(15,123
)
 
$
(14,405
)
 
$
(24
)
Level III Assets of Consolidated Funds
 
Equity Securities
 
Fixed Income
 
Partnership Interests
 
Derivatives, Net
 
Total
Balance, beginning of period
 
$
141,805

 
$
212,209

 
$
103,621

 
$
(4,127
)
 
$
453,508

Transfer in
 

 
83,608

 

 

 
83,608

Transfer out