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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 September 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 October 27, 2017 was 82,211,302.

 



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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;

"available capital" is comprised of uncalled committed capital and undrawn amounts under credit facilities and may include AUM that may be canceled or not otherwise available to invest (also referred to as "dry powder").

“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,

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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;

“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

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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 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 September 30,
 
As of December 31,
 
2017
 
2016
 
(unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
186,437

 
$
342,861

Investments (includes fair value investments of $581,614 and $448,336 at September 30, 2017 and December 31, 2016, respectively)
584,695

 
468,471

Performance fees receivable
997,578

 
759,099

Due from affiliates
161,432

 
162,936

Deferred tax asset, net
36,661

 
6,731

Other assets
103,885

 
65,565

Intangible assets, net
44,115

 
58,315

Goodwill
143,880

 
143,724

Assets of Consolidated Funds:
 
 
 
Cash and cash equivalents
799,609

 
455,280

Investments, at fair value
4,915,029

 
3,330,203

Due from affiliates
8,047

 
3,592

Dividends and interest receivable
10,061

 
8,479

Receivable for securities sold
25,926

 
21,955

Other assets
2,082

 
2,501

Total assets
$
8,019,437

 
$
5,829,712

Liabilities
 
 
 
Accounts payable, accrued expenses and other liabilities
$
94,351

 
$
83,336

Accrued compensation
133,799

 
131,736

Due to affiliates
17,207

 
17,564

Performance fee compensation payable
780,201

 
598,050

Debt obligations
486,007

 
305,784

Liabilities of Consolidated Funds:
 
 
 
Accounts payable, accrued expenses and other liabilities
50,992

 
21,056

Payable for securities purchased
481,055

 
208,742

CLO loan obligations, at fair value
4,476,643

 
3,031,112

Fund borrowings
121,261

 
55,070

Total liabilities
6,641,516

 
4,452,450

Commitments and contingencies

 

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

 
298,761

Non-controlling interest in Consolidated Funds
459,723

 
338,035

Non-controlling interest in Ares Operating Group entities
348,513

 
447,615

Controlling interest in Ares Management, L.P.:
 

 
 

Partners' capital (82,211,302 units and 80,814,732 units issued and outstanding at September 30, 2017 and at December 31, 2016, respectively)
275,410

 
301,790

Accumulated other comprehensive loss, net of tax
(4,486
)
 
(8,939
)
Total controlling interest in Ares Management, L.P.
270,924

 
292,851

Total equity
1,377,921

 
1,377,262

Total liabilities and equity
$
8,019,437

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Management fees (includes ARCC Part I Fees of $24,036, $76,436 and $33,260, $90,884 for the three and nine months ended September 30, 2017 and 2016, respectively)
$
183,177

 
$
163,609

 
$
535,990

 
$
480,563

Performance fees
87,008

 
164,482

 
480,204

 
337,686

Administrative and other fees
13,486

 
7,369

 
43,024

 
22,761

Total revenues
283,671

 
335,460

 
1,059,218

 
841,010

Expenses
 
 
 
 
 
 
 
Compensation and benefits
129,347

 
111,916

 
384,905

 
335,249

Performance fee compensation
58,637

 
123,173

 
361,044

 
253,739

General, administrative and other expenses
47,104

 
38,197

 
145,193

 
116,845

Transaction support expense

 

 
275,177

 

Expenses of the Consolidated Funds
19,039

 
10,088

 
27,472

 
11,014

Total expenses
254,127

 
283,374

 
1,193,791

 
716,847

Other income (expense)
 
 
 
 
 
 
 
Investment income and net interest expense (includes interest expense of $5,343, $15,576 and $4,136, $13,819 for the three and nine months ended September 30, 2017 and 2016, respectively)
(1,831
)
 
(1,681
)
 
(6,218
)
 
(47
)
Other income (expense), net
(2,492
)
 
23,042

 
16,826

 
33,956

Net realized and unrealized gain on investments
7,209

 
19,358

 
39,943

 
21,349

Investment income and net interest income of the Consolidated Funds (includes interest expense of $28,127, $86,324 and $26,413, $67,469 for the three and nine months ended September 30, 2017 and 2016, respectively)
20,054

 
8,737

 
41,675

 
25,759

Net realized and unrealized gain (loss) on investments of the Consolidated Funds
35,940

 
23,883

 
55,263

 
(5,723
)
Total other income
58,880

 
73,339

 
147,489

 
75,294

Income before taxes
88,424

 
125,425

 
12,916


199,457

Income tax expense (benefit)
4,552

 
7,641

 
(28,459
)
 
7,868

Net income
83,872

 
117,784

 
41,375

 
191,589

Less: Net income (loss) attributable to non-controlling interests in Consolidated Funds
18,195

 
7,861

 
25,403

 
(3,064
)
Less: Net income attributable to redeemable interests in Ares Operating Group entities

 
107

 

 
456

Less: Net income (loss) attributable to non-controlling interests in Ares Operating Group entities
37,839

 
66,511

 
(20,610
)
 
116,404

Net income attributable to Ares Management, L.P.
27,838

 
43,305

 
36,582


77,793

Less: Preferred equity distributions paid
5,425

 
6,751

 
16,275

 
6,751

Net income attributable to Ares Management, L.P. common unitholders
$
22,413

 
$
36,554

 
$
20,307


$
71,042

Net income attributable to Ares Management, L.P. per common unit:
 
 
 
 
 
 
 
Basic
$
0.26

 
$
0.45

 
$
0.22

 
$
0.87

Diluted
$
0.26

 
$
0.43

 
$
0.22

 
$
0.86

Weighted-average common units:
 
 
 
 
 
 
 
Basic
82,166,852

 
80,793,984

 
81,704,815

 
80,741,460

Diluted
82,166,852

 
84,464,591

 
81,704,815

 
82,667,049

Distribution declared and paid per common unit
$
0.31

 
$
0.28

 
$
0.72

 
$
0.63



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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
83,872

 
$
117,784

 
$
41,375

 
$
191,589

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
6,043

 
(2,241
)
 
11,514

 
(12,566
)
Total comprehensive income
89,915

 
115,543

 
52,889

 
179,023

Less: Comprehensive income (loss) attributable to non-controlling interests in Consolidated Funds
18,017

 
7,861

 
25,055

 
(3,064
)
Less: Comprehensive income attributable to redeemable interests in Ares Operating Group entities

 
105

 

 
409

Less: Comprehensive income (loss) attributable to non-controlling interests in Ares Operating Group entities
41,143

 
65,125

 
(13,201
)
 
108,651

Comprehensive income attributable to Ares Management, L.P.
$
30,755


$
42,452

 
$
41,035

 
$
73,027

 
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

 
(7,482
)
 

 
(8,994
)
 
 

 
(16,476
)
Contributions

 

 

 
1,884

 
 
145,717

 
147,601

Distributions
(16,275
)
 
(58,881
)
 

 
(110,127
)
 
 
(49,084
)
 
(234,367
)
Net income (loss)
16,275

 
20,307

 

 
(20,610
)
 
 
25,403

 
41,375

Currency translation adjustment

 

 
4,453

 
7,409

 
 
(348
)
 
11,514

Equity compensation

 
19,676

 

 
31,336

 
 

 
51,012

Balance at September 30, 2017
$
298,761


$
275,410


$
(4,486
)

$
348,513



$
459,723


$
1,377,921

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 Nine Months Ended September 30,
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
41,375

 
$
191,589

Adjustments to reconcile net income to net cash (used in) provided operating activities
(52,314
)
 
24,989

Adjustments to reconcile net income to net cash used in operating activities allocable to non-controlling interests in Consolidated Funds
(1,157,088
)
 
(506,849
)
Cash flows due to changes in operating assets and liabilities
(78,593
)
 
(30,485
)
Cash flows due to changes in operating assets and liabilities allocable to non-controlling interest in Consolidated Funds
54,370

 
61,397

Net cash used in operating activities
(1,192,250
)
 
(259,359
)
Cash flows from investing activities:
 

 
 

Purchase of furniture, equipment and leasehold improvements, net
(27,926
)
 
(8,167
)
Net cash used in investing activities
(27,926
)
 
(8,167
)
Cash flows from financing activities:
 

 
 

Proceeds from credit facility
245,000

 
147,000

Proceeds from term notes
70,009

 

Repayments of credit facility
(135,000
)
 
(257,000
)
Proceeds from the issuance of preferred equity, net of issuance costs

 
298,637

Distributions 
(169,008
)
 
(150,424
)
Preferred equity distributions
(16,275
)
 
(6,751
)
Net settlement of vested common units
(13,910
)
 

Stock option exercise
1,036

 

Excess tax benefit related to stock option exercise
81

 

Other financing activities
1,541

 
(701
)
Allocable to non-controlling interest in Consolidated Funds:
 

 
 

Contributions from non-controlling interests in Consolidated Funds
145,717

 
93,128

Distributions to non-controlling interests in Consolidated Funds
(49,084
)
 
(61,270
)
Borrowings under loan obligations by Consolidated Funds
2,438,491

 
530,731

Repayments under loan obligations by Consolidated Funds
(1,466,951
)
 
(103,648
)
Net cash provided by financing activities
1,051,647

 
489,702

Effect of exchange rate changes
12,105

 
(6,876
)
Net change in cash and cash equivalents
(156,424
)

215,300

Cash and cash equivalents, beginning of period
342,861

 
121,483

Cash and cash equivalents, end of period
$
186,437

 
$
336,783

 
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 Updates ("ASU") issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on the Company's 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. The guidance includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. 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.
The Company has substantially completed its assessment of the impact of the revenue recognition guidance. 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.
Accordingly, the Company has preliminarily concluded that carried interests, which are a performance-based capital allocation to the Company based on cumulative fund performance to date, represent equity method investments that are not in the scope of the amended revenue recognition guidance. Effective January 1, 2018, the Company will change its policy for recognition and measurement of carried interest. This accounting policy change will not change the timing or amount of revenue recognized related to carried interest. These amounts are currently recognized within performance fees in the Condensed Consolidated Statements of Operations. Under the equity method of accounting the Company will recognize its allocations of carried interest or incentive fees along with the allocations proportionate to the Company’s ownership in each fund. The Company will apply a full retrospective application and prior periods presented will be recast. The impact of adoption will be a reclassification of carried interest to equity income and will have no impact on net income (loss) attributable to Ares Management, L.P.
The Company has preliminarily concluded that the majority of its performance-based incentive fees are within the scope of the amended revenue recognition guidance. This accounting change will delay recognition of unrealized incentive fees compared to our current accounting treatment, and it is not expected to have a material impact on the Company’s financial statements.
The Company has evaluated the impact of the amended revenue recognition guidance on other revenue streams including management fees and it is not expected to have a material impact on its financial statements. The Company is still evaluating considerations for reporting certain revenues gross versus net.

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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)





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 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

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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)




reporting periods, with early adoption permitted. This guidance will not have a material impact on the Company's condensed consolidated financial statements.

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 September 30, 2017
 
As of September 30,
 
As of December 31,
 
 
2017
 
2016
Management contracts
1.9 years
 
$
67,306

 
$
111,939

Client relationships
10.8 years
 
38,600

 
38,600

Trade name
4.8 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
 
 
(64,991
)
 
(92,219
)
Intangible assets, net
 
 
$
44,115


$
58,315

Amortization expense associated with intangible assets was $3.7 million and $6.4 million for the three months ended September 30, 2017 and 2016, respectively, and $14.2 million and $20.8 million for the nine months ended September 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

 

 
156

 
156

Balance as of September 30, 2017
$
32,196

 
$
58,600

 
$
53,084

 
$
143,880

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

4. INVESTMENTS
The Company’s investments are composed 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
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Private Investment Partnership Interests:
 
 
 
 
 
 
 
AREA Sponsor Holdings, LLC
$
26,002

 
$
28,898

 
4.6
%
 
6.8
%
ACE II Master Fund, L.P. (1)(2)
19,141

 
22,042

 
3.4
%
 
5.2
%
Ares Corporate Opportunities Fund III, L.P.
114,674

 
97,549

 
20.3
%
 
22.9
%
Ares Corporate Opportunities Fund IV, L.P. (2)
34,990

 
37,308

 
6.2
%
 
8.7
%
Resolution Life L.P.
36,439

 
33,410

 
6.5
%
 
7.8
%
Other private investment partnership interests (1)(3)
168,732

 
118,075

 
30.0
%
 
27.7
%
Total private investment partnership interests (cost: $293,804 and $256,638 at September 30, 2017 and December 31, 2016, respectively)
399,978


337,282

 
71.0
%
 
79.1
%
Collateralized loan obligations (cost: $163,011 and $89,743 at September 30, 2017 and December 31, 2016, respectively) (3)
162,261

 
89,111

 
28.8
%
 
20.9
%
Common stock (cost: $1,132 and $124 at September 30, 2017 and December 31, 2016, respectively) (3)
1,304

 
100

 
0.2
%
 
0.0
%
Total fair value investments (cost: $457,947 and $346,505 at September 30, 2017 and December 31, 2016, respectively)
$
563,543


$
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 September 30,
 
As of December 31,
 
2017
 
2016
Equity method investment
$
3,081

 
$
3,616

Equity method investments at fair value
18,071

 
21,843

Total equity method investments
$
21,152


$
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 composed 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 September 30,
 
As of December 31,
 
2017
 
2016
Amortized cost
$

 
$
16,519

Unrealized loss, net

 
(116
)
Fair value
$

 
$
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.
During the third quarter ended September 30, 2017, the Company redeemed its remaining held-to-maturity investments balance of $18.5 million at par, which approximated the amortized cost, with no gain or loss recognized. Redemption occurred in connection with the restructuring and refinancing of the underlying collateral facility during the third quarter ended September 30, 2017.
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
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
United States:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
$
1,124,210

 
$
665,773

 
22.6
%
 
20.0
%
Consumer staples
55,357

 
64,840

 
1.1
%
 
1.9
%
Energy
138,687

 
45,409

 
2.8
%
 
1.4
%
Financials
234,828

 
139,285

 
4.8
%
 
4.2
%
Healthcare, education and childcare
396,747

 
246,403

 
8.0
%
 
7.4
%
Industrials
298,186

 
149,632

 
6.1
%
 
4.5
%
Information technology
138,390

 
194,394

 
2.8
%
 
5.8
%
Materials
163,728

 
139,994

 
3.3
%
 
4.2
%
Telecommunication services
337,695

 
261,771

 
6.9
%
 
7.9
%
Utilities
54,548

 
47,800

 
1.1
%
 
1.4
%
Total fixed income securities (cost: $2,949,788 and $1,945,977 at September 30, 2017 and December 31, 2016, respectively)
2,942,376


1,955,301

 
59.5
%

58.7
%
Equity securities:
 
 
 
 
 
 
 
Energy
158

 
421

 
0.0
%
 
0.0
%
Partnership and LLC interests
224,010

 
171,696

 
4.6
%
 
5.2
%
Total equity securities (cost: $192,265 and $149,872 at September 30, 2017 and December 31, 2016, respectively)
224,168


172,117

 
4.6
%

5.2
%

17

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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
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Europe:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
$
523,953

 
$
274,678

 
10.6
%
 
8.2
%
Consumer staples
72,446

 
39,197

 
1.5
%
 
1.2
%
Financials
43,702

 
28,769

 
0.9
%
 
0.9
%
Healthcare, education and childcare
199,823

 
111,589

 
4.1
%
 
3.4
%
Industrials
106,808

 
118,466

 
2.2
%
 
3.6
%
Information technology
46,512

 
49,507

 
0.9
%
 
1.5
%
Materials
235,505

 
124,629

 
4.8
%
 
3.7
%
Telecommunication services
143,972

 
118,632

 
2.9
%
 
3.6
%
Utilities
9,427

 
4,007

 
0.2
%
 
0.1
%
Total fixed income securities (cost: $1,383,866 and $892,108 at September 30, 2017 and December 31, 2016, respectively)
1,382,148


869,474

 
28.1
%

26.2
%
Equity securities:
 
 
 
 
 
 
 
Consumer staples

 
1,517

 
%
 
0.0
%
Healthcare, education and childcare
57,562

 
41,329

 
1.2
%
 
1.2
%
Telecommunication services

 
24

 
%
 
0.0
%
Total equity securities (cost: $67,198 and $67,290 at September 30, 2017 and December 31, 2016, respectively)
57,562


42,870

 
1.2
%

1.2
%
Asia and other:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
27,950

 
24,244

 
0.6
%
 
0.7
%
Financials
22,402

 
1,238

 
0.5
%
 
0.0
%
Healthcare, education and childcare

 
10,010

 
%
 
0.3
%
Telecommunication services
22,830

 
8,696

 
0.5
%
 
0.3
%
Total fixed income securities (cost: $73,146 and $46,545 at September 30, 2017 and December 31, 2016, respectively)
73,182


44,188

 
1.6
%

1.3
%
Equity securities:
 
 
 
 
 
 
 
Consumer discretionary
48,161

 
44,642

 
1.0
%
 
1.3
%
Consumer staples
47,208

 
50,101

 
1.0
%
 
1.5
%
Healthcare, education and childcare
44,637

 
32,598

 
0.9
%
 
1.0
%
Industrials
16,578

 
16,578

 
0.3
%
 
0.5
%
Total equity securities (cost: $122,418 and $122,418 at September 30, 2017 and December 31, 2016, respectively)
156,584


143,919

 
3.2
%

4.3
%

18

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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
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
2017
 
2016
 
2017
 
2016
Canada:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
$
4,093

 
$

 
0.1
%
 
%
Consumer staples
10,387

 
5,256

 
0.2
%
 
0.2
%
Energy
28,459

 
12,830

 
0.6
%
 
0.4
%
Healthcare, education and childcare

 
15,509

 
%
 
0.5
%
Industrials
12,464

 
1,401

 
0.3
%
 
0.0
%
Telecommunication services
9,725

 
13,852

 
0.2
%
 
0.4
%
Total fixed income securities (cost: $64,567 and $48,274 at September 30, 2017 and December 31, 2016, respectively)
65,128


48,848

 
1.4
%

1.5
%
Equity securities:
 
 
 
 
 
 
 
Consumer discretionary
7,862

 
164

 
0.2
%
 
0.0
%
Total equity securities (cost: $17,202 and $408 at September 30, 2017 and December 31, 2016, respectively)
7,862

 
164

 
0.2
%
 
0.0
%
Australia:
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
Consumer discretionary
3,142

 
5,627

 
0.1
%
 
0.2
%
Energy
2,877

 
6,046

 
0.1
%
 
0.2
%
Industrials

 
2,926

 
%
 
0.1
%
Utilities

 
21,154

 
%
 
0.6
%
Total fixed income securities (cost: $6,910 and $37,975 at September 30, 2017 and December 31, 2016, respectively)
6,019


35,753

 
0.2
%

1.1
%
Equity securities:
 
 
 
 
 
 
 
Utilities

 
17,569

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


17,569

 
%

0.5
%
Total fixed income securities
4,468,853

 
2,953,564

 
90.8
%
 
88.8
%
Total equity securities
446,176

 
376,639

 
9.2
%
 
11.2
%
Total investments, at fair value
$
4,915,029


$
3,330,203







At September 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.

19

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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 September 30, 2017:
Financial Instruments of the Company
 
Level I 
 
Level II 
 
Level III 
 
Investments
Measured
at NAV
 
Total 
Assets, at fair value
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed income-collateralized loan obligations
 
$

 
$

 
$
162,261

 
$

 
$
162,261

Equity securities
 
300

 
1,004

 

 

 
1,304

Partnership interests
 

 

 
36,439

 
381,610

 
418,049

Total investments, at fair value
 
300


1,004


198,700


381,610


581,614

Derivatives—foreign exchange contracts
 

 
1,310

 

 

 
1,310

Total assets, at fair value
 
$
300


$
2,314


$
198,700


$
381,610


$
582,924

Liabilities, at fair value
 
 
 
 
 
 
 
 
 
 
Derivatives—foreign exchange contracts
 
$

 
$
(4,194
)
 
$

 
$

 
$
(4,194
)
Total liabilities, at fair value
 
$


$
(4,194
)

$


$


$
(4,194
)

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 
Assets, at fair value
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
Fixed income investments:
 
 
 
 
 
 
 
 
Bonds
 
$

 
$
91,683

 
$
7,373

 
$
99,056

Loans
 

 
4,037,594

 
312,203

 
4,349,797

Collateralized loan obligations
 

 
20,000

 

 
20,000

Total fixed income investments
 


4,149,277


319,576


4,468,853

Equity securities
 
65,150

 
158

 
156,858

 
222,166

Partnership interests
 

 

 
224,010

 
224,010

Total investments, at fair value
 
65,150


4,149,435


700,444


4,915,029

Derivatives—other
 

 

 
1,328

 
1,328

Total assets, at fair value
 
$
65,150


$
4,149,435


$
701,772


$
4,916,357

Liabilities, at fair value
 
 
 
 
 
 
 
 
Derivatives—other
 
$

 
$

 
$
(201
)
 
$
(201
)
Loan obligations of CLOs
 

 
(4,476,643
)
 

 
(4,476,643
)
Total liabilities, at fair value
 
$


$
(4,476,643
)

$
(201
)

$
(4,476,844
)
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 
Assets, at fair value
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
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

Derivatives—foreign exchange contracts
 

 
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
Assets, at fair value
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
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

Derivatives:
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
Derivatives—other
 
$

 
$

 
$
(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 September 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
 
$
164,807

 
$
33,410

 
$
198,217

 
$
1,940

Purchases(1)
 
29,911

 

 
29,911

 

Sales/settlements(2)
 
(33,062
)
 

 
(33,062
)
 
(1,000
)
Expired contingent considerations
 

 

 

 
(1,000
)
Realized and unrealized appreciation, net
 
605

 
3,029

 
3,634

 
60

Balance, end of period
 
$
162,261


$
36,439


$
198,700


$

Increase in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date
 
$
442

 
$
3,029

 
$
3,471

 
$


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)




Level III Assets of Consolidated Funds
 
Equity Securities
 
Fixed Income
 
Partnership
Interests
 
Derivatives, Net
 
Total
Balance, beginning of period
 
$
146,274

 
$
187,579

 
$
217,740

 
$
2,809

 
$
554,402

Transfer in
 

 
86,420

 

 

 
86,420

Transfer out
 
(271
)
 
(60,550
)
 

 
(4
)
 
(60,825
)
Purchases(1)
 

 
139,903

 
15,000

 

 
154,903

Sales(2)
 
(3,701
)
 
(49,783
)
 
(15,000
)
 

 
(68,484
)
Additions(3)
 

 
14,479

 

 
1,393

 
15,872

Settlements, net
 

 

 

 
(3,127
)
 
(3,127
)
Amortized discounts/premiums
 

 
63

 

 
101

 
164

Realized and unrealized appreciation, net
 
14,556

 
1,465

 
6,270

 
(45
)
 
22,246

Balance, end of period
 
$
156,858


$
319,576


$
224,010


$
1,127


$
701,571

Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets still held at the reporting date
 
$
12,830

 
$
920

 
$
6,270

 
$
(2,021
)
 
$
17,999

 
(1)
Purchases include paid‑in‑kind interest and securities received in connection with restructurings.
(2)
Sales include distributions, principal redemptions and securities disposed of in connection with restructurings.
(3)
Additions relate a CLO that was refinanced and restructured that is now consolidated.
The following tables set forth a summary of changes in the fair value of the Level III measurements for the three months ended September 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
 
$
54,155

 
$
44,746

 
$
98,901

 
$
41,035

Purchases(1)
 
4

 
833

 
837

 

Sales/settlements(2)
 
(943
)
 

 
(943
)
 
(1,000
)
Realized and unrealized appreciation (depreciation), net
 
2,721

 
(12,169
)
 
(9,448
)
 
(17,690
)
Balance, end of period
 
$
55,937

 
$
33,410

 
$
89,347

 
$
22,345

Increase (decrease) in unrealized appreciation/depreciation included in earnings related to financial assets and liabilities still held at the reporting date
 
$
2,479

 
$
(6,237
)
 
$
(3,758
)
 
$
(17,690
)
Level III Assets of Consolidated Funds
 
Equity Securities
 
Fixed Income
 
Partnership Interests
 
Derivatives, Net
 
Total
Balance, beginning of period
 
$
143,334

 
$
237,372

 
$
115,440

 
$
(2,076
)
 
$
494,070

Transfer in
 
18,135

 
54,202

 

 

 
72,337

Transfer out
 

 
(70,910
)
 

 

 
(70,910
)
Purchases(1)
 
6,171

 
94,527

 
21,433

 

 
122,131

Sales(2)
 
(290
)
 
(45,002
)
 
(2,933