Ares Management Corp - Quarter Report: 2014 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 001-36429

ARES MANAGEMENT, L.P.
(Exact name of Registrant as specified in its charter)

2000 Avenue of the Stars, 12^th 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 o    No ý

         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 ý    No o

         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):

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The number of common units representing limited partner interests outstanding as of June 9, 2014 was 80,667,664.

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ARES MANAGEMENT, L.P.

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Forward-Looking Statements

        This Quarterly Report on Form 10-Q may contain 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, that 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 these 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. We believe these factors include but are not limited to those described under "Risk Factors" in our prospectus dated May 1, 2014, filed with the Securities and Exchange Commission (the "SEC") in accordance with Rule 424(b) of the Securities Act of 1933 on May 5, 2014, which is accessible on the SEC's website at www.sec.gov. 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 or incorporated by reference in this Quarterly Report on Form 10-Q and in the prospectus. 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.

        Prior to the reorganization on May 1, 2014 in connection with our initial public offering, our business was conducted through operating subsidiaries held directly or indirectly by Ares Holdings LLC and Ares Investments LLC (or "AI"). These two entities were principally owned by Ares Partners Management Company LLC ("APMC"), the Abu Dhabi Investment Authority and its affiliate (collectively, "ADIA") and an affiliate of Alleghany Corporation (NYSE: Y) (such affiliate, "Alleghany"). ADIA and Alleghany each own minority interests with limited voting rights in our business. We refer to APMC, ADIA and Alleghany collectively as our "existing owners." APMC is controlled by our Co-Founders. Ares Management, L.P. was formed on November 15, 2013 to serve as a holding partnership for our businesses. Prior to the consummation of our initial public offering, Ares Management, L.P. had not commenced operations and had nominal assets and liabilities. Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q to (1) "Ares," "we," "us" and "our" refer to our businesses, both before and after the consummation of our reorganization into a holding partnership structure and (2) our "Predecessors" refer to Ares Holdings Inc. ("AHI") and Ares Investments LLC, our accounting predecessors, as well as their wholly owned subsidiaries and managed funds, in each case prior to the reorganization. References in this Quarterly Report on Form 10-Q to "our general partner" refer to Ares Management GP LLC, an entity wholly owned by Ares Partners Holdco LLC, which is in turn owned and controlled by our Co-Founders.

        Under generally accepted accounting principles in the United States ("GAAP"), we are required to consolidate (a) entities 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 the general partner and are presumed to have control, and (b) entities that we concluded are variable interest entities ("VIEs"), including limited partnerships in which we have a nominal economic interest and the CLOs, for which we are deemed to be the primary beneficiary. When a fund is consolidated, we reflect the assets, liabilities, revenues, expenses and cash

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flows of the fund in our combined and 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 Consolidated Funds. However, the presentation of performance fee compensation and other expenses associated with generating such revenues are 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 Funds is presented as net income attributable to non-controlling interests and redeemable non-controlling interests in Consolidated Funds in our Combined and Consolidated Statements of Operations.

        In this Quarterly Report on Form 10-Q, 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 funds and therefore shows the results of our reportable segments without giving effect to the consolidation of the funds 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 four 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, legal/compliance and human resources. The OMG's expenses are not allocated to our four 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 Operations Management Group, and we believe that this information enhances the ability of unitholders to analyze our performance.

        When used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:

•

"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 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 combined and consolidated financial statements;



•

"Co-Founders" refers to Michael Arougheti, David Kaplan, John Kissick, Antony Ressler and Bennett Rosenthal;



•

"distributable earnings" or "DE" refers to a pre-income tax measure that is used to assess amounts potentially available for distributions to stakeholders. Distributable earnings is calculated as the sum of Fee Related Earnings, realized performance fees, realized performance fee compensation expense, realized net other income, and further adjusts for 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 presented before giving effect to unrealized performance fee income, unrealized performance fee compensation expense, unrealized net investment income, amortization of intangibles, equity compensation expense and is further adjusted by certain items described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Certain Non-GAAP Measures to Consolidated GAAP Financial Measures"

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•

"economic net income" or "ENI" refers to net income excluding (a) income tax expense, (b) operating results of our Consolidated Funds, (c) depreciation expense, (d) the effects of changes arising from corporate actions, and (e) certain other items that we believe are not indicative of our performance. Changes arising from corporate actions include equity-based compensation expenses, the amortization of intangible assets, transaction costs associated with acquisitions and capital transactions, placement fees and underwriting costs and expenses incurred in connection with corporate reorganization;



•

"fee earning AUM" refers to the AUM on which we directly or indirectly earn management fees. Fee earning AUM is equal to the sum of all the individual fee bases of our funds that contribute directly or indirectly to our management fees;



•

"fee related earnings" or "FRE" refers to a component of ENI that is used to assess the ability of our business to cover direct base compensation and operating expenses from management fees. FRE differs from income before taxes computed in accordance with GAAP as it adjusts for the items included in the calculation of ENI and further adjusts for performance fees, performance fee compensation, investment income from our Consolidated Funds and certain other items that we believe are not indicative of our performance;



•

"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 (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview of Combined and Consolidated Results of Operations—Revenues") that are classified as management fees as they are predictable and are recurring in nature, are not subject to repayment (or clawback) and are generally cash-settled each quarter;



•

"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 and other entities and accounts that are managed or co-managed by the Ares Operating Group. It also includes funds managed by Ivy Hill Asset Management, L.P., a wholly owned portfolio company of Ares Capital Corporation (Nasdaq: ARCC) ("ARCC"), and a registered investment adviser;



•

"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; and



•

"performance related earnings" or "PRE" refers to a measure used to assess our investment performance. PRE differs from income (loss) before taxes computed in accordance with GAAP as it only includes performance fee income, performance fee compensation and investment income earned from our Consolidated Funds and non-consolidated funds.

        Many of the terms used in this Quarterly Report on Form 10-Q, including AUM, fee earning AUM, ENI, FRE, PRE and distributable earnings, may not be comparable to similarly titled measures used by other companies. In addition, our definitions of AUM and fee earning AUM are not based on any definition of AUM or fee earning AUM that is set forth in the agreements governing the investment funds that we manage and may differ from definitions of AUM set forth in other agreements to which we are a party from time to time. Further, ENI, FRE, PRE and distributable earnings are not measures of performance calculated in accordance with GAAP. We use ENI, FRE, PRE and distributable earnings as measures of operating performance, not as measures of liquidity. ENI, FRE, PRE and distributable earnings 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

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use of ENI, FRE, PRE and distributable earnings 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 distributable earnings as supplemental measures to our GAAP results, to provide a more complete understanding of our performance as our management measures it. Amounts and percentages throughout this prospectus may reflect rounding adjustments and consequently totals may not appear to sum.

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Ares Management, L.P.

Statements of Financial Condition

(Amounts in Dollars)

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Ares Management, L.P.

Notes to the Statement of Financial Condition

For the Three Months Ended March 31, 2014
(unaudited)

1. ORGANIZATION

        In anticipation of its initial public offering (the "IPO") that closed on May 7, 2014, Ares Management, L.P. (the "Company") was formed as a Delaware limited partnership on November 15, 2013.

        Pursuant to a reorganization effectuated in connection with the IPO, on May 1, 2014 the Company became a holding partnership. The Company's sole assets became equity interests through wholly owned subsidiary entities in Ares Holdings Inc. ("AHI"), Ares Domestic Holdings Inc., Ares Offshore Holdings, Ltd., Ares Investments LLC and Ares Real Estate Holdings LLC. The Company, either directly or through direct subsidiaries, is the general partner of each of the Ares Operating Group (as defined below) entities, and operates and controls all of the businesses and affairs of the Ares Operating Group. Ares Management GP LLC is the general partner of the Company.

        Additionally, on May 1, 2014, in connection with the IPO, Ares Holdings LLC was converted into a limited partnership, Ares Holdings L.P. ("Ares Holdings"), and Ares Investments LLC was converted into a limited partnership, Ares Investments L.P. ("Ares Investments"). In addition, the Company formed Ares Domestic Holdings L.P. ("Ares Domestic"), Ares Offshore Holdings L.P. ("Ares Offshore") and Ares Real Estate Holdings L.P. ("Ares Real Estate"). Ares Holdings, Ares Domestic, Ares Offshore, Ares Investments and Ares Real Estate are collectively referred to as the "Ares Operating Group."

        In exchange for its interest in the Company, prior to the consummation of the IPO, Ares Owners Holdings L.P. transferred to the Company its interests in each of AHI, Ares Domestic Holdings Inc., Ares Offshore Holdings, Ltd., Ares Real Estate Holdings LLC and a portion of its interest in Ares Investments. Similarly, the Abu Dhabi Investment Authority contributed its direct interest in AHI to its affiliate, AREC Holdings Ltd., a Cayman Islands exempted company ("AREC"), and subsequently, in exchange for its interest in the Company, AREC transferred to the Company its interest in each of AHI, Ares Domestic, Ares Offshore, Ares Investments and Ares Real Estate. As a result of the foregoing, Ares Owners Holdings L.P. holds 34,540,079 common units in the Company and AREC holds 34,538,155 common units in the Company. Following the foregoing exchanges, Ares Owners Holding L.P. retained a 59.21% direct interest, or 118,421,766 partnership units in each of the Ares Operating Group entities (collectively, the "Ares Operating Group Units"), in each of the Ares Operating Group entities. AREC has no direct interest in the Ares Operating Group entities. An affiliate of Alleghany Corporation ("Alleghany") owns a 6.25% direct interest, or 12,500,000 Ares Operating Group Units, in each of the Ares Operating Group entities.

        On May 7, 2014, the Company issued 11,363,636 common units in the IPO at the price of $19.00 per common unit. In addition, on June 4, 2014 the Company issued an additional 225,794 common units at $19.00 per common unit pursuant to the partial exercise by the underwriters of their overallotment option. Total proceeds from the IPO, including from the partial exercise by the underwriters of their overallotment option, net of underwriting discounts, were $209.2 million. The Company entered into an exchange agreement with the holders of Ares Operating Group units so that such holders, subject to any applicable transfer restrictions and other provisions, may up to four times each year from and after the second anniversary of the date of the closing of the IPO exchange their Ares Operating Group Units for common units on a one-for-one basis (provided that Alleghany may exchange up to half of its Ares Operating Group Units from and after the first anniversary of the IPO).

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Ares Management, L.P.

Notes to the Statement of Financial Condition (Continued)

For the Three Months Ended March 31, 2014
(unaudited)

1. ORGANIZATION (Continued)

        Following the consummation of the IPO, including the partial exercise by the underwriters of their overallotment option, assuming no exchange of Ares Operating Group Units for common units, Ares Owners Holdings L.P. holds a 42.82% direct interest in the Company, AREC holds a 42.82% direct interest in the Company and the public holds a 14.37% direct interest in the Company.

        Following the consummation of the IPO, including the partial exercise by the underwriters of their overallotment option, Ares Owners Holdings L.P. holds a 72.29% direct and indirect interest in the Ares Operating Group, an affiliate of Alleghany holds a 5.91% direct interest in the Ares Operating Group, AREC holds a 16.32% indirect interest in the Ares Operating Group and the public holds 5.48% indirect interest in the Ares Operating Group.

        The Company intends to conduct all of its material business activities through the Ares Operating Group. Following the IPO, the Company will consolidate the financial results of the Ares Operating Group entities, their consolidated subsidiaries and certain Consolidated Funds. The accompanying statement of financial condition of the Company does not reflect the effect of the reorganization, the IPO and the related transactions which occurred subsequent to the reporting date.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        There have been no significant changes to the Company's accounting policies since it filed its audited financial statements for the year ended December 31, 2013. For further information about the Company's accounting policies, refer to our prospectus dated May 1, 2014, filed with the SEC in accordance with Rule 424(b) of the Securities Act of 1933 on May 5, 2014.

        Basis of Accounting—The statement of financial condition has been prepared in accordance with accounting principles generally accepted in the United States of America. Separate statements of operations, changes in equity and cash flows have not been presented in the financial statements because there have been no activities of this entity that would impact those statements.

3. PARTNERS' CAPITAL

        Partners' capital is comprised of a $1,000 contribution from the limited partner of the Company, as of March 31, 2014.

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Ares Holdings Inc. and Ares Investments LLC
(Predecessors to Ares Management, L.P.)

Combined and Consolidated Statements of Financial Condition

(Amounts in Thousands, Except Share Data)

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Ares Holdings Inc. and Ares Investments LLC
(Predecessors to Ares Management, L.P.)

Combined and Consolidated Statements of Operations

(Amounts in Thousands)
(unaudited)

Substantially all revenue is earned from affiliated funds of the Company. See accompanying notes.

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Ares Holdings Inc. and Ares Investments LLC
(Predecessors to Ares Management, L.P.)

Combined and Consolidated Statements of Comprehensive Income

(Amounts in Thousands)
(unaudited)

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Ares Holdings Inc. and Ares Investments LLC
(Predecessors to Ares Management, L.P.)

Combined and Consolidated Statements of Changes in Equity

(Amounts in Thousands)
(unaudited)

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Ares Holdings Inc. and Ares Investments LLC
(Predecessors to Ares Management, L.P.)

Combined and Consolidated Statements of Cash Flows

(Amounts in Thousands)
(unaudited)

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

1. ORGANIZATION AND BASIS OF PRESENTATION

        The accompanying combined and consolidated financial statements include the results of two affiliated entities, Ares Holdings Inc. ("AHI") and Ares Investments LLC ("AI"), which directly or indirectly hold controlling interests in Ares Management LLC ("AM LLC") and Ares Investments Holdings LLC ("AIH LLC"), as well as their wholly owned subsidiaries (collectively the "Company" or "Ares"). Ares Partners Management Company LLC ("APMC") directs the operations of AHI and AI through its controlling ownership interest of approximately 50.1% and 70.3%, respectively, in each entity. The remaining ownership of AHI and AI is shared among various minority non-control-oriented strategic investment partners, whose financial interest in the consolidated and combined results are reflected as non-controlling interests in consolidated subsidiaries.

        AM LLC is a leading global alternative asset management firm that operates four distinct but complementary investment groups: the Tradable Credit Group, the Direct Lending Group, the Private Equity Group and the Real Estate Group. Information about segments should be read together with Note 12, "Segment Reporting." Subsidiaries of AM LLC serve as the general partners and/or investment managers to various investment funds 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. In addition, AM LLC consolidates the following foreign operating subsidiaries: Ares Management Limited and Ares Asia Management (HK), Ltd.

        AIH LLC is a holding company that primarily holds carried interest and co-investment interests in partnerships and other investment vehicles managed directly or indirectly by Ares.

        In addition, certain Ares-affiliated funds, related co-investment entities and certain collateralized loan obligations ("CLOs") (collectively, the "Consolidated Funds") managed by AM LLC and its wholly owned subsidiaries have been consolidated in the accompanying financial statements for the periods presented pursuant to U.S. generally accepted accounting principles ("U.S. GAAP") as described in Note 2, "Summary of Significant Accounting Policies." Including the results of the Consolidated Funds significantly increases the reported amounts of the assets, liabilities, revenues, expenses and cash flows of the Company; 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 and as equity appropriated for Consolidated Funds in the accompanying combined and consolidated financial statements.

        The accompanying combined and consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. These statements and notes have not been audited, exclude some of the disclosures required for annual audited financial statements and should be read in conjunction with the audited combined and consolidated financial statements and notes for the year ended December 31, 2013, included in Ares Management, L.P.'s final prospectus dated May 1, 2014 filed with the Securities and Exchange Commission in accordance with Rule 424(b) of the Securities Act of 1933 on

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)

May 5, 2014. 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. In the opinion of management, the combined and consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.

        The accompanying combined and consolidated financial statements of AHI and AI reflect the predecessor entities, and do not reflect the effect of the reorganization, the initial public offering and the related transactions which occurred in May 2014. Refer to Note 13, "Subsequent Events" for more information.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        There have been no significant changes to the Company's accounting policies since it filed its audited financial statements for the year ended December 31, 2013. For further information about the Company's accounting policies, refer to our prospectus dated May 1, 2014, filed with the SEC in accordance with Rule 424(b) of the Securities Act of 1933 on May 5, 2014.

Principles of Consolidation

        The Company consolidates those entities in which it has a direct and indirect controlling financial interest based on either a variable interest model or voting interest model. As such, the Company consolidates (a) entities in which it holds a majority voting interest or has 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 the Company is the general partner and is presumed to have control and (b) entities that the Company concludes are variable interest entities ("VIEs"), including limited partnerships in which the Company has a nominal economic interest and CLOs for which the Company is deemed to be the primary beneficiary.

        With respect to the Consolidated Funds, which typically represent limited partnerships and single member limited liability companies, the Company earns a fixed management fee based on invested capital or a derivation thereof, and a performance fee based upon the investment returns in excess of a stated benchmark or hurdle rate. The Company, as the general partner of various funds, generally has operational discretion and control, and limited partners have no substantive rights to impact ongoing governance and operating activities of the fund. Such a fund is required to be consolidated unless the Company has a less than significant level of equity at risk. The fund is typically considered a VIE as described below, to the extent that the Company's equity at risk is less than significant in a given fund and it has no obligation to fund any future losses. In these cases, the fund investors are generally deemed to be the primary beneficiaries, and the Company does not consolidate the fund. In cases where the Company's equity at risk is deemed to be significant, the fund is generally not considered to be a VIE, and the

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Company will generally consolidate the fund unless the limited partners are granted substantive rights to remove the general partner or liquidate the partnership, also known as kick-out rights.

        Variable Interest Model.    The Company consolidates entities that are determined to be VIEs where the Company is deemed to be the primary beneficiary. An entity is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity's business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation rules, which were revised effective January 1, 2010, require an analysis to determine whether (i) an entity in which the Company holds a variable interest is a VIE and (ii) the Company's involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would give the Company a controlling financial interest. The consolidation rules may be deferred for VIEs if the VIE and the reporting entity's interest in VIE meet deferral conditions set forth in FASB Accounting Standards Codification ("ASC") 810-10-65-2. Certain limited partnerships meet the deferral conditions if: (a) the limited partnerships generally have all the attributes of an investment company, (b) the Company does not have the obligation to fund losses of the limited partnership and (c) the limited partnership is not a securitization, asset-backed financing entity or qualifying special purpose vehicle. Where a VIE qualifies for the deferral of the consolidation rules, the analysis is based on consolidation rules prior to January 1, 2010. These rules require an analysis to determine (i) whether an entity in which the Company holds a variable interest is a VIE and (ii) whether the Company's involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees) would be expected to absorb a majority of the variability of the entity. Under either guideline, the Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders the conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its direct and indirect economic interests in the entity. The consolidation analysis is generally performed qualitatively; however, if the primary beneficiary is not readily determinable, a quantitative assessment may also be performed. This analysis requires judgment. These judgments include: (1) determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, (2) evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the success of the entity, (3) determining whether two or more parties' equity interests should be aggregated, (4) determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity, (5) evaluating the nature of relationships and activities of the parties involved in determining which party within a related-party group is most closely associated with a VIE and (6) estimating cash flows in evaluating which member within the equity group absorbs a majority of the expected losses and hence would be deemed the primary beneficiary.

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Certain funds that have historically been consolidated in the financial statements are no longer consolidated because, as of the reporting period, they were: (a) liquidated, (b) the Company no longer holds a majority voting interest or (c) the Company is no longer deemed to be the primary beneficiary of the VIEs as it has no economic interest, no obligation to absorb losses and no rights to receive benefits from the VIEs.

Basis of Accounting

        The accompanying financial statements are prepared in accordance with U.S. GAAP. Management has determined that the Company's Consolidated Funds are investment companies under U.S. GAAP for the purposes of financial reporting based on the following characteristics: the Consolidated Fund obtains funds from one or more investors and provides investment management services, and the Consolidated Fund's business purpose and substantive activities are investing funds for returns from capital appreciation and/or investment income. Therefore, U.S. GAAP for an investment company requires investments to be recorded at fair value and the unrealized appreciation (depreciation) in an investment's fair value is recognized on a current basis in the Combined and Consolidated Statements of Operations. Additionally, the Consolidated Funds do not consolidate their majority-owned and controlled investments in portfolio companies. In the preparation of these combined and consolidated financial statements, the Company has retained the specialized accounting guidance for the Consolidated Funds under U.S. GAAP.

        All of the investments held and CLO loan obligations issued by the Consolidated Funds are presented at their estimated fair values in the Company's Combined and Consolidated Statements of Financial Condition. The excess of the CLO assets over the CLO liabilities upon consolidation is reflected in the Company's Combined and Consolidated Statements of Financial Condition as equity appropriated for Consolidated Funds. Net income attributable to the investors in the CLOs is included in net income (loss) attributable to non-controlling interests in consolidated entities in the Combined and Consolidated Statements of Operations and equity appropriated for Consolidated Funds in the Combined and Consolidated Statements of Financial Condition.

Use of Estimates

        The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management's estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. These assumptions and estimates require management to exercise judgment in the process of applying the Company's accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on performance fee revenue and performance fee compensation involve a higher degree of judgment and complexity, and these assumptions and estimates may be significant to the combined and consolidated financial statements.

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Actual results could differ from these estimates and such differences could be material. Certain comparative amounts for prior periods have been reclassified to conform with the current year's presentation.

Goodwill and Intangible Assets

        The Company's finite-lived intangible assets consist of contractual rights to earn future management fees and performance fees from investment funds it acquires. Finite-lived intangibles are amortized on a straight-line basis over their estimated useful lives, ranging from approximately 1 to 10 years. Finite-lived intangible assets arise from the Company's acquisition of management contracts, which provide the right to receive future fee income. The purchase price is treated as an intangible asset and is amortized over the life of the contracts. Amortization is included as part of general, administrative and other expense in the Combined and Consolidated Statements of Operations.

        The Company tests finite-lived intangibles for impairment if certain events occur or circumstances change that indicate the carrying amount of an intangible may not be recoverable. The Company will use a two-step process to evaluate impairment. The first step compares the estimated undiscounted future cash flow attributable to the intangible being evaluated with its carrying amount. The second step, used to measure the amount of potential impairment, compares the fair value of the intangible with their carrying amount.

        The Company tests goodwill annually for impairment. If, after assessing qualitative factors, the Company believes that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company will use a two-step process to evaluate impairment. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. The second step, used to measure the amount of any potential impairment, compares the implied fair value of the reporting unit with the carrying amount of goodwill.

        The Company also tests goodwill for impairment in other periods if an event occurs or circumstances change such that is more likely than not to reduce the fair value of the reporting unit below its carrying amounts. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including the Company's interpretation of current economic indicators and market valuations, and assumptions about the Company's strategic plans with regard to its operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.

        Goodwill is not amortized and is not deductible for income tax purposes.

Recent Accounting Pronouncements

        In June 2013, FASB issued guidance to clarify the characteristics of an investment company and to provide guidance for assessing whether an entity is an investment company. Consistent with existing guidance for investment companies, all investments are to be measured at fair value including

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

non-controlling ownership interests in other investment companies. There are no changes to the current requirements relating to the retention of specialized accounting in the consolidated financial statements of a non-investment company parent. The guidance is effective for interim and annual periods beginning after December 15, 2013. The Company adopted this guidance as of January 1, 2014, and the adoption did not have a material impact on its financial statements.

        In July 2013, FASB issued guidance to eliminate the diversity in practice on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. Under the new guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carry forward, with exceptions as defined. The guidance does not require new recurring disclosures. The guidance applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists at the reporting date. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company adopted this guidance as of January 1, 2014, and the adoption did not have a material impact on its financial statements.

        In May 2014, FASB and International Accounting Standards Board (IASB) jointly issued a new revenue recognition standard that will improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial reporting Standard ("IFRS"). The standard affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). It will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. It will also supersede some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this standard. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company continues to evaluate the impact this guidance will have on its financial statements.

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

3. GOODWILL AND INTANGIBLE ASSETS

Business Combinations

        During the three months ended March 31, 2014, the Company re-evaluated one of the leases assumed in connection with its acquisition of AREA Management Holdings, LLC ("AREA"). Based upon remaining lease payments, the Company determined that the lease payments were in excess of current market conditions. The Company recorded an unfavorable lease liability of $2.3 million with a corresponding increase to goodwill. The unfavorable lease liability represents the difference between the discounted cash flows associated with the remaining lease payments and the lease payments for a similar lease at current market rates and is amortized on a straight-line basis over the term of the lease agreements. The amount of the unfavorable lease amortization for the three months ended March 31, 2014 was $0.4 million and is presented within general, administrative and other expenses within the Combined and Consolidated Statement of Operations.

        There were no impairments of goodwill recorded as of March 31, 2014.

        During the three months ended March 31, 2014, in connection with the termination of certain management contracts within its Tradable Credit Group, the Company evaluated for impairment certain intangible assets associated with acquired management fees and performance fees contracts. The Company determined the fair value of these intangibles was zero because no future cash flows are expected from these contracts. As a result, the Company recorded amortization expense of $3.0 million to remove the remaining carrying value of the related intangibles.

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ARES HOLDINGS INC. AND ARES INVESTMENTS LLC
(Predecessors to Ares Management, L.P.)

Notes to the Combined and Consolidated Financial Statements (Continued)

For the Three Months Ended March 31, 2014 and 2013
and as of March 31, 2014 and December 31, 2013
(unaudited)

(Dollars in Thousands, Except Share Data and as Otherwise Noted)

4. INVESTMENTS

        Investments are comprised of (a) the investments held by AIH LLC at fair value and (b) investments held by the Consolidated Funds at fair value.

        Investments held by AIH LLC are summarized below: