Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Ares Management Corporation is a Delaware corporation, which was formerly a limited partnership formed on November 15, 2013 and which converted to a Delaware corporation effective on November 26, 2018. Unless the context otherwise requires, references to “Ares,” “we,” “us,” “our,” and the “Company” are intended to mean the business and operations of Ares Management Corporation and its consolidated subsidiaries. The following discussion analyzes the financial condition and results of operations of the Company. “Consolidated Funds” refers collectively to certain Ares-affiliated funds, related co-investment entities and certain CLOs that are required under generally accepted accounting principles in the United States (“GAAP”) to be consolidated in our consolidated financial statements included in this Annual Report on Form 10-K. Additional terms used by the Company are defined in the Glossary and throughout the Management's Discussion and Analysis in this Annual Report on Form 10-K.

The following discussion and analysis should be read in conjunction with the audited, consolidated financial statements of Ares Management Corporation and the related notes included in this Annual Report on Form 10-K.

This section of the Annual Report on Form 10-K discusses activity as of and for the years ended December 31, 2019 and 2018. For discussion on activity for the year ended December 31, 2017 and period-over-period analysis on results for the year ended December 31, 2018 to 2017, refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2018.

Amounts and percentages presented throughout our discussion and analysis of financial condition and results of operations may reflect rounded results in thousands (unless otherwise indicated) and consequently, totals may not appear to sum.

Managing Business Performance

Non-GAAP Financial Measures

We use the following non-GAAP measures to assess and track our performance:

Fee Related Earnings (FRE)
Realized Income (RI)

These non-GAAP financial measures supplement and should be considered in addition to and not in lieu of, the results of operations, which are discussed further under “—Components of Consolidated Results of Operations” and are prepared in accordance with GAAP. For the specific components and calculations of these non-GAAP measures, as well as a reconciliation of these measures to the most comparable measure in accordance with GAAP, see Note 15, “Segment Reporting,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Operating Metrics

We monitor certain operating metrics that are common to the alternative asset management industry, which are discussed below.

Assets Under Management

Assets under management (“AUM”) refers to the assets we manage. We view AUM as a metric to measure our investment and fundraising performance as it reflects assets generally at fair value plus available uncalled capital. For our funds other than CLOs, our AUM equals the sum of the following:

net asset value (“NAV”) 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).

NAV refers to the fair value of all of the assets of a fund less the liabilities of the fund.

For CLOs, our AUM is equal to initial principal amounts of notes adjusted for paydowns.

The tables below present rollforwards of our total AUM by segment for the years ended December 31, 2019 and 2018 ($ in millions):


	Credit Group		Private Equity Group		Real Estate Group		Total AUM
Balance at 12/31/2018	$	95,836	$	23,487	$	11,340	$	130,663
Net new par/equity commitments	6,591		3,151		2,361		12,103
Net new debt commitments	10,684		25		633		11,342
Distributions	(6,268)		(3,813)		(1,689)		(11,770)
Change in fund value	3,700		2,316		562		6,578
Balance at 12/31/2019	$	110,543	$	25,166	$	13,207	$	148,916
Average AUM(1)	$	103,853	$	24,537	$	12,142	$	140,532


	Credit Group		Private Equity Group		Real Estate Group		Total AUM
Balance at 12/31/2017	$	71,732	$	24,530	$	10,229	$	106,491
Net new par/equity commitments	21,105		1,498		2,847		25,450
Net new debt commitments	9,340		100		75		9,515
Distributions	(7,744)		(1,900)		(2,209)		(11,853)
Change in fund value	1,403		(741)		398		1,060
Balance at 12/31/2018	$	95,836	$	23,487	$	11,340	$	130,663
Average AUM(1)	$	84,647	$	23,784	$	10,793	$	119,224

(1) Represents a five-point average of quarter-end balances for each period.

The components of our AUM are presented below as of December 31, 2019 and 2018 ($ in millions):


AUM: $148,916						AUM: $130,663


			FPAUM						AUM not yet paying fees						Non-fee paying(1)						General partner and affiliates

(1) Includes $7.9 billion and $6.7 billion of AUM of funds from which we indirectly earn management fees as of December 31, 2019 and 2018, respectively.

Please refer to “— Results of Operations by Segment” for a more detailed presentation of AUM by segment for each of the periods presented.

Fee Paying Assets Under Management

Our FPAUM is generally comprised of the following components:

The amount of limited partner capital commitments for certain closed-end funds within the reinvestment period;
The amount of limited partner invested capital for the aforementioned closed-end funds beyond the reinvestment period;
The gross amount of aggregate collateral balance for CLOs, at par, adjusted for defaulted or discounted collateral; and
The portfolio value, gross asset value or NAV.

The tables below present rollforwards of our total FPAUM by segment for the years ended December 31, 2019 and 2018 ($ in millions):


	Credit Group		Private Equity Group		Real Estate Group		Total
FPAUM Balance at 12/31/2018	$	57,847	$	17,071	$	6,952	$	81,870
Commitments	4,997		362		1,080		6,439
Subscriptions/deployment/increase in leverage	13,674		2,019		1,269		16,962
Redemptions/distributions/decrease in leverage	(6,446)		(1,567)		(867)		(8,880)
Change in fund value	2,181		3		(16)		2,168
Change in fee basis	(373)		(848)		(455)		(1,676)
FPAUM Balance at 12/31/2019	$	71,880	17,040		$	7,963	$	96,883
Average FPAUM(1)	$	65,278	$	17,108	$	7,353	$	89,739


	Credit Group		Private Equity Group		Real Estate Group		Total
FPAUM Balance at 12/31/2017	$	49,450	$	16,858	$	6,189	$	72,497
Commitments	4,768		1,049		1,580		7,397
Subscriptions/deployment/increase in leverage	10,434		896		678		12,008
Redemptions/distributions/decrease in leverage	(6,788)		(1,609)		(1,134)		(9,531)
Change in fund value	(10)		6		(20)		(24)
Change in fee basis	(7)		(129)		(341)		(477)
FPAUM Balance at 12/31/2018	$	57,847	$	17,071	$	6,952	$	81,870
Average FPAUM(1)	$	53,616	$	17,306	$	6,738	$	77,660

(1) Represents a five-point average of quarter-end balances for each period.

Please refer to “— Results of Operations by Segment” for detailed information by segment of the activity affecting total FPAUM for each of the periods presented.

The charts below present FPAUM by its fee basis as of December 31, 2019 and 2018 ($ in millions):


FPAUM: $96,883						FPAUM: $81,870


			Invested capital						Market value/other						Collateral balances (at par)						Capital commitments

Incentive Eligible Assets Under Management, Incentive Generating Assets Under Management and Available Capital

IEAUM generally represents the NAV plus uncalled equity or total assets plus uncalled debt, as applicable, of our funds from which we are entitled to receive performance income, excluding capital committed by us and our professionals (from which we generally do not earn performance income). With respect to ARCC's AUM, only ARCC Part II Fees may be generated from IEAUM.

IGAUM generally represents the AUM of our funds that are currently generating on a realized or unrealized basis, performance income. It generally represents the NAV or total assets of our funds, as applicable, for which we are entitled to receive performance income, excluding capital committed by us and our professionals (from which we generally do not earn performance income). ARCC is only included in IGAUM when Part II Fees are being generated.

The charts below present our IEAUM and IGAUM by segment as of December 31, 2019 and 2018 ($ in millions):


						Credit						Private Equity						Real Estate

The charts below present our available capital, which we refer to as dry powder, and AUM not yet paying fees by segment as of December 31, 2019 and 2018 ($ in millions):


						Credit						Private Equity						Real Estate

Management Fees Fund Duration

We view the duration of funds we manage as a metric to measure the stability of our future management fees. For the years ended December 31, 2019 and 2018, 81% and 84%, respectively, of our segment management fees were attributable to funds with three or more years in duration. The charts below present the composition of our segment management fees by the initial fund duration for the years ended December 31, 2019 and 2018:


			Permanent Capital						10 or more years						7 to 9 years						3 to 6 years						Fewer than 3 years						Differentiated Managed Accounts(1)						Managed Accounts

(1) Differentiated managed accounts have been managed by the Company for longer than three years, are investing in illiquid strategies or are co-investments structured to pay management fees.

Fund Performance Metrics

Fund performance information for our investment funds considered to be “significant funds” is included throughout this discussion with analysis to facilitate an understanding of our results of operations for the periods presented. Our significant funds include those that contributed at least 1% of our total management fees for the year ended December 31, 2019 or represented at least 1% of the Company’s total FPAUM as of December 31, 2019, and for which we have sole discretion for investment decisions within the fund. In addition to management fees, each of our significant funds may generate performance income upon the achievement of performance hurdles. The fund performance information reflected in this discussion and analysis is not indicative of our overall performance. An investment in Ares is not an investment in any of our funds. Past performance is not indicative of future results. As with any investment there is always the potential for gains as well as the possibility of losses. There can be no assurance that any of these funds or our other existing and future funds will achieve similar returns.

We do not present fund performance metrics for significant funds with less than two years of investment performance, which begins from the date of the fund's first investment, except for those significant funds that pay management fees on invested capital, in which case performance is shown at the earlier of (i) the one-year anniversary of the fund's first investment or (ii) such time that the fund has invested at least 50% of its capital.

Components of Consolidated Results of Operations

Revenues

Management Fees. Management fees are generally based on a defined percentage of average fair value of assets, total commitments, invested capital, NAV, net investment income or par value of the investment portfolios managed by us. The fees are generally based on a quarterly measurement period and amounts can be paid in advance or in arrears depending on the terms set forth in each fund's investment management agreement. Management fees are recognized as revenue in the period advisory services are rendered, subject to our assessment of collectability. Additional details regarding our management fees are presented below:

Credit Group:

Syndicated loans and high yield bonds: Typical management fees range from 0.35% to 0.50% of par plus cash or NAV. The syndicated loan funds have an average management contract term from the closing date of 10.5 years as of December 31, 2019 and the fee ranges generally remain unchanged at the close of the re-investment period. The funds in the high-yield strategy generally represent open-ended managed accounts, which typically do not include investment period termination or management contract expiration dates.
Multi-asset credit: Typical management fees range from 0.50% to 1.50% of NAV. The funds in this strategy are generally open-ended or managed account structures, which typically do not have investment period termination or management contract expiration dates. The funds in this strategy include ARDC, a publicly-traded closed-end fund, which does not have an investment period termination date. The funds in this strategy, (excluding ARDC, which is a permanent capital vehicle), had an average management contract term from the closing date of 4.5 years as of December 31, 2019.
Alternative credit: Typical management fees range from 0.50% to 1.50% of NAV, gross asset value, committed capital or invested capital. The funds in this strategy had an average management contract term from the closing date of 6.3 years as of December 31, 2019.
U.S and European direct lending: Typical management fees range from 0.75% to 1.50% of invested capital, NAV or total assets (in certain cases, excluding cash and cash equivalents). Following the expiration or termination of the investment period, the fee basis for certain closed-end funds and managed accounts in this strategy generally change either to the aggregate cost or to market value of the portfolio investments. In addition, management fees include the ARCC Part I Fees. Management fees on the lower end of the typical fee range are generally accompanied by transaction-based fees. The funds in this strategy (excluding ARCC, which is a permanent capital vehicle) had an average management contract term from the closing date of 4.4 years as of December 31, 2019.

Private Equity Group:

Corporate opportunities, infrastructure and power and energy opportunities: Typical management fees range from 1.50% to 2.00% of total capital commitments during the investment period. The management fees for corporate private equity funds generally step down to between 0.75% and 1.25% of the aggregate adjusted cost of unrealized portfolio investments following the earlier to occur of: (i) the expiration or termination of the investment period or (ii) the launch of a successor fund. The infrastructure and power funds generally step down the fee base to the aggregated adjusted cost of unrealized portfolio investments, while retaining the same fee rate, following the expiration or termination of the investment period. The funds in this strategy had an average management contract term from the closing date of 10.2 years as of December 31, 2019.

*•*Special opportunities funds: Typical management fees range from 1.00% to 1.50% of the lesser of the aggregate cost basis of unrealized portfolio investments or committed capital. The funds in this strategy are comprised of closed-end funds, with investment period termination or management contract termination dates. The special opportunities funds also include managed accounts, which generally do not include investment period termination or management contract termination dates. The funds in this strategy had an average management contract term from the closing date of 9.9 years as of December 31, 2019.

Real Estate Group:

*•*Real Estate equity and debt funds: Typical management fees range from 0.50% to 1.50% of invested capital, stockholders’ equity, total capital commitments or a combination thereof. Following the expiration or termination of the investment period the basis on which management fees are earned for certain closed-end funds, managed accounts and co-investment vehicles in this strategy changes from committed capital to invested capital with no change in the management fee rate. The funds in these strategies (excluding ACRE, which is a permanent capital vehicle) had an average management contract term from the closing date of 9.3 years as of December 31, 2019.

As of the reporting date, accrued but unpaid management fees, net of management fee reductions and management fee offsets, are included in due from affiliates on the Consolidated Statements of Financial Condition. See Note 10, “Related Party Transactions,” to our consolidated financial statements included in this Annual Report on Form 10-K for more information.

Carried Interest Allocation. In certain fund structures, carried interest is allocated to us based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms in each fund’s governing documents. Additional details regarding our carried interest are presented below:

Credit Group:

Multi-asset credit and alternative credit: Typical carried interest represents 15% to 20% of each carried interest eligible fund’s profits, subject to a preferred return of approximately 7% to 8% per annum.
U.S. and European direct lending: Typical carried interest represents 10% to 20% of each carried interest eligible fund’s profits, or cumulative realized capital gains (net of cumulative realized losses and unrealized capital depreciation), and are subject to a preferred return rate of approximately 5% to 8% per annum.

Private Equity Group:

Private equity funds: Carried interest represents 20% of each carried interest eligible fund’s profits, subject to a preferred return of approximately 8% per annum.

Real Estate Group:

*•*Real estate funds: Typical carried interest represents 10% to 20% of each carried interest eligible fund’s profits, subject to a preferred return of approximately 8% to 10% per annum.

We may be liable to certain funds for previously realized carried interest allocation if the fund’s investment values decline below certain return hurdles, which vary from fund to fund. For detailed discussion of contingencies on performance income, see Note 9, “Commitments and Contingencies,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Incentive Fees. Incentive fees earned on the performance of certain fund structures are recognized based on the fund’s performance during the period, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s investment management agreement. Incentive fees are realized at the end of a measurement period, typically annually. Once realized, such fees are no longer subject to reversal. Additional details regarding our incentive fees are presented below:

Credit Group:

*•*Syndicated loans and high yield bonds: Typical incentive fees represents 15% to 20% of each incentive eligible fund’s profits, subject to a preferred return of approximately 12% per annum.

Multi-asset credit and alternative credit: Typical incentive fees represents 12.5% to 20% of each incentive eligible fund’s profits, subject to a preferred return of approximately 5% to 7% per annum.
U.S. and European direct lending: Typical incentive fees represents 10% to 20% of each incentive eligible fund’s profits, or cumulative realized capital gains (net of cumulative realized losses and unrealized capital depreciation), and are subject to a preferred return rate of approximately 5% to 8% per annum.

Real Estate Group:

Real Estate debt: Incentive fees we receive from ACRE are based on a percentage of the difference between ACRE’s core earnings (as defined in ACRE’s management agreement) and an amount derived from the weighted average issue price per share of ACRE’s common stock in its public offerings multiplied by the weighted average number of shares of common stock outstanding.

Principal Investment Income (Loss). Principal investment income (loss) consists of interest and dividend income and net realized and unrealized gains (losses) on equity method investments that we manage. Interest and dividend income are recognized on an accrual basis to the extent that such amounts are expected to be collected. A realized gain (loss) may be recognized when we redeem all or a portion of our investment or when we receive a distribution of capital. Unrealized gains (losses) on investments result from appreciation (depreciation) in the fair value of our investments, as well as reversals of previously recorded unrealized appreciation (depreciation) at the time the gain (loss) on an investment becomes realized.

Administrative, Transaction and Other Fees. Other fees primarily include revenue from administrative services provided to certain of our affiliated funds that are paid to us. In addition, we may receive fees from certain affiliated funds based on income to those funds from loan originations that we refer to as transaction-based fees.

Expenses

Compensation and Benefits. Compensation generally includes salaries, bonuses, health and welfare benefits, equity-based compensation, and ARCC Part I Fee incentive compensation expenses. Compensation cost relating to the issuance of restricted units and options is measured at fair value at the grant date, reduced for actual forfeitures, and expensed over the vesting period on a straight-line basis. Bonuses are accrued over the service period to which they relate. Compensation and benefits expenses are typically correlated to the operating performance of our segments, which is used to determine incentive-based compensation for each segment. Certain of our senior partners receive distributions based on their equity interests and are not paid an annual salary or bonus.

Performance Related Compensation. Performance related compensation includes compensation directly related to carried interest allocation and incentive fees, which generally consists of percentage interests that we grant to our professionals. Depending on the nature of each fund, the performance income participation is generally structured as a fixed percentage, typically 60-80%, or as an annual award. We have an obligation to pay our professionals a portion of the carried interest allocation or incentive fees earned from certain funds, including carried interest allocation or incentive fees from Consolidated Funds that are eliminated in consolidation. The performance related compensation payable is calculated based upon the recognition of carried interest allocation and incentive fees and is not payable until the carried interest allocation or incentive fee is realized.

Although changes in performance related compensation are directly correlated with changes in performance income reported within our segment results, this correlation does not always exist when our results are reported on a fully consolidated basis in accordance with GAAP. This discrepancy is caused when performance income earned from our Consolidated Funds is eliminated upon consolidation and performance related compensation is not.

General, Administrative and Other Expenses. General and administrative expenses include costs primarily related to professional services, occupancy, travel, communication and information services, placement fees, depreciation and amortization, and other general operating items.

Expenses of Consolidated Funds. Consolidated Funds’ expenses consist primarily of costs incurred by our Consolidated Funds, including professional services fees, research expenses, trustee fees, travel expenses and other costs associated with administering these funds and with launching new products.

Other Income (Expense)

Net Realized and Unrealized Gains (Losses) on Investments. A realized gain (loss) may be recognized when we redeem all or a portion of our investment or when we receive a distribution of capital. Unrealized gains (losses) on investments result from appreciation (depreciation) in the fair value of our investments, as well as reversals of previously recorded unrealized appreciation (depreciation) at the time the gain (loss) on an investment becomes realized.

Interest and Dividend Income. Interest and dividend income is primarily generated from investments in products that we manage. Interest and dividend income are both recognized on an accrual basis to the extent that such amounts are expected to be collected.

Interest Expense. Interest expense includes interest related to our Credit Facility, which has a variable interest rate based upon a credit spread that is adjusted with changes to corporate credit ratings, to our senior notes, which have a fixed coupon rate, and to certain term loans that were extinguished in 2018.

Other Income (Expense), Net. Other income (expense), net consists of transaction gains (losses) and other non-operating and non-investment related activity, such as loss on disposal of assets, among other items.

Net Realized and Unrealized Gains (Losses) on Investments of Consolidated Funds. Realized gains (losses) may arise from dispositions of investments held by our Consolidated Funds. Unrealized gains (losses) are recorded to reflect appreciation (depreciation) of investments held by the Consolidated Funds due to periodic changes in fair value of the investments, as well as reversals of previously recorded unrealized appreciation (depreciation) when the gain (loss) on an investment becomes realized.

Interest and Other Income of Consolidated Funds. Interest and other income of Consolidated Funds primarily includes interest and dividend income generated from the underlying investment securities of our Consolidated Funds.

Interest Expense of Consolidated Funds. Interest expense primarily consists of interest related to our Consolidated CLOs’ loans payable and, to a lesser extent, revolving credit lines, term loans and notes of other Consolidated Funds. The interest expense of the Consolidated CLOs is solely the responsibility of such CLOs and there is no recourse to us if the CLO is unable to make interest payments.

Income Taxes. Effective March 1, 2018, our operations are conducted through domestic corporations that are subject to corporate level taxes and for which we record current and deferred income taxes at the prevailing rates in the various jurisdictions in which these entities operate. The majority of our Consolidated Funds are not subject to income tax as the funds’ investors are responsible for reporting their share of income or loss. To the extent required by federal, state and foreign income tax laws and regulations, certain funds may incur income tax liabilities.

Income taxes are accounted for using the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Non-Controlling Interests. Net income attributable to non-controlling interests in Consolidated Funds represents the ownership interests that third parties hold in entities that are consolidated into our consolidated financial statements.

Net income attributable to non-controlling interests in Ares Operating Group entities represents the results attributable to strategic investment partners based on the proportional daily average ownership in Ares Operating Group entities.

For additional discussion on components of our consolidated results of operations, see Note 2, “Summary of Significant Accounting Policies,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Trends Affecting Our Business

We believe that our disciplined investment philosophy across our distinct but complementary investment groups contributes to the stability of our performance throughout market cycles. As of December 31, 2019, approximately 70% of our assets under management were in funds with a remaining contractual life of three years or more, approximately 73% were in funds with an initial duration greater than seven years at time of closing and 90% of our management fees are derived from permanent capital, CLOs and closed end funds. Our funds have a stable base of committed capital enabling us to invest in assets with a long-term focus over different points in a market cycle and to take advantage of market volatility. However, our results of operations, including the fair value of our AUM, are affected by a variety of factors, particularly in the United States and Western Europe, including conditions in the global financial markets and the economic and political environments.

U.S. credit markets rallied in the fourth quarter of 2019, capping off a strong year of performance. Prices moved higher across the markets as relatively attractive valuations and a constructive macroeconomic backdrop supported investor sentiment. More specifically, capital markets were buoyed by accommodative Federal Reserve policy, an initial resolution in U.S.-China trade relations and a generally positive economic outlook from key central banks. Against this backdrop, the CSLLI, a leveraged loan index, returned 1.7% in the fourth quarter of 2019 while the ICE BofA High Yield Master II Index, a high yield bond index, returned 2.6%. The fourth quarter cemented a strong year with the leveraged loan and high yield bond markets returning 8.2% and 14.4%, respectively, in 2019.

European credit markets experienced similar results as broader market sentiment benefited from progress on the U.S.-China trade agreement, increased clarity related to Brexit and supportive European Central Bank policy. Additionally, the return of the Corporate Sector Purchase Programme in November provided a boost to corporate credit prices. In this environment, the Credit Suisse Western European Leveraged Loan Index (“WELLI”) returned 0.8% while the ICE BofA European Currency High Yield Constrained Index returned 2.1% for the fourth quarter. Solid performance through year-end contributed to full year 2019 returns of 5.0% for the WELLI and 11.4% for the ICE BofA European Currency High Yield Constrained Index.

In the U.S., the S&P 500 Index returned an additional 9.1% through the fourth quarter of 2019 bringing the full year 2019 performance to 31.5% capping at near record highs across the U.S. equity markets. This comes as a significant rebound from a 2018 that saw the S&P 500 index finish the year down 5.2% after a volatile fourth quarter in 2018 wiped out all gains from the year. Outside the U.S., global equity markets had similar strong rebound performance with the MSCI All Country World ex USA Index, appreciating 8.9% in the fourth quarter bringing total 2019 appreciation to 21.5% and erasing the negative 14.2% performance from 2018. Competition in the intermediated private equity auction market remains robust as ample dry power and an abundance of low-cost debt have kept purchase price multiples near historical highs. Leverage levels remain elevated and are even higher when adjustments to EBITDA are taken into account. These dynamics have led to a significant compression in private equity risk premiums. We continue to believe careful company selection, a focus on high-quality assets and a differentiated view to drive value creation are of key to driving performance in the current market environment.

Commercial real estate property prices continued to rise by approximately 4% across major European cities and 5% across major U.S. cities according to Real Capital Analytics. Sales volume, compared to its 2018 levels for both regions, reflected deep and liquid transactions markets driven by robust global institutional investor appetite for the asset class. Tight labor markets, healthy consumer spending and low interest rates supported tenant demand and resulted in keeping occupancies and rents at or near their cyclical highs. U.S. real estate lending remained active with originations exceeding last year’s record pace. Supply activity remains below average across Europe and the U.S., and the use of leverage has been generally disciplined. Given a stable macroeconomic backdrop albeit with slower expected GDP growth, we believe supply and demand fundamentals should stay balanced.

In 2019, some of the considerations informing our strategic decisions included:

Our ability to fundraise and increase AUM and fee paying AUM. During the year ended December 31, 2019, we raised $23.8 billion of gross AUM, both in commingled and SMAs, and continued to expand our investor base, raising capital from over 75 different funds and 151 institutional investors, including 51 direct institutional investors that were new to Ares. Our fundraising efforts helped drive AUM growth of approximately 14% for 2019. During 2020, we expect that our fundraising will come from a combination of our existing and new strategies primarily in the U.S and Europe. As of December 31, 2019, we also had $27.1 billion of AUM not yet paying fees, which represents approximately $255.6 million in annual potential

management fee revenue. Of the $255.6 million, $233.5 million relates to $25.2 billion of AUM available for future deployment. Our pipeline of potential fees, coupled with our future fundraising opportunities, gives us the potential to increase our management fees in 2020.

Our ability to attract new capital and investors with our broad multi asset class product offering. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as an attractive vehicle for capital appreciation and income generation. We continually seek to create avenues to meet our investors’ evolving needs by offering an expansive range of investment funds, developing new products and creating managed accounts and other investment vehicles tailored to our investors’ goals. We continue to expand our distribution channels, seeking to meet the needs of insurance companies, as well as the needs of traditional institutional investors, such as pension funds, sovereign wealth funds, and endowments. If market volatility persists or increases, investors may seek absolute return strategies that seek to mitigate volatility. We offer a variety of investment strategies depending upon investors’ risk tolerance and expected returns.
Our disciplined investment approach and successful deployment of capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital that our investors have committed to our investment funds. Greater competition, high valuations, cost of credit and other general market conditions have affected and may continue to affect our ability to identify and execute attractive investments. Under our disciplined investment approach, we deploy capital only when we have sourced a suitable investment opportunity at an attractive price. During the year ended December 31, 2019, we deployed $27.4 billion of gross capital across our investment groups compared to approximately $22.4 billion deployed in 2018. As of December 31, 2019, we had $34.6 billion of capital available for investment and we remain well-positioned to invest our assets opportunistically.
Our ability to invest capital and generate returns through market cycles. The strength of our investment performance affects investors’ willingness to commit capital to our funds. The flexibility of the capital we are able to attract is one of the main drivers of the growth of our AUM and the management fees we earn. Current market conditions and a changing regulatory environment have created opportunities for Ares’ businesses, particularly in the Credit Group’s direct lending funds, and in the Private Equity's special opportunities funds, which utilize flexible investment mandates to manage portfolios through market cycles.
Our ability to continue to achieve stable dividend payments to investors. Our dividend policy for our Class A common stock is closely aligned with our core management fee business. We intend to provide a steady quarterly dividend for each calendar year that will be based on our after-tax fee related earnings, with future potential changes based on the level and growth of our after-tax fee related earnings. Our fixed dividend is reassessed each year based upon the level and growth of our after-tax fee related earnings. As fee related earnings reflect the core earnings of our business and consists of management fees less compensation and general and administrative expenses, having our recurring dividend based on this amount removes volatility from our dividend and enables investors to receive what we believe is an attractive after-tax, qualifying dividend yield.

See “Item 1A. Risk Factors” included in this Annual Report on Form 10-K for a discussion of the risks to which our businesses are subject.

Recent Transactions

On January 21, 2020, a subsidiary of Ares entered into a definitive agreement to acquire a controlling interest in SSG Capital Holdings Limited and its operating subsidiaries (collectively, “SSG”), a leading Asian alternative asset management firm. Headquartered in Hong Kong with offices across Asia, SSG manages private credit and special situations funds.

The sale of National Veterinary Associates (“NVA”) previously announced on June 17, 2018 by one of our private equity funds was completed in February 2020.

Consolidation and Deconsolidation of Ares Funds

Consolidated Funds represented approximately 6.7% of our AUM as of December 31, 2019, 3.4% of our management fees and 2.0% of our performance income for the year ended December 31, 2019. As of December 31, 2019, we consolidated 16 CLOs and eight private funds, and as of December 31, 2018, we consolidated 13 CLOs and 10 private funds.

The activity of the Consolidated Funds is reflected within the consolidated financial statement line items indicated by reference thereto. The impact of the Consolidated Funds also typically will decrease management fees, carried interest allocation and incentive fees reported under GAAP to the extent these are eliminated upon consolidation.

The assets and liabilities of our Consolidated Funds are held within separate legal entities and, as a result, the liabilities of our Consolidated Funds are typically non-recourse to us. Generally, the consolidation of our Consolidated Funds has a significant gross-up effect on our assets, liabilities and cash flows but has no net effect on the net income attributable to us or our stockholders' equity. The net economic ownership interests of our Consolidated Funds, to which we have no economic rights, are reflected as non-controlling interests in the Consolidated Funds in our consolidated financial statements.

The performance of our Consolidated Funds is not necessarily consistent with, or representative of, the combined performance trends of all of our funds.

For the actual impact that consolidation had on our results and further discussion on consolidation and deconsolidation of funds, see Note 16 “Consolidation” to our consolidated financial statements included herein.

Results of Operations

Consolidated Results of Operations

We consolidate funds where we are deemed to hold a controlling financial interest. The Consolidated Funds are not necessarily the same entities in each year presented due to changes in ownership, changes in limited partners' rights, and the creation and termination of funds. The consolidation of these funds had no effect on net income attributable to us for the periods presented. The following table and discussion sets forth information regarding our consolidated results of operations for the years ended December 31, 2019 and 2018 ($ in thousands):


	Year Ended December 31,						2019 vs 2018
	2019		2018		Favorable (Unfavorable)
					$ Change		% Change
Revenues
Management fees (includes ARCC Part I Fees of $164,396 and $128,805 for the years ended December 31, 2019 and 2018, respectively)	$	979,417	$	802,502	$	176,915	22	%
Carried interest allocation	621,872		42,410		579,462		NM
Incentive fees	69,197		63,380		5,817		9
Principal investment income (loss)	56,555		(1,455)		58,010		NM
Administrative, transaction and other fees	38,397		51,624		(13,227)		(26)
Total revenues	1,765,438		958,461		806,977		84
Expenses
Compensation and benefits	653,352		570,380		(82,972)		(15)
Performance related compensation	497,181		30,254		(466,927)		NM
General, administrative and other expenses	270,219		215,964		(54,255)		(25)

Expenses of Consolidated Funds	42,045		53,764		11,719		22
Total expenses	1,462,797		870,362		(592,435)		(68)
Other income (expense)
Net realized and unrealized gains (losses) on investments	9,554		(1,884)		11,438		NM
Interest and dividend income	7,506		7,028		478		7
Interest expense	(19,671)		(21,448)		1,777		8
Other expense, net	(7,840)		(851)		(6,989)		NM
Net realized and unrealized gains (losses) on investments of Consolidated Funds	15,136		(1,583)		16,719		NM
Interest and other income of Consolidated Funds	395,599		337,875		57,724		17
Interest expense of Consolidated Funds	(277,745)		(222,895)		(54,850)		(25)
Total other income	122,539		96,242		26,297		27
Income before taxes	425,180		184,341		240,839		131
Income tax expense	52,376		32,202		(20,174)		(63)
Net income	372,804		152,139		220,665		145
Less: Net income attributable to non-controlling interests in Consolidated Funds	39,704		20,512		19,192		94
Less: Net income attributable to non-controlling interests in Ares Operating Group entities	184,216		74,607		109,609		147
Net income attributable to Ares Management Corporation	148,884		57,020		91,864		161
Less: Series A Preferred Stock dividends paid	21,700		21,700		—		—
Net income attributable to Ares Management Corporation Class A common stockholders	$	127,184	$	35,320	91,864		260

NM - Not Meaningful

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenues

Management Fees. Total management fees increased by $176.9 million, or 22%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase in total management fees was primarily due to the Credit Group, driven by an increase in ARCC Part I Fees and by higher FPAUM from capital deployments in direct lending funds. Total management fees also increased in the Real Estate Group and Private Equity Group by having higher FPAUM from new commitments during the current year. For detail regarding the fluctuations of management fees within each of our segments see “—Results of Operations by Segment.”

Carried Interest Allocation. Carried interest allocation increased by $579.5 million to $621.9 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was principally composed of the following ($ in millions, unless otherwise noted):


	Year Ended December 31, 2019		Primary Drivers	Year Ended December 31, 2018		Primary Drivers
Credit funds	$	129.5	10 direct lending funds with $11.2 billion of IGAUM generating returns in excess of their hurdle rates, primarily from Ares Capital Europe III, L.P. ("ACE III"), Ares Capital Europe IV, L.P. ("ACE IV") and Ares Private Credit Solutions, L.P. ("PCS") that generated $30.1 million, $48.6 million and $30.6 million of carried interest allocation during the period, respectively. ACE IV and PCS were higher primarily due to additional deployment, while ACE III was lower primarily due to the fund moving past its investment period.	$	82.6	10 direct lending funds with $7.9 billion of IGAUM generating returns in excess of their hurdle rates, primarily from ACE III, ACE IV and PCS that generated carried interest allocation during the period of $50.0 million, $8.6 million and $16.3 million, respectively.
Private equity funds	416.5		Market appreciation of Ares Corporate Opportunities Fund III, L.P.'s (“ACOF III”) investments in Floor & Decor and a professional services company; increased fair value of Ares Corporate Opportunities Fund IV, L.P.'s ("ACOF IV") investment in NVA resulting from the sale of the company; and market appreciation across several ACOF IV and Ares Corporate Opportunities Fund V, L.P. ("ACOF V") portfolio companies.	(168.7)		Market depreciation of ACOF III's investment in Floor & Decor; Market depreciation across several ACOF IV portfolio companies
Real estate funds	75.9		Market appreciation from multiple properties within six of our U.S. real estate equity funds, EF IV and five European real estate equity funds.	128.5		Market appreciation from multiple properties within seven of our U.S. real estate equity funds, EF IV and two European real estate funds. In addition, there was a sale of a large conference resort center in Colorado, held in multiple funds, that generated returns in excess of hurdle rates.
Carried interest allocation	$	621.9		$	42.4

Incentive Fees. Incentive fees increased by $5.8 million, or 9%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily due to a greater number of direct lending funds that generated incentive fees during the current year and not in the prior year. In addition, an increase in deployment from funds that generated incentive fees in both the current and prior years contributed to the increase in incentive fees. This increase was partially offset by $50.2 million of ARCC Part II Fees that were recognized in 2018 and not in 2019.

Principal Investment Income (Loss). Principal investment income (loss) increased by $58.0 million to $56.6 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase during the current year period was primarily driven by a higher fair value of our investment in ACOF III as a result of market appreciation of its investment in Floor & Decor.

Administrative, Transaction and Other Fees. Administrative fees and other fees decreased by $13.2 million, or 26%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease during the current year

was primarily driven by lower transaction-based fees within certain funds in our Credit Group that fluctuate with the volume of capital deployed.

Compensation and Benefits. Compensation and benefits expenses increased by $83.0 million, or 15%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by higher incentive compensation attributable to the operating performance of our Company, an increase in ARCC Part I Fees compensation and 8% headcount growth.

Equity compensation expense also increased by $8.0 million, or 9%, for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to additional restricted units granted as part of our annual bonus program and to certain retention awards, including restricted units granted to our Chief Executive Officer during the third quarter of 2018. Additionally, our annual equity compensation bonus program commenced in 2016 with awards scheduled to vest over a four year service period. As such, equity compensation expense for the current year reflects expenses associated with four years of bonus grants, whereas equity compensation expense for the prior year includes only three years of bonus grants.

Performance Related Compensation. Performance related compensation increased by $466.9 million to $497.2 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase in performance related compensation is largely correlated with the respective increases in carried interest allocation and incentive fees described above.

General, Administrative and Other Expenses. General, administrative and other expenses increased by $54.3 million, or 25%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was due to several factors including a non-cash impairment charge of $20.0 million that was recognized during the third quarter of 2019 to certain intangible assets that were recorded as part of our acquisition of the Energy Investors Funds ("EIF"). The impairment was recognized since there was a lower number of legacy EIF investors that committed to invest into the successor funds and the decision by management to no longer introduce the successor funds under the EIF trade name. As a result, these changes are expected to decrease the future expected cash flows from management fees generated by EIF's existing client relationships and to decrease the royalties attributable to EIF's trade name. The increase was also driven by higher professional service fees of $13.3 million during the current year, largely as a result of professional services related to due diligence, marketing and legal expenses related to the expansion of our insurance and Asia platforms and to other strategic initiatives. Additionally, placement fees increased by $19.6 million due to new commitments to a fund in our special opportunities strategy during the current year. The prior year includes an $11.8 million one-time reimbursement to ARCC for certain rent and utilities for the first quarter of 2018 and the years ended 2017, 2016, 2015 and 2014. Beginning in the second quarter of 2018, we began to incur occupancy and marketing expenses that were previously incurred by ARCC. This resulted in approximately $2.3 million in incremental recurring expenses for the year ended December 31, 2019.

Expenses of Consolidated Funds. Expenses of Consolidated Funds decreased by $11.7 million, or 22%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was primarily driven by higher professional fees incurred as a result of a greater number of CLO debt issuances and refinances during the prior year. These fees were expensed in the period incurred, as CLO debt is recorded at fair value on our Consolidated Statements of Financial Condition.

Other Income (Expense)

When evaluating the changes in other income (expense), we separately analyze the other income generated by the Company from the investment returns generated by our Consolidated Funds.

Net Realized and Unrealized Gains (Losses) on Investments. Net realized and unrealized gains (losses) on investments increased from net realized and unrealized losses on investments of $1.9 million for the year ended December 31, 2018 to net realized and unrealized gains on investments of $9.6 million for the year ended December 31, 2019. The increase during the current year was primarily driven by higher net gains from our CLO securities, which rebounded from the market dislocation at the end of 2018, and higher net gains recognized on our foreign currency hedging instruments where the offsetting change in unrealized is recorded in principal investment income.

Interest Expense. Interest expense decreased by $1.8 million, or 8%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease during the current year was primarily driven by the pay-off of term loans that had financed certain investments in CLOs during the second quarter of 2018. The decrease was partially offset by a higher average outstanding balance of the Credit Facility during 2019 when compared to 2018.

Other Expense, Net. Other expense, net is principally composed of transaction gains (losses) associated with currency fluctuations for our businesses domiciled outside of the U.S. and remain volatile based on the fluctuations in foreign currency exchange rates. Other expense, net for the year ended December 31, 2018 also included debt extinguishment costs recorded in connection with the repayment of term loans resulting from the removal of US risk retention requirements associated with our syndicated loan business.

Net Realized and Unrealized Gains (Losses) on Investments of Consolidated Funds. Net realized and unrealized gains (losses) on investments of Consolidated Funds increased from net realized and unrealized losses on investments of Consolidated Funds of $1.6 million for the year ended December 31, 2018 to net realized and unrealized gains on investments of Consolidated Funds of $15.1 million for the year ended December 31, 2019. The increase was primarily driven by higher net gains on the securities held by the CLOs, which rebounded from market dislocation at the end of 2018.

Interest and Other Income of Consolidated Funds. Interest and other income of the Consolidated Funds increased by $57.7 million, or 17%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by additional interest paying assets from three additional CLOs that we began consolidating subsequent to December 31, 2018 resulting in an increase in interest income during the current year.

Interest Expense of Consolidated Funds. Interest expense of the Consolidated Funds increased by $54.9 million, or 25%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily the result of interest expense from debt issued for three additional CLOs we began consolidating subsequent to December 31, 2018, resulting in an increase in interest expense during the current year.

Income Tax Expense. Income tax expense increased by $20.2 million, or 63%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was attributable to higher income allocable to Ares Management Corporation that also increased due to higher controlling ownership. However, the tax rate in the current year is significantly lower than the prior year because the prior year's tax rate reflected one-time deferred tax expenses from the embedded net unrealized gains of both carried interest and the investment portfolio that were not subject to corporate taxes prior to our election to be taxed as a corporation for U.S. federal income tax purposes during 2018.

Non-Controlling Interests. Net income attributable to non-controlling interests in Ares Operating Group entities represents results attributable to the owners of AOG Units that are not held by Ares Management Corporation and is allocated based on the weighted average daily ownership of the AOG unitholders. The weighted average daily ownership for non-controlling AOG unitholders decreased from 55.8% for the year ended December 31, 2018 to 52.0% for the year ended December 31, 2019. The decrease in non–controlling ownership was primarily driven by our Class A common stock offering during the year ended December 31, 2019 and by stock option exercises and vesting of restricted stock awards during the year ended December 31, 2019.

Net income attributable to non-controlling interests in Ares Operating Group entities increased by $109.6 million, or 147%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily a result of the increase in income before taxes.

Segment Analysis

For segment reporting purposes, revenues and expenses are presented on a basis before giving effect to the results of our Consolidated Funds. As a result, segment revenues from management fees, performance income and investment income are different than those presented on a consolidated basis in accordance with GAAP because revenues recognized from Consolidated Funds are eliminated in consolidation. Furthermore, expenses and the effects of other income (expense) are different than related amounts presented on a consolidated basis in accordance with GAAP due to the exclusion of the results of Consolidated Funds.

Discussed below are our results of operations for our reportable segments. We separately discuss the OMG. This information is used by our management to make operating decisions, assess performance and allocate resources.

FRE, RI and Other Measures

FRE and RI are non-GAAP financial measures our management uses when making resource deployment decisions and in assessing performance of our segments. For definitions of each of these non-GAAP financial measures see the Glossary. The following table sets forth FRE and RI by segment for the years ended December 31, 2019 and 2018 ($ in thousands):


							2019 vs 2018
	Year Ended December 31,						Favorable (Unfavorable)
	2019		2018		$ Change		% Change
Fee Related Earnings:
Credit Group	$	414,212	$	325,153	$	89,059	27	%
Private Equity Group	114,419		106,036		8,383		8
Real Estate Group	25,482		23,950		1,532		6
Operations Management Group	(230,454)		(199,827)		(30,627)		(15)
Fee Related Earnings	$	323,659	$	255,312	68,347		27
Realized Income:
Credit Group	$	471,643	$	372,338	$	99,305	27	%
Private Equity Group	212,564		150,532		62,032		41
Real Estate Group	51,757		67,605		(15,848)		(23)
Operations Management Group	(232,478)		(195,079)		(37,399)		(19)
Realized Income	$	503,486	$	395,396	108,090		27

Reconciliation of Consolidated GAAP Financial Measures to Certain Non-GAAP Measures

Income before provision for income taxes is the GAAP financial measure most comparable to RI and FRE. The following table presents the reconciliation of income before taxes as reported in the Consolidated Statements of Operations to RI and FRE ($ in thousands):


	Year Ended December 31,
	2019		2018
Income before taxes	$	425,180	$	184,341
Adjustments:
Depreciation and amortization expense	40,602		25,087
Equity compensation expense	97,691		89,724
Acquisition and merger-related expense	16,266		2,936
Deferred placement fees	24,306		20,343
Other (income) expense, net(1)	(460)		13,489
Net expense of non-controlling interests in consolidated subsidiaries	2,951		3,343
Income before taxes of non-controlling interests in Consolidated Funds, net of eliminations	(39,174)		(20,643)
Unconsolidated performance (income) loss - unrealized	(303,142)		247,212
Unconsolidated performance related compensation - unrealized	206,799		(221,343)
Unconsolidated net investment loss - unrealized	32,467		50,907
Realized Income	503,486		395,396
Unconsolidated performance income - realized	(402,518)		(357,207)
Unconsolidated performance related compensation - realized	290,382		251,597
Unconsolidated net investment income - realized	(67,691)		(34,474)
Fee Related Earnings	$	323,659	$	255,312

(1) 2018 period includes $11.8 million payment to ARCC for rent and utilities for the years ended 2017, 2016, 2015 and 2014, and the first quarter of 2018.

Results of Operations by Segment

Credit Group—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Fee Related Earnings:

The following table presents the components of the Credit Group's FRE and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Management fees (includes ARCC Part I Fees of $164,396 and $128,805 for the years ended December 31, 2019 and 2018, respectively)	$	713,853	$	564,899	$	148,954	26	%
Other fees	17,124		23,247		(6,123)		(26)
Compensation and benefits	(261,662)		(218,148)		(43,514)		(20)
General, administrative and other expenses	(55,103)		(44,845)		(10,258)		(23)
Fee Related Earnings	$	414,212	$	325,153	89,059		27

Management Fees. The chart below presents Credit Group management fees and effective management fee rates for the years ended December 31, 2019 and 2018 ($ in millions):

ARCC Part I fees increased primarily due to higher net interest and dividend income levels as ARCC deployed more capital and grew total assets during 2019, including through an increase in leverage that became available at the end of the second quarter of 2019. ARCC Part I fees additionally increased by $10 million due to the expiration of the quarterly fee waiver at the end of the third quarter of 2019. This increase in capital deployment at ARCC also resulted in an increase in management fees of $24.3 million in the current year. Management fees on existing direct lending funds similarly benefited from increased deployment, with an increase of $50.2 million in management fees from ACE IV, PCS and Ares Senior Direct Lending Fund L.P. (“SDL”) in 2019. CLOs accounted for approximately 9% of the Credit Group's management fees for the year ended December 31, 2019 and for approximately 10% of the Credit Group's management fees for the year ended December 31, 2018.

The increase in the effective management fee rate was primarily due to deployment in direct lending funds with higher effective fee rates for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Other Fees. Other fees decreased by $6.1 million, or 26%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease from the prior year was primarily driven by lower transaction-based fees within certain funds in our Credit Group that fluctuate with the volume of capital deployed.

Compensation and Benefits. Compensation and benefits expenses increased by $43.5 million, or 20%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by an increase in ARCC Part I Fees compensation of $21.6 million during the current year. The increase was further driven by 8% headcount growth and by higher incentive compensation attributable to improved operating performance. We continue to hire investment professionals to support our growing U.S. and European direct lending AUM, which increased by 15%.

General, Administrative and Other Expenses. General, administrative and other expenses increased by $10.3 million, or 23%, for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily driven by higher occupancy and overhead costs from headcount growth. Beginning in the second quarter of 2018, we also began to incur occupancy and marketing expenses that were previously incurred by ARCC. This resulted in approximately $2.3 million in incremental recurring expenses for the year ended December 31, 2019. Additionally, we continue to invest in expanding our retail distribution footprint through a joint venture, which paid an incremental $2.3 million of fees to a third party broker for retail distribution services during the year ended December 31, 2019.

Realized Income:

The following table presents the components of the Credit Group's RI and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Fee Related Earnings	$	414,212	$	325,153	$	89,059	27	%
Performance income-realized	104,442		121,270		(16,828)		(14)
Performance related compensation-realized	(61,641)		(75,541)		13,900		18
Realized net performance income	42,801		45,729		(2,928)		(6)
Investment income-realized	2,457		2,492		(35)		(1)
Interest and other investment income-realized	18,670		10,350		8,320		80
Interest expense	(6,497)		(11,386)		4,889		43
Realized net investment income	14,630		1,456		13,174		NM
Realized Income	$	471,643	$	372,338	99,305		27

NM - Not Meaningful

Realized income for the periods presented was composed of FRE, as explained above, realized net performance income and realized net investment income for the respective periods.

Realized net performance income decreased by $2.9 million, or 6%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. Realized net performance income for the year ended December 31, 2019 was principally composed of incentive fees from certain direct lending funds that generated incentive fees during the current year and not in the prior year, in addition to funds that generated incentive fees in both years but had higher incentive fees in the current year due to increased deployment. Realized net performance income for the year ended December 31, 2018 included net ARCC Part II Fees of $15.1 million and tax distributions received from ACE III and certain other direct lending funds that exceeded the amounts received in 2019.

Realized net investment income increased by $13.2 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by investment income related to distributions from our U.S. direct lending funds. The increase during the current period was further driven by lower interest expense as a result of the pay-off of term loans that had financed certain investments in CLOs during the second quarter of 2018.

Credit Group— Carried Interest and Incentive Fees

The following table presents the accrued carried interest and incentive fee receivables for the Credit Group ($ in thousands):


	As of December 31,
	2019		2018
ACE II	$	29,858	$	27,060
ACE III	76,628		63,338
ACE IV	57,388		8,517
CSF III	13,991		9,962
ARCC	—		50,246
PCS	52,029		21,009
Other credit funds	83,101		30,523
Total Credit Group	$	312,995	$	210,655

The change in accrued carried interest and incentive fee receivable from the prior year was primarily attributable to the following: (i) a $210.9 million increase in total unrealized carried interest allocation for year ended December 31, 2019; offset by (ii) the realization of $104.4 million of carried interest allocation and incentive fees realized during the year ended December 31, 2019; (iii) $7.8 million of net incentive fees for which the cash receipt did not occur in the year the realization was recognized; and (iv) foreign currency translation and other adjustments.

The following table presents the components of the total change in unrealized carried interest allocation and incentive fees for the Credit Group for the years ended December 31, 2019 and 2018 ($ in thousands):


	Year Ended December 31, 2019										Year Ended December 31, 2018
	Realized		Unrealized, net		Total Change in Unrealized		Realized		Unrealized, net		Total Change in Unrealized
ACE II	$	—	$	3,002	$	3,002	$	7,246	$	3,514	$	10,760
ACE III	15,733		14,395		30,128		28,111		21,876		49,987
ACE IV	—		48,612		48,612		—		8,572		8,572
CSF III	—		4,029		4,029		703		2,348		3,051
ARCC	—		—		—		50,246		—		50,246
PCS	—		30,557		30,557		—		16,289		16,289
Other credit funds	88,709		5,870		94,579		34,964		(24,949)		10,015
Total Credit Group	$	104,442	$	106,465	$	210,907	$	121,270	$	27,650	$	148,920

Credit Group—Assets Under Management

The tables below present rollforwards of AUM for the Credit Group for the years ended December 31, 2019 and 2018 ($ in millions):


	Syndicated Loans		High Yield		Multi-Asset Credit		Alternative Credit		U.S. Direct Lending		European Direct Lending		Total Credit Group
Balance at 12/31/2018	$	18,880	$	4,024	$	2,761	$	5,448	$	40,668	$	24,055	$	95,836
Net new par/equity commitments	1,124		165		(13)		2,298		2,253		764		6,591
Net new debt commitments	3,360		—		—		75		6,060		1,189		10,684
Distributions	(1,346)		(1,230)		(396)		(523)		(2,110)		(663)		(6,268)
Change in fund value	302		533		259		273		1,560		773		3,700
Balance at 12/31/2019	$	22,320	$	3,492	$	2,611	$	7,571	$	48,431	$	26,118	$	110,543
Average AUM(1)	$	20,928	$	3,734	$	2,569	$	6,841	$	44,958	$	24,823	$	103,853


	Syndicated Loans		High Yield		Multi-Asset Credit		Alternative Credit		U.S. Direct Lending		European Direct Lending		Total Credit Group
Balance at 12/31/2017	$	16,530	$	4,630	$	3,333	$	4,791	$	30,640	$	11,808	$	71,732
Net new par/equity commitments	268		293		128		1,597		7,504		11,315		21,105
Net new debt commitments	3,162		—		—		—		4,254		1,924		9,340
Distributions	(956)		(808)		(639)		(950)		(3,182)		(1,209)		(7,744)
Change in fund value	(124)		(91)		(61)		10		1,452		217		1,403
Balance at 12/31/2018	$	18,880	$	4,024	$	2,761	$	5,448	$	40,668	$	24,055	$	95,836
Average AUM(1)	$	17,827	$	4,413	$	3,006	$	5,199	$	36,387	$	17,815	$	84,647

(1) Represents a five-point average of quarter-end balances for each period

Credit Group—Fee Paying AUM

The tables below present rollforwards of fee paying AUM for the Credit Group for the years ended December 31, 2019 and 2018 ($ in millions):


	Syndicated Loans		High Yield		Multi-Asset Credit		Alternative Credit		U.S. Direct Lending		European Direct Lending		Total Credit Group
FPAUM Balance at 12/31/2018	$	18,328	$	4,025	$	2,196	$	2,826	$	21,657	$	8,815	$	57,847
Commitments	3,811		162		112		681		231		—		4,997
Subscriptions/deployment/increase in leverage	354		4		38		1,230		7,451		4,597		13,674
Redemptions/distributions/decrease in leverage	(1,176)		(1,137)		(451)		(566)		(2,082)		(1,034)		(6,446)
Change in fund value	141		441		249		169		858		323		2,181
Change in fee basis	—		—		—		—		(239)		(134)		(373)
FPAUM Balance at 12/31/2019	$	21,458	$	3,495	$	2,144	$	4,340	$	27,876	$	12,567	$	71,880
Average FPAUM(1)	$	20,099	$	3,735	$	2,118	$	3,631	$	24,880	$	10,815	$	65,278


	Syndicated Loans		High Yield		Multi-Asset Credit		Alternative Credit		U.S. Direct Lending		European Direct Lending		Total Credit Group
FPAUM Balance at 12/31/2017	$	15,251	$	4,629	$	2,809	$	3,434	$	16,869	$	6,458	$	49,450
Commitments	4,196		282		17		133		110		30		4,768
Subscriptions/deployment/increase in leverage	—		12		42		480		6,212		3,688		10,434
Redemptions/distributions/decrease in leverage	(945)		(805)		(610)		(1,239)		(1,954)		(1,235)		(6,788)
Change in fund value	(170)		(90)		(62)		18		420		(126)		(10)
Change in fee basis	(4)		(3)		—		—		—		—		(7)
FPAUM Balance at 12/31/2018	$	18,328	$	4,025	$	2,196	$	2,826	$	21,657	$	8,815	$	57,847
Average FPAUM(1)	$	16,913	$	4,412	$	2,473	$	3,356	$	18,787	$	7,675	$	53,616

(1) Represents a five-point average of quarter-end balances for each period

The components of our AUM for the Credit Group are presented below as of December 31, 2019 and 2018 ($ in millions):


AUM: $110,543						AUM: $95,836


			FPAUM						AUM not yet paying fees						Non-fee paying(1)						General partner and affiliates

(1) Includes $7.9 billion and $6.7 billion of AUM of funds for which we indirectly earn management fees as of December 31, 2019 and 2018, respectively.

The charts below present FPAUM for the Credit Group by its fee basis as of December 31, 2019 and 2018 ($ in millions):


FPAUM: $71,880						FPAUM: $57,847


			Market value/other						Collateral balances (at par)						Invested capital						Capital commitments

Credit Group—Fund Performance Metrics as of December 31, 2019

ARCC contributed approximately 52% of the Credit Group’s total management fees for the year ended December 31, 2019. In addition to ARCC, five significant funds, ACE III, ACE IV, PCS, Ares Credit Strategies Fund III L.P. (“CSF III”) and SDL, contributed approximately 15% of the Credit Group’s management fees for the year ended December 31, 2019. ACE III and ACE IV focus on direct lending to European middle market companies, and PCS targets junior capital needs of upper middle market companies in North America. CSF III focuses on European and U.S. direct lending strategies. SDL focuses on investing predominantly in directly originated senior secured loans in North America.

The following table presents the performance data for our significant non-drawdown fund in the Credit Group as of December 31, 2019 ($ in millions):


				Returns(%)
	Year of Inception	AUM		Current Quarter			Year-To-Date			Since Inception(1)	Primary Investment Strategy
Fund				Gross	Net	Gross	Net	Gross	Net
ARCC(2)	2004	$	16,623	N/A	2.8	N/A	11.4	N/A	11.8	U.S. Direct Lending

(1)Since inception returns are annualized.

(2)Net returns are calculated using the fund's NAV and assume dividends are reinvested at the closest quarter-end NAV to the relevant quarterly ex-dividend dates. Additional information related to ARCC can be found in its financial statements filed with the SEC, which are not part of this report.

The following table presents the performance data of our significant drawdown funds as of December 31, 2019 ($ in millions):


	Year of Inception	AUM		Original Capital Commitments		Cumulative Invested Capital		Realized Proceeds(1)		Unrealized Value(2)		Total Value		MoIC			IRR(%)		Primary Investment Strategy
Fund														Gross(3)	Net(4)	Gross(5)	Net(6)
CSF III	2010	$	1,175	$	1,135	$	1,209	$	617	$	1,153	$	1,770	1.5x	1.5x	9.1	7.8	European & U.S. Direct Lending
ACE III(7)	2015	4,964		2,822		2,479		596		2,561		3,157		1.4x	1.3x	14.0	10.2	European Direct Lending
PCS	2017	3,627		3,365		1,898		161		1,914		2,075		1.2x	1.1x	13.0	9.0	U.S. Direct Lending
ACE IV Unlevered(8)	2018	9,653		2,851		1,446		35		1,502		1,537		1.1x	1.1x	12.5	9.1	European Direct Lending
ACE IV Levered(8)				4,819		2,412		84		2,568		2,652		1.1x	1.1x	18.4	13.6
SDL Unlevered(9)	2018	4,871		922		267		6		272		278		1.1x	1.0x	11.0	7.4	U.S. Direct Lending
SDL Levered(9)				2,045		568		18		594		612		1.1x	1.1x	20.0	12.7

(1)Realized proceeds represent the sum of all cash distributions to all partners and if applicable, exclude tax and incentive distributions made to the general partner.

(2)Unrealized value represents the fund's NAV reduced by the accrued incentive allocation, if applicable. There can be no assurance that unrealized values will be realized at the valuations indicated.

(3)The gross multiple of invested capital (“MoIC”) is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The gross MoIC is before giving effect to management fees, carried interest and other expenses, as applicable.

(4)The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying limited partners and if applicable, excludes those interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The net MoIC is after giving effect to management fees, carried interest, as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. The net MoIC would have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.

(5)The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Gross IRR reflects returns to the fee-paying limited partners and, if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the gross IRR calculation are based on the actual dates of the cash flows. The gross IRRs are calculated before giving effect to management fees, carried interest and other expenses, as applicable.

(6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying limited partners and, if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the net IRR calculations are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees, carried interest, as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.

(7)ACE III is made up of two feeder funds, one denominated in U.S. dollars and one denominated in Euros. The gross and net IRR and MoIC presented in the table are for the Euro denominated feeder fund. The gross and net IRR for the U.S. dollar denominated feeder fund are 14.7% and 10.8%, respectively. The gross and net MoIC for the U.S. dollar denominated feeder fund are 1.4x and 1.3x, respectively. Original capital commitments are converted to U.S. dollars at the prevailing exchange rate at the time of the fund's closing. All other values for ACE III are for the combined fund and are converted to U.S. dollars at the prevailing quarter-end exchange rate.

(8)ACE IV is made up of four parallel funds, two denominated in Euros and two denominated in pound sterling: ACE IV (E) Unlevered, ACE IV (G) Unlevered, ACE IV (E) Levered, and ACE IV (G) Levered. The gross and net IRR and MoIC presented in the table are for ACE IV (E) Unlevered and ACE IV (E) Levered. Metrics for ACE IV (E) Levered are inclusive of a U.S. dollar denominated feeder fund, which has not been presented separately. The gross and net IRR for ACE IV (G) Unlevered are 14.1% and 9.5%, respectively. The gross and net MoIC for ACE IV (G) Unlevered are 1.1x and 1.1.x, respectively. The gross and net IRR for ACE IV (G) Levered are 19.2% and 13.7%, respectively. The gross and net MoIC for ACE IV (G) Levered are 1.1x and 1.1.x, respectively. Original capital commitments are converted to U.S. dollars at the prevailing exchange rate at the time of the fund's closing. All other values for ACE IV Unlevered and ACE IV Levered are for the combined levered and unlevered parallel funds and are converted to U.S. dollars at the prevailing quarter-end exchange rate.

(9)Gross and net fund-level IRRs for SDL Unlevered and SDL Levered do not represent an annualized return as the time elapsed from the date of the first capital call is less than one year.

Private Equity Group—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Fee Related Earnings:

The following table presents the components of the Private Equity Group's FRE and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Management fees	$	211,614	$	198,182	$	13,432	7	%
Other fees	162		1,008		(846)		(84)
Compensation and benefits	(78,259)		(74,672)		(3,587)		(5)
General, administrative and other expenses	(19,098)		(18,482)		(616)		(3)
Fee Related Earnings	$	114,419	$	106,036	8,383		8

Management Fees. The chart below presents Private Equity Group management fees and effective management fee rates for the years ended December 31, 2019 and 2018 ($ in millions):

The increase in management fees was primarily due to the launch of Ares Energy Opportunities Fund, L.P. ("AEOF") in the fourth quarter of 2018, which generated management fees of $13.9 million for the year ended December 31, 2019, of which $0.7 million was attributable to one-time catch-up fees during the current year.

Compensation and Benefits. Compensation and benefits expenses increased by $3.6 million, or 5%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by higher incentive compensation attributable to improved operating performance and by an increase in headcount during the current year, which also contributed to the increase in general and administrative expenses from the prior year.

Realized Income:

The following table presents the components of the Private Equity Group's RI and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)
	2019		2018		$ Change		% Change
Fee Related Earnings	$	114,419	$	106,036	$	8,383	8	%
Performance income-realized	264,439		139,820		124,619		89
Performance related compensation-realized	(211,550)		(111,764)		(99,786)		(89)
Realized net performance income	52,889		28,056		24,833		89
Investment income-realized	47,696		17,816		29,880		168
Interest and other investment income-realized	5,046		4,624		422		9
Interest expense	(7,486)		(6,000)		(1,486)		(25)
Realized net investment income	45,256		16,440		28,816		175
Realized Income	$	212,564	$	150,532	62,032		41

Realized income for the periods presented was composed of FRE, as explained above, realized net performance income and realized net investment income for the respective periods.

Realized net performance income and realized net investment income for the year ended December 31, 2019 were primarily attributable to realizations from multiple investments sold within ACOF III as the fund continued to liquidate its remaining investments, including the sales of its positions in a real estate development portfolio company, in a professional services portfolio company, and the partial sale of its position in Floor & Decor.

Realized net performance income and realized net investment income for the year ended December 31, 2018 were primarily attributable to realizations from the partial monetization of multiple investments held within ACOF III, including partial sale of its position in Floor & Decor.

Private Equity Group—Carried Interest

The following table presents the accrued carried interest for the Private Equity Group ($ in thousands):


	As of December 31,
	2019		2018
ACOF III	$	156,053	$	316,377
ACOF IV	343,546		183,595
ACOF V	75,099		—
EIF V	28,242		—
AEOF	27,377		—
Other funds	28,576		6,900
Total Private Equity Group	$	658,893	$	506,872

The following table presents the components of the total unrealized gains (losses) in the carried interest allocation for the Private Equity Group for the years ended December 31, 2019 and 2018 ($ in thousands):


	Year Ended December 31, 2019										Year Ended December 31, 2018
	Realized		Unrealized, net		Total Change in Unrealized		Realized		Unrealized, net		Total Change in Unrealized
ACOF III	$	268,895	$	(160,324)	$	108,571	$	138,216	$	(254,201)	$	(115,985)
ACOF IV	—		159,951		159,951		1,604		(33,759)		(32,155)
ACOF V	—		75,099		75,099		—		—		—
EIF V	—		28,242		28,242		—		(16,215)		(16,215)
AEOF	—		27,377		27,377		—		—		—
Other funds	(4,456)		21,717		17,261		—		(4,361)		(4,361)
Total Private Equity Group	$	264,439	$	152,062	$	416,501	$	139,820	$	(308,536)	$	(168,716)

Private Equity Group—Assets Under Management

The tables below present rollforwards of AUM for the Private Equity Group for the years ended December 31, 2019 and 2018 ($ in millions):


	Corporate Private Equity		Infrastructure & Power		Special Opportunities		Energy Opportunities		Total Private Equity Group
Balance at 12/31/2018	$	17,159	$	3,842	$	1,733	$	753	$	23,487
Net new equity commitments	1,195		—		1,592		364		3,151
Net new debt commitments	—		—		25		—		25
Distributions	(3,364)		(401)		(46)		(2)		(3,813)
Change in fund value	2,163		(208)		223		138		2,316
Balance at 12/31/2019	$	17,153	$	3,233	$	3,527	$	1,253	$	25,166
Average AUM(1)	$	17,440	$	3,549	$	2,572	$	976	$	24,537


	Corporate Private Equity		Infrastructure & Power		Special Opportunities		Energy Opportunities		Total Private Equity Group
Balance at 12/31/2017	$	18,557	$	4,423	$	1,550	$	—	$	24,530
Net new equity commitments	213		354		175		756		1,498
Net new debt commitments	—		—		100		—		100
Distributions	(844)		(982)		(74)		—		(1,900)
Change in fund value	(767)		47		(18)		(3)		(741)
Balance at 12/31/2018	$	17,159	$	3,842	$	1,733	$	753	$	23,487
Average AUM(1)	$	18,003	$	4,033	$	1,597	$	755	$	23,784

(1) Represents a five-point average of quarter-end balances for each period; except for energy opportunities for the 2017 to 2018 period, which represents the average calculated using AUM on the strategy's first fund's inception date and December 31, 2018.

Private Equity Group—Fee Paying AUM

The tables below present rollforwards of fee paying AUM for the Private Equity Group for the years ended December 31, 2019 and 2018 ($ in millions):


	Corporate Private Equity		Infrastructure & Power		Special Opportunities		Energy Opportunities		Total Private Equity Group
FPAUM Balance at 12/31/2018	$	11,716	$	3,472	$	1,201	$	682	$	17,071
Commitments	—		—		—		362		362
Subscriptions/deployment/increase in leverage	1,133		91		795		—		2,019
Redemptions/distributions/decrease in leverage	(1,153)		(211)		(203)		—		(1,567)
Change in fund value	3		—		—		—		3
Change in fee basis	(775)		—		(73)		—		(848)
FPAUM Balance at 12/31/2019	$	10,924	$	3,352	$	1,720	$	1,044	$	17,040
Average FPAUM(1)	$	11,385	$	3,416	$	1,440	$	867	$	17,108


	Corporate Private Equity		Infrastructure & Power		Special Opportunities		Energy Opportunities		Total Private Equity Group
FPAUM Balance at 12/31/2017	$	12,073	$	4,019	$	766	$	—	$	16,858
Commitments	13		354		—		682		1,049
Subscriptions/deployment/increase in leverage	149		38		709		—		896
Redemptions/distributions/decrease in leverage	(490)		(939)		(180)		—		(1,609)
Change in fund value	(6)		—		12		—		6
Change in fee basis	(23)		—		(106)		—		(129)
FPAUM Balance at 12/31/2018	$	11,716	$	3,472	$	1,201	$	682	$	17,071
Average FPAUM(1)	$	12,026	$	3,621	$	977	$	682	$	17,306

The components of our AUM for the Private Equity Group are presented below as of December 31, 2019 and 2018 ($ in millions):


AUM: $25,166						AUM: $23,487


			FPAUM						Non-fee paying						AUM not yet paying fees						General partner and affiliates

The charts below present FPAUM for the Private Equity Group by its fee basis as of December 31, 2019 and 2018 ($ in millions):


FPAUM: $17,040						FPAUM: $17,071


			Capital commitments						Invested capital

Private Equity Group—Fund Performance Metrics as of December 31, 2019

Our significant funds combined for approximately 90% of the Private Equity Group’s management fees for the year ended December 31, 2019. ACOF IV, U.S. Power Fund IV ("USPF IV") and Ares Special Situations Fund IV, L.P. ("SSF IV") are in harvest mode, meaning they are generally not seeking to deploy capital into new investment opportunities, while ACOF V, EIF V and AEOF are in deployment mode. ACOF III is no longer considered a significant fund as it stopped paying management fees in 2019.

The following table presents the performance data as of December 31, 2019 for our significant funds in the Private Equity Group, all of which are drawdown funds ($ in millions):


	Year of Inception	AUM	Original Capital Commitments	Cumulative Invested Capital	Realized Proceeds(1)	Unrealized Value(2)	Total Value	MoIC			IRR(%)		Primary Investment Strategy
Fund								Gross(3)	Net(4)	Gross(5)	Net(6)
USPF IV	2010	$1,356	$1,688	$2,121	$1,385	$1,332	$2,717	1.3x	1.2x	7.2	3.6	Infrastructure and Power
ACOF IV	2012	5,511	4,700	4,214	3,117	4,803	7,920	1.9x	1.6x	18.6	12.1	Corporate Private Equity
EIF V	2015	872	801	795	287	748	1,035	1.3x	1.2x	17.1	10.9	Infrastructure and Power
SSF IV(7)	2015	1,608	1,515	3,181	1,754	1,467	3,221	1.0x	1.0x	1.1	(0.9)	Special Opportunities
ACOF V	2017	8,524	7,850	5,672	303	6,508	6,811	1.2x	1.1x	14.6	8.1	Corporate Private Equity
AEOF	2018	1,254	1,120	733	9	913	922	1.3x	1.1x	NA	NA	Energy Opportunities

(1)Realized proceeds represent the sum of all cash dividends, interest income, other fees and cash proceeds from realizations of interests in portfolio investments. Realized proceeds exclude any proceeds related to bridge financings.

(2)Unrealized value represents the fair market value of remaining investments. Unrealized value does not take into account any bridge financings. There can be no assurance that unrealized investments will be realized at the valuations indicated.

(3)The gross MoIC is calculated at the investment-level and is based on the interests of all partners. The gross MoIC is before giving effect to management fees, carried interest and other expenses, as applicable. The gross MoIC for the corporate private equity funds is also calculated before giving effect to any bridge financings. Inclusive of bridge financings, gross MoIC would be 1.8x for ACOF IV and 1.2x for ACOF V.

(4)The net MoIC for the infrastructure and power and SSF IV is calculated at the fund-level. The net MoIC for the corporate private equity funds is calculated at the investment level. For all funds, the net MoIC is based on the interests of the fee-paying limited partners and if applicable, excludes interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or performance fees. The net MoIC is after giving effect to management fees, carried interest, as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. The net MoIC would have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.

(5)The gross IRR is an annualized since inception gross internal rate of return of cash flows to and from investments and the residual value of the investments at the end of the measurement period. Gross IRRs reflect returns to all partners. For SSF IV, cash flows used in the gross IRR calculation are based on the actual dates of the cash flows. For all other funds, cash flows are assumed to occur at month-end. The gross IRRs are calculated before giving effect to management fees, carried interest and other expenses, as applicable. The gross IRR for the corporate private equity funds is also calculated before giving effect to any bridge financings. Inclusive of bridge financings, the gross IRR would be 18.5% for ACOF IV and 14.2% for ACOF V.

(6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying limited partners and if applicable, exclude interests attributable to the non-fee paying limited partners and/or the general partner which does not pay management fees or carried interest. The cash flow dates used in the net IRR calculation are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees, carried interest as applicable, and other expenses and exclude commitments by the general partner and Schedule I investors who do not pay either management fees or carried interest. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would have generally been lower had such fund called capital from its limited partners instead of utilizing the credit facility.

(7)In January 2017, a new team assumed portfolio management of SSF IV. In addition to presenting the cumulative performance measure for SSF IV, we have also adopted a new performance measurement called “SSF IV 2.0”. SSF IV 2.0 is a subset of SSF IV positions and is intended to provide insight into the new team’s cumulative investment performance. SSF IV 2.0 investments represent (i) existing and re-underwritten positions by the new team on January 1, 2017 and (ii) all new investments made by the new team since January 1, 2017. As part of the re-underwriting process, each liquid investment in the SSF IV portfolio was evaluated and a determination was made whether to continue to hold such investment in the SSF IV portfolio or dispose of such investment. At the same time, legacy illiquid investments have been excluded from the SSF IV 2.0 track record as it was not possible to dispose of such investments in the near-term due to their private, illiquid nature. Since January 2017, SSF IV 2.0 has generated gross and net internal rates of return of 12.3% and 8.2% through December 31, 2019, respectively. The IRR is an annualized since inception internal rate of return of cash flows to and from investments and the residual value of the investments at the end of the measurement period. Cash flows used in the IRRs calculations are based on the actual dates of the cash flows. The gross IRRs are calculated before giving effect to management fees, carried interest and other expenses, as applicable. The net IRRs are calculated after giving effect to estimated management fees, carried interest, as applicable, and other expenses.

Real Estate Group—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Fee Related Earnings:

The following table presents the components of the Real Estate Group's FRE and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Management fees	$	87,063	$	73,663	$	13,400	18	%
Other fees	792		33		759		NM
Compensation and benefits	(49,124)		(38,623)		(10,501)		(27)
General, administrative and other expenses	(13,249)		(11,123)		(2,126)		(19)
Fee Related Earnings	$	25,482	$	23,950	1,532		6

NM - Not Meaningful

Management Fees. The chart below presents Real Estate Group management fees and effective management fee rates for the years ended December 31, 2019 and 2018 ($ in millions):

Ares European Real Estate Fund V SCSp (“EF V”), which launched in the first quarter of 2018, generated additional management fees of $20.3 million during the current year, of which $8.2 million was attributable to one-time catch up fees from additional capital commitments to the fund during the year ended December 31, 2019.

The increase in effective management fee rates between periods was primarily due to deployment of capital within the most recent vintages of our real estate equity funds. Our latest U.S. real estate equity funds pay a fixed fee on committed capital and that fee increases once that capital is invested. As a result, our effective fee rate temporarily decreases immediately following capital raising and increases as capital is subsequently deployed.

Compensation and Benefits. Compensation and benefits expenses increased by $10.5 million, or 27%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by the addition of new senior executives in 2019, by certain market based increases for senior executives and by a 4% increase in headcount during the current year.

General, Administrative and Other Expenses. General, administrative and other expenses increased by $2.1 million, or 19%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. General, administrative and other expenses was driven by higher placement fees of $1.9 million for the year ended December 31, 2019 in connection with the launch of Ares US Real Estate Fund IX, L.P. ("US IX"), EF V and other U.S. equity and debt real estate funds.

Realized Income:

The following table presents the components of the Real Estate Group's RI and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Fee Related Earnings	$	25,482	$	23,950	$	1,532	6	%
Performance income-realized	33,637		96,117		(62,480)		(65)
Performance related compensation-realized	(17,191)		(64,292)		47,101		73
Realized net performance income	16,446		31,825		(15,379)		(48)
Investment income-realized	8,020		11,409		(3,389)		(30)
Interest and other investment income-realized	5,633		2,257		3,376		150
Interest expense	(3,824)		(1,836)		(1,988)		(108)
Realized net investment income	9,829		11,830		(2,001)		(17)
Realized Income	$	51,757	$	67,605	(15,848)		(23)

Realized income for the periods presented was composed of FRE, as explained above, realized net performance income and realized net investment income for the respective periods.

Realized net performance income for the year ended December 31, 2019 was primarily attributable to sales of multiple properties held within various U.S. real estate equity funds and to tax distributions received primarily from US VIII and EF IV. Realized net performance income for the year ended December 31, 2018 was primarily attributable to gains on the sale of a large conference resort center in Colorado that was held in multiple funds and to tax distributions received from EF IV.

Realized net investment income for the year ended December 31, 2019 was primarily attributable to sales of multiple properties held within various U.S. real estate equity funds resulting in realized gains from our investments in these funds and to interest income from our investment in a U.S. real estate equity fund that was made in the fourth quarter of 2018. Realized net investment income for the year ended December 31, 2018 was primarily attributable to the aforementioned sale of the conference resort center in Colorado and sales of multiple properties held within US VIII and within various other U.S. real estate equity funds resulting in net realized gains from our investments in these funds.

Real Estate Group— Carried Interest and Incentive Fees

The following table presents the accrued carried interest and incentive fee receivables for the Real Estate Group ($ in thousands):


	As of December 31,
	2019		2018
US VIII	$	61,119	$	50,847
US IX	6,844		—
EF IV	70,440		65,166
Other real estate funds	67,707		57,236
Subtotal	206,110		173,249
Other fee generating funds(1)	7,268		12,197
Total Real Estate Group	$	213,378	$	185,446

(1)Relates to investment income from AREA Sponsor Holdings LLC that is reclassified for segment reporting to align with the character of the underlying income generated.

The change in accrued carried interest and incentive fee receivable from the prior year was primarily attributable to the following: (i) a $78.3 million increase in total unrealized carried interest allocation for the year ended December 31, 2019; (ii) offset by the realization of $33.6 million of carried interest allocation and incentive fees realized during the year ended December 31, 2019; (iii) $16.9 million of carried interest allocation realized in 2018 and not received until 2019; and (iii) foreign currency translation and other adjustments.

The following table presents the components of total change in unrealized incentive fees and carried interest allocation for the Real Estate Group for the years ended December 31, 2019 and 2018 ($ in thousands):


	Year Ended December 31, 2019										Year Ended December 31, 2018
	Realized		Unrealized, net		Total Change in Unrealized		Realized		Unrealized, net		Total Change in Unrealized
US VIII	$	6,500	$	10,273	$	16,773	$	—	$	17,907	$	17,907
US IX	—		6,844		6,844		—		—		—
EF IV	11,501		5,435		16,936		24,301		14,334		38,635
Other real estate funds	9,967		26,992		36,959		68,970		4,071		73,041
Subtotal	27,968		49,544		77,512		93,271		36,312		129,583
Other fee generating funds(1)	5,669		(4,929)		740		2,846		(2,640)		206
Total Real Estate Group	$	33,637	$	44,615	$	78,252	$	96,117	$	33,672	$	129,789

(1)Relates to investment income from AREA Sponsor Holdings LLC that is reclassified for segment reporting to align with the character of the underlying income generated.

Real Estate Group—Assets Under Management

The tables below present rollforwards of AUM for the Real Estate Group for the years ended December 31, 2019 and 2018 ($ in millions):


	Real Estate Equity - U.S.		Real Estate Equity - Europe		Real Estate Debt		Total Real Estate Group
Balance at 12/31/2018	$	4,163	$	3,711	$	3,466	$	11,340
Net new equity commitments	452		1,102		807		2,361
Net new debt commitments	—		—		633		633
Distributions	(1,147)		(408)		(134)		(1,689)
Change in fund value	325		183		54		562
Balance at 12/31/2019	$	3,793	$	4,588	$	4,826	$	13,207
Average AUM(1)	$	3,742	$	4,175	$	4,225	$	12,142


	Real Estate Equity - U.S.		Real Estate Equity - Europe		Real Estate Debt		Total Real Estate Group
Balance at 12/31/2017	$	4,578	$	2,704	$	2,947	$	10,229
Net new equity commitments	813		1,456		578		2,847
Net new debt commitments	—		—		75		75
Distributions	(1,608)		(428)		(173)		(2,209)
Change in fund value	380		(21)		39		398
Balance at 12/31/2018	$	4,163	$	3,711	$	3,466	$	11,340
Average AUM(1)	$	4,342	$	3,365	$	3,086	$	10,793

(1) Represents a five-point average of quarter-end balances for each period.

Real Estate Group—Fee Paying AUM

The tables below present rollforwards of fee paying AUM for the Real Estate Group for the years ended December 31, 2019 and 2018 ($ in millions):


	Real Estate Equity - U.S.		Real Estate Equity - Europe		Real Estate Debt		Total Real Estate Group
FPAUM Balance at 12/31/2018	$	2,739	$	3,269	$	944	$	6,952
Commitments	290		790		—		1,080
Subscriptions/deployment/increase in leverage	230		277		762		1,269
Redemptions/distributions/decrease in leverage	(401)		(248)		(218)		(867)
Change in fund value	(1)		(63)		48		(16)
Change in fee basis	(222)		(233)		—		(455)
FPAUM Balance at 12/31/2019	$	2,635	$	3,792	$	1,536	$	7,963
Average FPAUM(1)	$	2,593	$	3,565	$	1,195	$	7,353


	Real Estate Equity - U.S.		Real Estate Equity - Europe		Real Estate Debt		Total Real Estate Group
FPAUM Balance at 12/31/2017	$	3,062	$	2,064	$	1,063	$	6,189
Commitments	350		1,230		—		1,580
Subscriptions/deployment/increase in leverage	259		392		27		678
Redemptions/distributions/decrease in leverage	(797)		(151)		(186)		(1,134)
Change in fund value	4		(64)		40		(20)
Change in fee basis	(139)		(202)		—		(341)
FPAUM Balance at 12/31/2018	$	2,739	$	3,269	$	944	$	6,952
Average FPAUM(1)	$	2,915	$	2,822	$	1,001	$	6,738

(1) Represents a five-point average of quarter-end balances for each period.

The components of our AUM for the Real Estate Group are presented below as of December 31, 2019 and 2018 ($ in millions):


AUM: $13,207						AUM: $11,340


			FPAUM						AUM not yet paying fees						Non-fee paying						General partner and affiliates

The charts below present FPAUM for the Real Estate Group by its fee basis as of December 31, 2019 and 2018 ($ in millions):


FPAUM: $7,963						FPAUM: $6,952


			Capital commitments						Invested capital						Market value/other(1)

(1)Market value/other includes ACRE's fee paying AUM, which is based on ACRE’s stockholders’ equity.

Real Estate Group—Fund Performance Metrics as of December 31, 2019

Our significant funds in the Real Estate Group combined for approximately 60% of the Real Estate Group’s management fees for the year ended December 31, 2019. EF IV and EF V are commingled funds focused on real estate assets located in Europe, primarily in the United Kingdom, France and Germany. US IX is a commingled equity fund focused on real estate assets located in United States. EF IV is in harvest mode, meaning it is generally not seeking to deploy capital into new investment opportunities, while US IX and EF V are in deployment mode.

The following table presents the performance data as of December 31, 2019 for our significant funds in the Real Estate Group, all of which are drawdown funds ($ in millions):


	Year of Inception	AUM		Original Capital Commitments		Cumulative Invested Capital		Realized Proceeds(1)		Unrealized Value(2)		Total Value		MoIC			IRR(%)		Primary Investment Strategy
Fund														Gross(3)	Net(4)	Gross(5)	Net(6)
EF IV(7)	2014	$	918	$	1,302	$	1,143	$	1,007	$	816	$	1,823	1.6x	1.4x	19.1	13.8	European Real Estate Equity
US IX	2017	1,051		1,040		769		35		778		813		1.1x	1.1x	13.4	9.0	U.S. Real Estate Equity
EF V(8)	2018	1,954		1,968		397		42		398		440		1.1x	1.0x	NA	NA	European Real Estate Equity

(1)Realized proceeds include distributions of operating income, sales and financing proceeds received.

(2)Unrealized value represents the fair value of remaining investments. There can be no assurance that unrealized investments will be realized at the valuations indicated.

(3)The gross MoIC is calculated at the investment level and is based on the interests of all partners. The gross MoIC for all funds is before giving effect to management fees, carried interest and other expenses, as applicable.

(4)The net MoIC is calculated at the fund-level and is based on the interests of the fee-paying partners and, if applicable, excludes interests attributable to the non fee-paying partners and/or the general partner which does not pay management fees, carried interest or has such fees rebated outside of the fund. The net MoIC is after giving effect to management fees, carried interest as applicable and other expenses. Net fund-level MoICs would generally likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.

(6)The net IRR is an annualized since inception net internal rate of return of cash flows to and from the fund and the fund’s residual value at the end of the measurement period. Net IRRs reflect returns to the fee-paying partners and, if applicable, exclude interests attributable to the non fee-paying partners and/or the general partner which does not pay management fees or carried interest or has such fees rebated outside of the fund. The cash flow dates used in the net IRR calculation are based on the actual dates of the cash flows. The net IRRs are calculated after giving effect to management fees, carried interest as applicable, and other expenses. The funds may utilize a credit facility during the investment period and for general cash management purposes. Net fund-level IRRs would generally likely have been lower had such fund called capital from its limited partners instead of utilizing the credit facility.

(7)EF IV is made up of two parallel funds, one denominated in U.S. dollars and one denominated in Euros. The gross and net MoIC and gross and net IRRs presented in the table are for the Euro denominated parallel fund. The gross and net IRRs for the U.S. dollar denominated parallel fund are 18.8% and 13.8%, respectively. The gross and net MoIC for the U.S. dollar denominated parallel fund are 1.6x and 1.3x, respectively. Original capital commitments are converted to U.S. dollars at the prevailing exchange rate at the time of fund's closing. All other values for EF IV are for the combined fund and are converted to U.S. dollars at the prevailing quarter-end exchange rate.

(8)EF V is made up of two parallel funds, one denominated in U.S. dollars and one denominated in Euros. The gross MoIC presented in the table is for the Euro denominated parallel fund. The gross and net MoIC for the U.S. dollar denominated parallel fund are 1.1x and 1.0x, respectively. Original capital commitments are converted to U.S. dollars at the prevailing exchange rate at the time of fund's closing. All other values for EF V are for the combined fund and are converted to U.S. dollars at the prevailing quarter-end exchange rate.

Operations Management Group—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Fee Related Earnings:

The following table presents the components of the OMG's FRE and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Compensation and benefits	$	(139,162)	$	(124,812)	$	(14,350)	(11)	%
General, administrative and other expenses	(91,292)		(75,015)		(16,277)		(22)
Fee Related Earnings	$	(230,454)	$	(199,827)	(30,627)		(15)

Compensation and Benefits. Compensation and benefits expenses increased by $14.4 million, or 11%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by higher incentive compensation attributable to improved overall operating performance and by headcount growth during the current year. Headcount growth was principally due to the expansion of our business operations teams as we have launched a new office in India to internalize certain business functions during the second half of 2019. The full year impact of these hires is not reflected in the current year and will increase compensation expenses in future periods. This expense growth is expected to be offset by reduced professional services expenses reflected within general, administrative and other expenses.

General, Administrative and Other Expenses. General, administrative and other expenses increased by $16.3 million, or 22%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily driven by higher occupancy and overhead costs from a 9% headcount growth and by initiatives focused on improving the scalability and efficiency of our business support functions through automation and centralization of certain activities. During the fourth quarter of 2019, we also incurred $6.5 million of costs pertaining to an ongoing SEC matter relating to certain of our compliance policies and procedures. We have been cooperating with the SEC, and we believe this matter is nearing resolution and the majority of the related expenses have been incurred.

Realized Income:

The following table presents the components of the OMG's RI and the changes from the prior year ($ in thousands):


	Year Ended December 31,						Favorable (Unfavorable)

	2019		2018		$ Change		% Change
Fee Related Earnings	$	(230,454)	$	(199,827)	$	(30,627)	(15)	%
Investment income-realized	—		4,790		(4,790)		(100)
Interest and other investment income (loss)-realized	(160)		2,184		(2,344)		NM
Interest expense	(1,864)		(2,226)		362		16
Realized net investment income (loss)	(2,024)		4,748		(6,772)		NM
Realized Income	$	(232,478)	$	(195,079)	(37,399)		(19)

Realized income for the periods presented was composed of FRE, as explained above, and realized net investment income for the respective periods.

Realized net investment income decreased from $4.7 million for the year ended December 31, 2018 to realized net investment loss of $2.0 million for the year ended December 31, 2019. We recorded realized gains from the sale of our non–core energy investments in the prior year.

Liquidity and Capital Resources

Sources and Uses of Liquidity

Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash from operations, including management fees, which are collected monthly, quarterly or semi-annually, and net realized performance income, which is unpredictable as to amount and timing, (4) fund distributions related to our investments that are also unpredictable as to amount and timing and (5) net borrowing from the Credit Facility. As of December 31, 2019, our cash and cash equivalents were $138.4 million and we had $70.0 million of borrowings outstanding under our Credit Facility. Our ability to draw from the Credit Facility is subject to a leverage covenant and we remain in compliance with all covenants as of December 31, 2019. We believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the ordinary course of business for the foreseeable future.

We expect that our primary liquidity needs will continue to be to (1) provide capital to facilitate the growth of our existing investment management businesses, (2) fund our investment commitments, (3) provide capital to facilitate our expansion into businesses that are complementary to our existing investment management businesses as well as other strategic growth initiatives, (4) pay operating expenses, including cash compensation to our employees and payments under the tax receivable agreement (“TRA”), (5) fund capital expenditures, (6) service our debt, (7) pay income taxes and (8) make dividend payments to our Class A common stockholders and the Series A Preferred stockholders in accordance with our dividend policy.

In the normal course of business, we intend to pay dividends based on our expected fee related earnings. If cash flow from operations were insufficient to fund dividends over a sustained period of time, we expect that we would suspend or reduce paying such dividends. Unless quarterly dividends have been declared and paid (or declared and set apart for payment) on the Series A Preferred Stock, we may not declare or pay or set apart payment for dividends on any shares of our Class A common stock during the period. Dividends on Series A Preferred Stock are not cumulative and the Series A Preferred Stock is not convertible into our Class A common stock or any other security.

Stock offerings and repurchases are additional sources and uses of liquidity, respectively. For a discussion of transactions occurring in the current period, see Note 14, “Equity,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Net realized performance income also provides us with a source of liquidity. Performance income may be realized when a portfolio investment is profitably disposed of and the fund’s cumulative returns are in excess of the preferred return or hurdle rate or may be realized at the end of each fund’s measurement period when investment performance exceeds a stated benchmark or hurdle rate. For a summary of accrued carried interest and incentive fee receivables by segment, see “— Results of Operations by Segment.”

Our consolidated financial statements reflect the cash flows of our operating businesses as well as those of our Consolidated Funds. The assets of our Consolidated Funds, on a gross basis, are significantly larger than the assets of our operating businesses and therefore have a substantial effect on our reported cash flows. The primary cash flow activities of our Consolidated Funds include: (1) raising capital from third-party investors, which is reflected as non-controlling interests of our Consolidated Funds, (2) financing certain investments by issuing debt, (3) purchasing and selling investment securities, (4) generating cash through the realization of certain investments, (5) collecting interest and dividend income and (6) distributing cash to investors. Our Consolidated Funds are treated as investment companies for financial accounting purposes under GAAP; therefore, the character and classification of all Consolidated Fund transactions are presented as cash flows from operations. Liquidity available at our Consolidated Funds is typically not available for corporate liquidity needs, and debt of the Consolidated Funds is non–recourse to the Company except to the extent of the Company's investment in the fund.

Cash Flows

The table below summarizes our consolidated statements of cash flows by activity attributable to the Company and to our Consolidated Funds. Negative amounts represent a net outflow or use of cash ($ in thousands).


	Year Ended December 31,
	2019		2018
Net cash provided by the Company's operating activities	$	309,073	$	394,282
Net cash used in the Consolidated Funds' operating activities	(2,392,094)		(1,811,340)
Net cash used in operating activities	(2,083,021)		(1,417,058)
Net cash used in the Company's investing activities	(16,796)		(18,419)
Net cash used in the Company's financing activities	(260,366)		(379,988)
Net cash provided by the Consolidated Funds' financing activities	2,382,696		1,785,283
Net cash provided by financing activities	2,122,330		1,405,295
Effect of exchange rate changes	5,624		21,500
Net change in cash and cash equivalents	$	28,137	$	(8,682)

Operating Activities

Net cash flows used in operating activities was $2.1 billion for the year ended December 31, 2019 compared to $1.4 billion for the year ended December 31, 2018. Net cash flows provided by the Company's operating activities was $309.1 million for the year ended December 31, 2019 compared to $394.3 million for the year ended December 31, 2018. While net income of the Company increased by $201.5 million from the prior year, net proceeds from sale of investments decreased by $127.2 million largely attributable to the sale of $206.0 million of CLO securities in the prior year following the removal of U.S. risk retention requirements related to open market CLO managers.

Net cash used in the Consolidated Funds' operating activities was $2.4 billion for the year ended December 31, 2019 compared to $1.8 billion for the year ended December 31, 2018. Net cash used in the Consolidated Funds' operating activities was principally attributable to the investment purchases of recently launched funds during both periods that correlates with the change in cash provided by financing activities.

Our increasing working capital needs reflect the growth of our business, while the capital requirements needed to support fund-related activities vary based upon the specific investment activities being conducted during such period. The movements within our Consolidated Funds do not adversely impact our liquidity or earnings trends. We believe that our ability to generate cash from operations, as well as the capacity under the Credit Facility, provides us with the necessary liquidity to manage short-term fluctuations in working capital and to meet our short-term commitments.

Investing Activities

Net cash used in the Company's investing activities was principally composed of furniture, fixtures, equipment and leasehold improvements purchased during both periods to support the growth in our staffing levels and our expanding global presence.

Financing Activities

Net cash used in the Company's financing activities was $260.4 million for the year ended December 31, 2019 compared to $380.0 million for the year ended December 31, 2018. Net cash used in the Company's financing activities for the year ended December 31, 2019 was principally composed of $345.4 million of distributions to AOG unitholders and dividends to our Class A common stockholders and Series A Preferred stockholders, $165.0 million of net repayments on the Company's Credit Facility and $10.4 million of stock repurchases, offset by $206.7 million of net proceeds from our Class A common stock offering and $90.5 million of net cash proceeds from exercises of stock options granted to certain of our employees.

Net cash used in the Company's financing activities for the year ended December 31, 2018 was principally composed of $334.3 million of distributions to AOG unitholders, common and preferred shareholders and $137.0 million of net repayments on the Company's debt facilities, offset by $105.3 million of net proceeds from our common share offering. The increase in distributions and dividends was primarily due to the increase in Class A common stock outstanding during 2019, as a result of our common share offering and by stock option exercises and vesting of restricted stock awards during the year.

Net cash provided by Consolidated Funds' financing activities was $2.4 billion for the year ended December 31, 2019 compared to $1.8 billion for the year ended December 31, 2018. Net cash provided by Consolidated Funds' financing activities

was principally attributable to borrowings of newly launched funds for both periods. Net borrowings of our Consolidated Funds was $2.3 billion for the year ended December 31, 2019 compared to net borrowings of $1.9 billion for the year ended December 31, 2018. Net contributions to our Consolidated Funds were $76.6 million and $88.7 million for the year ended December 31, 2019 and 2018, respectively.

Capital Resources

We intend to use a portion of our available liquidity to pay cash dividends to our Series A Preferred stockholders and our Class A common stockholders on a quarterly basis in accordance with our dividend policies. Our ability to make cash dividends to the Series A Preferred stockholders and our Class A common stockholders is dependent on a myriad of factors, including among others: general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; timing of capital calls by our funds in support of our commitments; our financial condition and operating results; working capital requirements and other anticipated cash needs; contractual restrictions and obligations; legal, tax and regulatory restrictions; restrictions on the payment of distributions by our subsidiaries to us and other relevant factors.

We are required to maintain minimum net capital balances for regulatory purposes for our United Kingdom subsidiaries, our Luxembourg subsidiary and our broker-dealer subsidiary. These net capital requirements are met in part by retaining cash, cash equivalents and investment securities. As a result, we may be restricted in our ability to transfer cash between different operating entities and jurisdictions. As of December 31, 2019, we were required to maintain approximately $32.3 million in liquid net assets within these subsidiaries to meet regulatory net capital and capital adequacy requirements. We remain in compliance with all regulatory requirements.

Holders of AOG Units, subject to the terms of the exchange agreement, may exchange their AOG Units for shares of our Class A common stock on a one-for-one basis. These exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Ares Management Corporation that otherwise would not have been available. These increases in tax basis may increase depreciation and amortization for U.S. federal income tax purposes and thereby reduce the amount of tax that we would otherwise be required to pay in the future. We entered into the TRA with the TRA recipients that provides payment to the TRA recipients of 85% of the amount of actual cash savings, if any, in U.S. federal, state, local and foreign income tax or franchise tax that we actually realize as a result of these increases in tax basis and of certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA and interest accrued thereon. Future payments under the TRA in respect of subsequent exchanges are expected to be substantial. As of December 31, 2019, the TRA liability balance was $26.5 million. In 2018, there were exchanges of approximately 13.1 million of AOG Units for shares of our Class A common stock. In connection with these conversions, we recognized deferred tax benefits of $25.2 million, which increased additional paid in capital by $3.8 million and our TRA liability by $21.4 million. An immaterial number of AOG Units were exchanged prior to 2018 and during the year ended December 31, 2019.

For a discussion of our debt obligations, including the debt obligations of our consolidated funds, see Note 7, “Debt,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Series A Preferred Stock

For a discussion of our equity, including our Series A Preferred Stock, see Note 14, “Equity,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change the underlying assumptions, estimates or judgments. See “—Components of Consolidated Results of Operations” and Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in this Annual Report on Form 10-K for a summary of our significant accounting estimates.

Principles of Consolidation

We consolidate entities based on either a variable interest model or voting interest model. As such, for entities that are determined to be variable interest entities (“VIEs”), we consolidate those entities where we have both significant economics and the power to direct the activities of the entity that impact economic performance. For limited partnerships and similar entities evaluated under the voting interest model, we do not consolidate those entities for which we act as the general partner unless we hold a majority voting interest.

The consolidation guidance requires qualitative and quantitative analysis to determine whether our involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related income), would give us a controlling financial interest. 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 and (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 hence would be deemed the primary beneficiary.

The creditors of the consolidated VIEs do not have recourse to us other than to the assets of the consolidated VIEs. The assets and liabilities of the consolidated VIEs are comprised primarily of investments and loans payable, respectively.

Fair Value Measurement

GAAP establishes a hierarchal disclosure framework prioritizing 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 where 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 multiple levels 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. Our assessment of the significance of an input requires judgment and considers factors specific to the instrument. See Note 5, “Fair Value,” to our consolidated financial statements included in this Annual Report on Form 10-K for a summary of our valuation of investments and other financial instruments by fair value hierarchy levels.

Equity-Based Compensation

We granted certain restricted units with a vesting condition based upon the volume-weighted, average closing price of shares of our Class A common stock meeting or exceeding a stated price for 30 consecutive calendar days on or prior to January 1, 2028, referred to as the market condition. Vesting is also generally subject to continued employment at the time such market condition is achieved. Under the terms of the awards, if the price target is not achieved by the close of business on January 1, 2028, the unvested market condition awards will be automatically canceled and forfeited, with any expense that was previously recognized reversed.

The grant date fair values are based on a probability distributed Monte-Carlo simulation. Due to the existence of the market condition, the vesting period for the awards is not explicit, and as such, compensation expense is recognized on a straight-line basis over the median vesting period derived from the positive iterations of the Monte Carlo simulations where the market condition was achieved.

Below is a summary of the significant assumptions used to estimate the grant date fair value of market condition awards:


Closing price of the Company's common shares as of valuation date						$20.95
Risk-free interest rate						2.95%
Volatility						30.0%
Dividend yield						5.0%
Cost of equity						10.0%

Income Taxes

Effective March 1, 2018, the Company is taxed as corporation for U.S. federal and state income tax purposes. Prior to the Tax Election, the Company’s share of carried interest and investment income flowed through to investors without being subject to income taxes at the entity level. Consequently, we did not reflect a provision for income taxes on such income except those for foreign, state and local income taxes incurred at the entity level.

We use the liability method of accounting for deferred income taxes pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the statutory tax rates expected to be applied in the periods in which those temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. A valuation allowance is recorded on our net deferred tax assets when it is more likely than not that such assets will not be realized. When evaluating the realizability of our deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies and expectations of future earnings.

Under GAAP, the amount of tax benefit to be recognized is the amount of benefit that is more likely than not to be sustained upon examination. We analyze our tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where we are required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, we determine that uncertainties in tax positions exist, a liability is established. We recognize accrued interest and penalties related to unrecognized tax positions in interest expense and general, administrative and other expenses, respectively, in the Consolidated Statements of Operations.

Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating

uncertainties under GAAP. We review our tax positions quarterly and adjust our tax balances as new legislation is passed or new information becomes available.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements and their impact on the Company can be found in Note 2, “Summary of Significant Accounting Policies,” in the “Notes to the Consolidated Financial Statements” included in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

In the normal course of business, we engage in off-balance sheet arrangements, including transactions in derivatives, guarantees, commitments, indemnifications and potential contingent repayment obligations. See Note 9, “Commitments and Contingencies,” to our consolidated financial statements included in this Annual Report on Form 10-K.

Contractual Obligations, Commitments and Contingencies

The following table sets forth information relating to our contractual obligations of the Company and of the Consolidated Funds as of December 31, 2019 ($ in thousands):


	Less than 1 year		1 - 3 years		4 - 5 years		Thereafter		Total
The Company:
Operating lease obligations(1)	$	30,935	$	62,440	$	53,512	$	55,529	$	202,416
Debt obligations payable(2)	—		—		246,609		—		246,609
Capital lease obligations	549		1,017		274		—		1,840
Interest obligations on debt(3)	16,094		32,188		27,430		—		75,712
Credit Facility(4)	—		—		70,000		—		70,000
Capital commitments(5)	387,434		—		—		—		387,434
Subtotal	435,012		95,645		397,825		55,529		984,011
Consolidated Funds:

Debt obligations payable	71,500		1,194		17,550		8,311,127		8,401,371
Interest obligations on debt(3)	229,917		683,396		455,022		1,095,460		2,463,795
Capital commitments of Consolidated Funds(5)	13,201		—		—		—		13,201
Total	$	749,630	$	780,235	$	870,397	$	9,462,116	$	11,862,378

(1)The table includes future minimum commitments for our operating leases. Office space, computer and communication equipment are leased under agreements with expirations ranging from one-year contracts to lease commitments through 2030. Rent expense includes only base contractual rent. These amounts include total rent payments of $10.5 million under the terms of an operating lease that did not commence as of December 31, 2019.

(2)Debt obligations include $250 million of senior notes, net of unamortized discount.

(3)Interest obligations reflect future interest payments on outstanding debt obligations with stated interest rates.

(4)Represents outstanding balance under the Credit Facility as of December 31, 2019 and maturity date of March 21, 2024.

(5)Represents commitments to fund certain investments. These amounts are generally due on demand and are therefore presented as obligations payable in the less than one-year.

We entered into a TRA with the TRA Recipients that requires us to pay them 85% of any tax savings realized by Ares Management Corporation from any step-up in tax basis resulting from an exchange of Ares Operating Group Units for shares of our Class A common stock or, at our option, for cash. Because the timing of amounts to be paid under the tax receivable agreement cannot be determined, this contractual commitment has not been presented in the table above. The tax savings achieved may not ensure that we have sufficient cash available to pay this liability, and we may be required to incur additional debt to satisfy this liability.

For further discussion of our capital commitments, indemnification arrangements and contingent obligations, see Note 9, “Commitments and Contingencies,” to our audited consolidated financial statements included in this Annual Report on Form 10-K.

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