But The Facade Looks So Great!
I recently received a comment on one of my episodes regarding Visual Edge IT, a financially non-performing investment within the Ares Capital portfolio.
The commenter suggested I was making things up! Because things look great from the outside, the commenter wondered how they could be so bad. The answer is simple: what one sees on the outside can easily be a façade.
It seems the more upsetting to the status quo, the more one can be fooled by a façade.
Over the last four decades, the print industry has seen its share of facade creators. These people are incapable of addressing reality or insecure about repercussions if they do. Insecure people find it much more pleasant to cover up things. However, creating a whitewashed façade and planting flowers in front of a poorly constructed building will not fix the building's structural problems.
When considering the façade of any business, I suggest also considering the structural condition to which the whitewashed façade is attached.
Investments held by BDC lenders can be financially non-performing for what seems like an eternity. When one digs into Ares Capital's 10Qs and 10Ks as these documents relate to Visual Edge IT, one will discover that Visual Edged IT has been financially non-performing since 2020.
I believe that Ares Capital currently has a deconstruction mindset and is contemplating an exit strategy. BDC lenders are not too easily fooled and don't continue with bad investments just because they like the people within the companies they invest in. Investors invest for ROI and, when necessary, tell friends that the time is up.
It seems Ares Capital invested in Visual Edge IT when things were much different. The bet on a significant ROI was apparently based on a strategy that is not proving financially successful. What new strategy is being bet on today? It now seems that second or third-guessing is in play.
We see that Ares Capital took that massive 48 Million Loss against Visual Edge IT in their 3rd quarter of 2023. That loss was against a senior subordinate loan, and the remaining balance after the loss write-off was converted to a preferred position. Those actions are not a sign that things are good at all. Remember that the senior subordinate loan was in nonaccrual for over a year before Ares Capital restructured the debt.
The story unfolding regarding Visual Edge IT and its BDC Lender, Ares Capital, highlights many things our industry should pay attention to. I have been a prominent critic of managed IT services delivered through the print services industry. The reasons I am critical are highlighted when I listen to Visual Edged IT's CEO explain how he envisions delivering IT services to reinvent his print services company.
Visual Edge IT or any other roll-up in the industry must be more vigilant than ever regarding its diversification strategies. The investors behind these businesses are awakening to the performance realities. In my thinking, hope can no longer be a strategy. Other than continuous hope, what strategy does Ares Capital visualize as they continue putting good money after bad in their non-performing investments regarding Visual Edge IT?
Visual Edge IT is not successful based on its façade. The success of all organizations is based on a solid financial structure behind the whitewash or facade. When the structure is ignored for too long, deconstruction usually follows.
So, no, I am not making things up about Visual Edge IT. I am reading the Ares Capital 10K and 10Q, clearly showing the cracks in Visual Edged IT's financial structure behind the facade.
Now is the time for our industry to look through all its facades of flowers and whitewash and assess the value of the structures behind the facades.
Status Quo is the killer of all that will be invented.
Ray Stasieczko
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