Lawyers are heartless. And Alberta lawyers — well, let’s just say that when they watch The Wizard of Oz they don’t understand the Tin Man’s problem at all. The second the federal government started hammering nails into the coffin of the income trust sector, they were figuring out how to make money at the funeral. And really, it was a no brainer.

Step one: Invite the private equity boys to the party. Er, funeral. Er, city.

“There are five or seven big and active private equity funds who have invested in energy historically,” says Robert Lehodey, a partner with the Calgary office of Osler Hoskin & Harcourt. “They are all in Calgary meeting with people.”

“Pretty much all of them are active right now, they are looking at stuff, and they are all the ones you’d expect,” echoes Jeff Lawson, a partner with Burnet Duckworth & Palmer.

Not that they’re strangers to Cowtown to begin with. New York’s Carlyle/ Riverstone made headlines last year with its US$1.2- billion purchase of En Cana’s Niska Gas Storage assets, and then taking a stake in Alberta’s first biofuel plant. Meg Energy Corp. raised about $2-billion in the past 36 months primarily from quiet private equity money, including global investor Warburg Pincus.

Many U.S. funds have had stakes in Canadian energy assets, projects or companies for years. Among them are First Reserve, the self-avowed largest private-equity investor in the energy sector; Lime Rock Partners, which has stakes in Canadian oilsands, E&P companies and Calgary companies exploring internationally; Houston’s En- Cap Investments, which has a reputation for backing seasoned management teams; Kayne Anderson Capital Advisors, which just closed its fourth energy private equity fund with total commitments of US$950-million; and Natural Gas Partners, which has eight private equity funds that invest in oil and gas production, midstream and oil field service companies. Houston’s SCF Partners has been investing in the Canadian energy service sector for 17 years. There’s Canadian money, too, of course — ARC Financial Group being the most-established player throughout the energy sector.

And that was all before the Nightmare on Halloween.

Now, the private equity funds are suddenly looking at lower prices and the possibility of distressed companies, which is bringing New York-based private equity funds to the table. Distress turns them on. (We love ’em and their money, really, but the private equity funds — especially the New York-outbound ones — do make your average Calgary lawyer look like a cuddly teddy bear.)

“There are a lot of people looking at the town who would be quite happy to see a distressed market,” says Chip Johnston, a partner with Bennett Jones in Calgary. “Energy assets can be bought for profit at different points of the cycle, and these players know that. Globally, capital has become much more specialized and intelligent, and the plays we will see for energy assets reflect that. These people have a very long term outlook.” And due diligence and risk analysis strategies that chill the soul.

“They are selective,” says Mr. Lehodey. “They have a two or three month due-diligence process. They are very, very thorough. They have to be satisfied with the time horizon, the risk appetite, and how the business plan will be implemented. Giving money to a group of guys in conventional E&P business hasn’t been typically high on their list of things to do.”

Those factors mitigated against significant investment in the patch in the past. Local private equity money has been happy to fill the gap, but even the most successful of these don’t aspire to the league of the top New York players. Commodities are volatile and subject to forces not even the most sophisticated private equity funds can predict or control.

Plus — they just weren’t needed. As Bennett Jones’ Darrell Peterson puts it, “Historically, oil and gas has been self-funded, a perpetual money machine.”

None of that has changed (well, maybe a little — it will be a while before the oilsands become a self-funded money machine). But the private equity funds have changed — or rather, they have grown so lush with cash, they’ve had to move out of their former comfort zones.

“The reality is, there is so much money in the private world that has been attracted and dedicated to traditional industries with predictable income streams that people have been forced to look elsewhere,” says John Mercury, a member of Bennett Jones’ private equity and mergers and acquisitions group — another sign of the times. Who in the patch had a private equity group a year ago? Then there’s the recent Calgary arrival from the New York office of Paul Weiss.

“Funds that weren’t energy focused are working on understanding the volatility of the energy markets and how to price it. Everyone is now familiar with hedge fund strategies, which tend to be quite short-term. They are applying knowledge gained in that part of the world to gain some comfort on how to price some of these emerging deals.”

Of course, the money from the mega-funds won’t be going to unproven junior E&P companies. Mr. Lehodey predicts a focus on “proven management teams,” overseeing and repackaging the former trust assets, and even more investment in the patch’s big, expensive and long-term projects, “like the oilsands, coal bed methane, fractured shale, things that have more differential than a conventional E&P company.”

But here’s the real question: How is their appetite for energy assets going to affect the legal landscape in Calgary?

“We are actively engaged in maintaining and significantly expanding our relationships with private equity investors in the energy space, we are actively engaged in introducing those we know to opportunities here, and we are actively introducing clients who have opportunities to private equity,” says Mr. Lehodey.

That’s lawyer talk for: “This is a development that will shake up the market way more than the rise of income trusts ever did.”

So are income trust and securities lawyers busy repainting themselves in private equity stripes?

“All the securities law firms and lawyers are thinking of the growing interest of major private equity funds in energy as an event,” says Mr. Lowry.

Some are a little anxious. The income- trust market fed lawyers with a very steady stream of work. Never mind trust conversion or creation. Junior companies were created with a view to selling to the trusts as soon as they drilled a few holes. Trusts had a voracious appetite: They had to pursue expansion to maintain distributions. They’d raise money, do an acquisition. Raise money, do another acquisition. Get acquired.

“There was a constant and steady flow of that work,” says Mr. Lowry. “The effect of a more permanent shift to private equity and quieter money may be a damper on that flow of work. Particularly for the people who have been positioned on the issuer side for the last 10 years, they may find themselves doing one-off transactions. Help take a company private, and then you’re done.”

“It’s a new world,” says Mr. Lehodey. With new worries. Like Mr. Lehodey, Mr. Johnston predicts a flurry of private equity deals in the months to come, including in the more “traditional areas” and “higher risk assets.” Then, perhaps a lull.

The temptation to throw a heavy object at the head of yet another Albertan telling you “it’s a cyclical thing” can be overpowering at times. But just because it’s cliche doesn’t mean it ain’t true.

“This is Calgary, something else will come up. That’s the beauty of this market,” says Mr. Lowry. It’s a cyclical thing.

Ouch. [You really did not have to throw that.]

(Copyright National Post 2007)