The election of a left-of-centre party in a province historically run by its political antithesis does not bode well for deal making in Alberta in the short term, but the jury is out on whether there will be any long-term damage.
"The NDP, which has won a clear mandate for change in Alberta has suggested they're going to increase taxes, whether it's through income taxes or royalty changes," said Andrew McCreath, CEO of Forge First Asset Management Inc., a Toronto-based hedge fund company.
So the cost of doing business in Alberta is likely going up for energy companies and that will reduce the potential return on investment for those planning on making an acquisition and in turn will dampen enthusiasm for mergers and acquisitions (M&A), Mr. McCreath argued. But perhaps even worse than that is the uncertainty that will linger until the NDP tables its provincial budget.
"You're just not going to make that big business decision until you know what the rules are. So absolutely this will freeze M&A activity in the short term in the province of Alberta and it will cause energy companies to reallocate their capital to other projects globally and other provinces within Canada such as Saskatchewan," Mr. McCreath added.
Stephen Griggs, chief executive of Toronto-based activist investment company Smoothwater Capital Corp., has a significant amount of investments in Calgary. Smoothwater is the largest shareholder in Genesis Land Development Corp., the biggest land developer and home builder in the city. He doesn't think deal making will dry up in a big way in Alberta.
"I suspect there'll be some short-term hesitation on the part of buyers, until there's a better sense of clarity around what the government is intending to do. But I would not expect it to be very long," he said.
"I don't think anybody is expecting the new NDP government to do anything radical. It certainly wasn't their platform."
The Canadian private equity (PE) industry is heavily reliant on wheeling and dealing in the energy sector. Energy accounted for 44 per cent of PE investment in the first quarter according to data released Wednesday by the Canadian Venture Capital and Private Equity Association (CVCA). On a provincial basis, Alberta was the top dog, gobbling up $1.9-billion of the $5.4-billion invested.
"It's too early to say what the impact will be specifically without seeing the policies and timelines fleshed out a bit more," said Mike Woollatt, the association's CEO, when asked how the election of the NDP will affect the future of private equity investment in Alberta.
"I think there'll be a pause [in deal making] while people digest what's going to happen," said Shawn Denstedt, a Calgary-based lawyer with Osler Hoskin & Harcourt LLP, who advises companies in the energy sector. He predicts the pause will be short-lived and that economic reality in Alberta will trump political ideology for the NDP, resulting in a budget being tabled that is unlikely to be overly punitive for the energy sector.
"Once the budget's in place, then we're off to the races again … and I think there will be an uptick in deal making."