No gold rush for Cuba despite diplomatic thaw

A slight thaw in U.S.-Cuba relations has some observers thinking that down the road, U.S. asset owner interest in the Caribbean nation could heat up.

“Every now and then I get a call from someone in private equity or infrastructure asking when we can invest in Cuba,” said Julia E. Sweig, Nelson and David Rockefeller senior fellow for Latin America Studies and director for Latin America studies at the Council on Foreign Relations, a Washington-based think tank. “But regulations regarding that aren't out yet.”

Institutional investment in Cuba “could be years away,” said Greg Behar, senior vice president, director of global equity investment strategy at Northern Trust Asset Management, Chicago. “It'd be in the bullpen for frontier markets.”

What sparked interest in Cuba, 53 years after the U.S. broke off diplomatic relations, was the Dec. 17 announcement by President Barack Obama and Cuban President Raul Castro that they would begin a process to normalize relations between the two countries. Along with establishing a U.S. embassy in Havana, the agreement would lift some U.S. travel restrictions and give U.S. banks access to the Cuban financial system. However, the agreement does not end the 52-year U.S. embargo against trade with Cuba, nor does it change Cuba's designation as a state sponsor of terrorism, made by the U.S. State Department in 1982.

It's the embargo — which would require an act of Congress to remove — and the terrorism sponsorship designation that has U.S. institutional investors silent on Cuba as a potential investment destination. Sources at money managers, asset owners and investment consultants contacted for this story would not comment on the potential for future investment in Cuba.

Given the half-century of animosity between the U.S. and Cuba, there would “definitely” be political risk in institutional investment in Cuba, said Brenden Woods, partner and co-head of infrastructure and real assets at alternative investment consultant StepStone Group, San Diego. “But I wouldn't necessarily say it's higher than any other emerging market. You may see adoption of developed-market investment structures like public/private partnerships, but implementation of those structures may require some observation before commitment. It'd definitely be a material consideration. It'll probably be a little bit of who jumps first, then you'll see a little follow-the-leader.”

Officials at two public pension funds that have small allocations to frontier markets said, on condition of anonymity, that it's too soon to say whether they would allow their external managers to invest in Cuba. But one of the executives said there could eventually be opportunities for private equity investments there.

The ban even has an effect on investors in countries which have no ban on Cuba because of the financial weight the U.S. holds. “Of course, no one will talk about it,” said Sebastiaan Berger, the Hague, Netherlands-based CEO of CEIBA Investments Ltd. CEIBA is a real estate investment manager focusing on development of Cuban commercial and hotel real estate. “That wall will crumble. There already have been pension funds elsewhere investing in Cuba, but everyone's secretive about it because of the ridiculous regulations that are in place.”

The terrorism-sponsorship designation “is now under formal review as part of a review of U.S.-Cuban relations,” said Philip Peters, president, Cuba Research Center, Alexandria, Va., a think tank focusing on Cuban-American relations. “Because of this designation, the movement of money to and from Cuba is monitored by the U.S. Treasury, making investment by anyone, foreign or U.S., very difficult. Few banks want to deal with them. That would all go away once the designation was removed, making Cuba a lot more attractive for investment.”

Northern Trust's Mr. Behar said Cuba would also need to shore up its economic and financial infrastructure, including the creation of a stock exchange, and would need to be open to all foreign investment before being included in indexes and portfolios of frontier markets strategies.

Mr. Peters and others said Cuba would provide fertile ground as a frontier market in need of huge amounts of foreign investment, with sectors running the gamut from real estate and infrastructure to commodities and energy.

Potential opportunities in Cuba are “almost everywhere, because Cuba needs everything,” said Ms. Sweig.

Mr. Berger said some sectors prime for investment in Cuba, in addition to tourism, are air, ground and sea transportation of any kind; oil and gas exploration; nickel mining; cement production; “almost anything you can think of” in industrial and service sectors; and a wide array of construction and infrastructure needs.

“All of these are areas for growth,” Ms. Sweig said, but she cautioned: “Just because the Obama administration changed its policy doesn't mean that Cuba will change its policies top to bottom. Cuba has foreign investment guidelines and national priorities ... this doesn't mean Cuba will be open for business tomorrow.”

Currently, foreign investment in Cuba is done under a 2014 Cuban law allowing joint ventures with the Cuban government directly or with one of the country's state-run businesses. Investments are directed to portfolio projects chosen by the Cuban government, with most steered to sectors that generate hard currency. Cuba has two currencies, a non-convertible peso and a peso that can be converted, but only in Cuba. “Some foreign investors who've been there a long time have gotten returns,” Mr. Peters said. “The question is what would have to happen to get the returns. In basic finance, the math works out, but will the returns come in a currency that can't be converted in foreign exchange?” Mr. Castro has called for a unified currency, “and if it's fully convertible on the world market, this problem goes away,” he said.

Ms. Sweig said the Cuban government normally holds at least 51% of a joint venture, “but supposedly they've become more flexible with that ownership share.”

One potential target for private equity investment is entrepreneurial cooperative businesses in Cuba that operate independent of the government.

“Individually operated and small-sized businesses have seen big growth” since a 2010 law that liberalized rules for opening private businesses, said Mr. Peters. That law helped increase the number of Cubans operating private businesses to 500,000 today from 150,000 in 2010. “Those people are receiving investment on the family level with seed capital to start small businesses like restaurants, car repair shops and tailors,” he said.

Since Mr. Obama announced resumption of diplomatic relations with Cuba, CEIBA has received a lot more inquiries from potential investors, said Mr. Berger. He expects CEIBA will benefit from its longtime expertise in Cuba, but he also acknowledged CEIBA is a relatively small manager and there'll be plenty of room for other money managers. CEIBA manages $110 million in assets, including “a small amount” from European pension funds he would not identify.

Cuba might be seen as following the same path as communist-led nations China and Vietnam in moving to a more open economic market, but Mr. Peters warned that Cuban officials won't admit to that.

“Cuban officials have been in touch with the Vietnamese and Chinese. They've seen up-close how China and Vietnam have evolved in terms of private capital and investment,” Mr. Peters said. “No Cuban will say that they're following a blueprint from anyone, but I'm sure they've learned a lot from watching them.” n