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.”
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