No gold rush for Cuba despite diplomatic thaw
No gold rush for Cuba despite diplomatic thaw
Big hurdles to U.S. institutional investing keep it “years away’
BY RICK BAERT | JANUARY 12, 2015
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
“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
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
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
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.
Lots of inquiries
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.
“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
This article originally appeared in the January 12, 2015 print issue as,
“No gold rush for Cuba despite diplomatic thaw”.
— Contact Rick Baert at | @Baert_PI
Source: No gold rush for Cuba despite diplomatic thaw – Pensions &