Investing & Cuba: Let's talk business.
The media has thrown a party over the recent presidential visit to Cuba. Baseball, food, music, [dirty] dancing – all in the romanticized “land stuck in time” just 222 miles south of Florida. If you paid close attention, you’d know that Mr. President took various CEOs with him. So, putting the party on hold for a minute – let’s talk business.
The media is hyping up these American companies bursting at the seams to funnel their money into Cuba to open a factory, tap into the tourism industry or “purchase” some favorable real estate and hedge their bets on its future appreciation. The media preaches that those who get into the party early will walk away with the most. But is that really the case? Getting in on the party early can pay some serious dividends, but taking all factors into consideration, it could also swallow your investment whole.
Having just returned from Cuba myself, and having studied and experienced firsthand the Cuban investment, tax and property laws at the University of Havana Law School, there are some considerations to make before heading south to pioneer a cigar-rolling factory.
Alternative to Foreign Direct Investment (FDI) – Securitized Investment.
Does the risk really outweigh the reward to the point that you need to prepare to invest directly in Cuba now? Not exactly. If you want to bet on a favorable US-Cuba outcome, invest in the Herzfeld Caribbean Basin Fund, trading on NASDAQ under the ticker CUBA. The fund invests in companies that could benefit from ameliorating US-Cuba relations, and has appreciated since its inception. It is legal to invest in this fund since the majority of profits don’t derive directly from business with Cuba. However, it is a closed-end fund, so there are a limited number of shares trading – keep that in mind.
In the Cuba scenario, I advocate for what I like to call the “Recovered Fumble”. Allowing the biggest US companies who don’t have much to lose (should an investment there go wrong), provides great data for the risk-takers with less resources. Let the big companies test the waters with their excess capital and see if they fumble. The smaller guys can recover and score if they do.
The risks to invest in Cuba are real. Just recently, new laws in Cuba have allowed for totally foreign ownership of a venture, meaning you don’t have to partner up with the government to do business there anymore. Tax laws have relaxed tax rates to nearly half of what they were before in order to attract more FDI. However, Corporate executives have been jailed over loose accusations and their “property” was seized. Navigating and circumventing US and Cuban law adds 2 extra layers of risk to any investment there. Many Cubans are weary of the American imperialist reputation. Naturally, they are concerned America wants to exploit Cuba for a profit. This means American investors should be worried, too.
Some good news is that the International Court of Commercial Arbitration, which I spent a day at, votes in favor of investors about 70% of the time. This isn’t enough of a reason to invest there, but shows some signs of investment security for those who will.
You will hear the media and Cubans say that Cuba needs to change “at its own pace”. Well, Cuba desperately needs capital, and that is a fact. It better speed that pace up. Lacking capital does not give Cuba leverage. Americans want to provide this capital for a high rate of return, given the risks involved, but need to see the Cuban government “put its money where its mouth is” and respect the new investment and tax laws. Once investors can see proof of that, they will want to invest.
Let big corporate take the first plunge. Collect data from their investment experience in Cuba for the first 10-12 quarters, and reassess investment risk. Then spend money on legal advice to navigate the waters of international investment law, and determine if Cuba is the proper place to invest your money. By then, the embargo may even be lifted. There will be enough of the “pie” left at that point for everybody willing to take a bite out of it.
Contact me to discuss further. I’d love to hear your thoughts. I maintain my relationships with the Cuban lawyers I met during my visit, so I can get you their thoughts, too. What I can’t get you is their recipe on fried garbanzo beans. I’m keeping that my own little secret.
DISCLAIMER: This article does not purport to give any investment advice.