One of my favourite aspects of working in the offshore environment is that we get to speak to fund managers based all over the world about the latest hot and trendy investment opportunities. Over the last few years we have dealt with enquiries about bitcoin, crowd-funding, acquiring a portfolio of oil tankers and real estate opportunities in Puerto Rico to name but a few of the more intriguing conversations. It constantly keeps the team on our (permanently parked under the desk) toes and there is no doubt that recently we have been part of a very regular trickle of Cuba based conversations and how to maximise the gradual opening of the borders.

When Raul Castro took over from his brother as President of Cuba in 2008, he began a long-anticipated process of political and economic reform. As a result of his strategy, the stagnant economy has been gradually coming to life, galvanised by a fledgling private sector. Diplomatic advances have been made, animosities are thawing and, slowly but surely, relations with overseas nations are being restored. With this sea change comes the possibility of direct foreign investment, a prospect historically laden with regulatory obstacles and risks – from both sides.

It is easy to see why there is excitement surrounding Cuba’s development. The tourism industry is set to explode and the relaxation in travel restrictions for Americans opens a previously-untapped market of over 300 million potential visitors. Such a vast influx of people will require utilities, hotels, ports, roads and telecoms; truly massive investment is required to improve the current infrastructure and there is cautious optimism from sponsors eager to participate in the process and Cubans looking forward to the resulting developments.

Indeed, it is the tourism sector that US News largely focused on in the following article as the best way to invest in Cuba as a US citizen:

But rather than related company stock-picking, what about direct foreign investment? Is there a way for US based investors to capitalise directly on some of the infrastructure opportunities for example?

It is very interesting to see that other countries have already stolen a march on this aspect. China is Cuba’s second largest trading partner behind Venezuela,  already having 29 business agreements in place and a recent delegation arrived in Havana with the intention of increasing this exponentially. Japan is also trying to tie up its links and has reportedly offered $9.76 million in grant aid to purchase medical equipment.

There is no doubting the country is primed to be a very interesting investment opportunity, but people remain wary, even in 2016, of investing Cuba at this point in time.

Although there are signs pointing to the lifting of the economic embargo and the unification of the dual currency, the embargo is still in place and extends to non-US companies who wish to do business in both Cuba and the USA. This means that for most American companies, conducting business with Cuba is illegal, and multinational companies wishing to engage with Cuba have to maintain completely separate US operations.

Past forays into Cuba by enterprising persons have resulted in success for some and misfortune for others. The adoption of the Foreign Investment Law in April 2014 has reduced some of the risks, establishing and fixing the goal-posts, but the legal and regulatory framework is still in its infancy and it will take time for familiarity and confidence to grow.

For those managers and potential investors that we speak to who have the appetite to venture into the Cuban market, a fund based in the British Virgin Islands or the Cayman Islands can be an invaluable vehicle. Vehicles in these jurisdictions have played a vital role in moving capital from developed to developing countries for over 30 years. Foreign capital is made available because of the stability and neutrality that can be provided by an investment vehicle in a responsive, well-regulated jurisdiction, that provides a reliable high degree of corporate governance and legal certainty. All of these things help hedge the overall risk when making the decision on whether to invest in a potentially volatile market.

Given the complexity of the Foreign Investment Law, investing into an offshore fund (rather than a Cuban entity for example) that has been structured so as to ensure the maximum levels of protection allows an investor to hand over their hard-earned cash with confidence that the manager has sought the best advice and is seeking to protect their combined interests.

While the Cuban economic and political landscape is adapting and adjusting, some investment managers may form the view that the challenges outweigh the opportunities. Others will take the chance to play a part in the development process and we are certainly speaking to a number of those.

The cigars are on order.