President Obama, in emphasizing research and development during his State of the Union address, invoked the Space Race of the 1960s. But today, the race is on to find sources other than the government to finance the launch of telecommunications satellites into orbit. Much of that money comes from the private sector, primarily through debt and private equity deals. Peter Nesgos, who specializes in corporate deals in the space and satellite industry at Milbank, Tweed, Hadley & McCloy in New York, talked to The National Law Journal about the business of financing satellites. The remarks below have been edited for length and clarity.

NLJ: What’s driving the surge in private financing of communications satellite providers?

Peter Nesgos: The first is really the demand for ubiquitous connectivity and high bandwidth capacity at fast speeds. That’s a fancy way of saying people want to communicate anywhere and do anything wherever they are. That means needing to be connected and needing to have a clear signal and needing a lot of access to data. If you look at individuals with their own smartphones, they are now reliant on them to do an awful lot more than what was going on a few years ago.

The other thing driving investment and affecting our business are limits on government funding, whether it’s for R&D or infrastructure build-out or investment in next-generation technology. Governments are not investing. They’re expecting the private sector to participate. It’s certainly something that is not unique to this industry, but it certainly is becoming more of a feature, given the demands on government and the state of the financial markets.

NLJ: Where does most financing in this business come from?

Nesgos: We’re seeing a lot of emphasis on export credit, support like the Ex-Im Bank [the Export-Import Bank of the United States], where more traditional commercial lending may not be easily available from mainline commercial banks. It’s a congressionally established government agency that is established to help support U.S. exports.

And we’re also seeing a lot of interest among investors and investment banks in dealing with new and emerging satellite companies that are both entrepreneurial and well established. Private equity certainly has played quite a role in the past few years, going back to some of the major transactions — for example, for Intelsat, Inmarsat and Eutelsat — three major satellite organizations that were government agencies that were privatized. One deal we worked on was Asia Broadcast Satellite, and it was acquired by Permira Partners, a private equity investor that already invested in Intelsat.

NLJ: What’s the biggest cost for a communications satellite provider?

Nesgos: The three biggest capital expenditures are the cost of the satellite, the cost of the launch service and the launch insurance, which is pretty expensive compared to other types of insurance.

NLJ: Launch insurance?

Nesgos: Unlike most insurance, which really pays for a fortuitous event like lightning striking your house or flood damage, this insurance will pay if a satellite doesn’t work or a launch doesn’t work, for any reason. Launch insurance costs have ranged from 7 percent up to 20 percent of what you’re insuring. A little indication of what that means: If a satellite costs $200 million to buy — satellite prices can range from $50 million to $500 million — it’ll cost you pretty close to $100 million to launch it, so you’ve already got $300 million on the pad. If the insurance is rated at, say, 10 percent, you’re paying $30 million for coverage of the launch and initial operations of the satellite. That’s a pretty significant amount.

NLJ: Some recent financings have focused on providing communications services to developing nations, like India. Tell me about these deals.

Nesgos: One good example is O3b Networks. Its market is the over 3 billion people who don’t have access to high-speed connectivity around the world. It’s an interesting project. It will involve eight satellites to begin with, launching this year, that are focused on the area that is within 45 degrees of the equator, north and south. Which pretty well covers most of the developing world: Latin America, Africa, Middle East, Asia-Pacific. We worked on that project. It’s really quite novel in terms of what it will provide. We worked with O3b in securing about $1.2 billion in debt and equity financing. In fact, that was for the first eight satellites. And then we got them another $100 million for buying an additional four satellites, so we’ll have 12 at the end of the day. That’s a good example of how, through both export credit-supported financing as well as private investment, this project’s gotten off the ground.

NLJ: What other kind of deals are you working on?

Nesgos: We’re seeing quite a number of innovative joint ventures and strategic alliances. One project last year involved Asia Broadcast Satellite and a company called Satmex [Satelites Mexicanos]. Here you had a Hong Kong company and a Mexican company coming together to jointly procure $400 million of satellites built by Boeing and launched by SpaceX [Space Exploration Technologies Corp.]. That’s another indication of how the satellite business world is coming together through joint ventures and strategic alliances to be able to fund and finance satellite activities.

NLJ: You mentioned SpaceX, which just announced its deal to launch a satellite into space for an Israeli firm. What role is SpaceX playing in this industry?

Nesgos: We’re often on the opposite side of the table to SpaceX, negotiating launch contracts. SpaceX designs and manufactures launch vehicles, so we’ve been involved in a number of launch contracts for our clients. SpaceX is a good example of how private industry can rise to the occasion — not only in terms of providing transportation to the International Space Station, which of course it’s doing on behalf of the U.S. government and the International Space Station partners, but also getting into the commercial business. The government, or NASA, isn’t going to build a new-generation shuttle. They’ll be looking for SpaceX to provide that transportation.

NLJ: Your firm represents LightSquared Inc., a communications satellite provider that filed for bankruptcy last year after the Federal Communications Commission, concluding that its signals would interfere with global positioning systems, refused to approve its plans to build a 4G wireless network. What lessons can be learned from this company’s challenges?

Nesgos: It reinforces the criticality of spectrum and the reliability of the regulator. The first question an investor typically asks is: Does the company have the government authorizations to implement its business plan? By spectrum, I’m talking about the radio-frequency spectrum, the license to communicate. Every satellite company needs those authorizations. It would be the same as a trucking company that needs a license to do interstate transportation, or an airline that needs a license to fly from A to B. In the case of satellite companies, it’s not so much a safety risk as an ability to communicate. In order to communicate from point A to point B, you need to be able to use radio frequencies. Those are licensed by the FCC. So getting a license from the FCC is really your ticket to start a business.

NLJ: That seems fairly obvious.

Nesgos: It is obvious. But it’s never easy, just like in any license. You have to ask: How much spectrum am I getting? What purpose is it going to be used for? Since it’s much in demand, there is a lot of competition for it, as well. But it’s really the golden ring for any satellite company, and making sure that the licenses are going to be able to accomplish your business purposes is critical.