New fund would provide drone development a $2.2B shot in the arm

For all the hype, drone development is pretty slow going. But a D.C.-based investment banking firm hopes to give it a boost with $2.2 billion in funding from the private sector, most notably the aerospace industry.

The fund, dubbed the UAS America Fund, is the latest effort by Nexa Capital Partners LLC to encourage transformative concepts in transportation and aerospace that face an uphill battle financially. The company wouldn’t say how much of the $2.2 billion target it has raised or how much has been invested.

But a Nexa executive told me the concept works like this: Nexa asks the companies that manufacturer the unmanned systems, mostly for the Pentagon, to contribute to a fund that will support cash-strapped businesses developing new drone applications. The defense companies get new chances to target commercial opportunities and new technologies they can integrate into their own offerings. Or, perhaps, new acquisition targets.

“We’ve been watching the drone and unmanned system space for a couple of years now, trying to find the right time when it generates momentum,” said Jim Hughey, senior vice president at Nexa. “We think the time is here.”

Amazon gets credit for inspiring much of the recent dialogue about the potential of unmanned devices with its announcement that is hopes to deliver packages by drone someday, he noted, but this is about far more than those conceptual ideas.

“It’s bigger than what Amazon is doing. Amazon is working on things that are 10 years down the line, very grandiose,” he said. “But there’s so much activity going on now. It’s an industry that will transform our economy when all is said and done.”

The fund won’t finance the actual system development, but rather the infrastructure needed for drone flight. Unmanned aerial vehicles, whether used for agriculture, search and rescue or even real estate applications, need to be properly tracked, certified and able to communicate. All that requires infrastructure that is mostly technology in nature, adapted from current aviation sector but tweaked for drones. And it can cost upward of $100 million per system developed. Normally funding for that infrastructure would fall under the Federal Aviation Administration’s purview, Hughey said, but the money isn’t in the budget.

“So we’re bringing in private sector funding for the infrastructure, to allow all the mom-and-pop companies, startups to operate efficiently,” Hughey said.

If this sounds familiar, you might have read about a similar program initiated by Nexa, which got buy-in from aerospace companies including Exelis Inc. and Airbus Americas, to fund loans to commercial airlines to equip their planes to take advantage of the FAA’s next-generation air traffic control system. Like that program, this one seeks backstop Treasury loan guarantees from Congress, similar to those offered for highway construction projects and nuclear power plants, which essentially transfer any debt obligation to the FAA in cases where a borrower defaults.

A year and a half after Nexa first began to put the UAS America Fund together, pockets of investment are already happening, many in partnership with state governments hoping to attract development to their jurisdictions. But more active funding of infrastructure needs is expected to start in 2015.

Hughey declined to reveal companies supporting the fund, but said it’s garnering a lot of positive response among defense companies. Among those currently delivering drones to the Pentagon are Lockheed Martin Corp., Northrop Grumman Corp. and The Boeing Co., to name a few.

“When these new projects get rolled out, it’s going to be their command and control technologies that will make up the infrastructure,” he said. “At the same time, they all have these capabilities and they’re looking for areas to commercialize. That’s what they’re investing in.”

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