PEMACOM 2026: Insights on the private equity and M&A landscape

Introduction

Dr. Nikolaus von Jacobs

PEMACOM, the Private Equity and M&A Community, held its annual conference for cross-border M&A and private equity investments on 22 September in Munich, bringing together investors, sponsors, and advisors across 11 breakout and 6 plenary sessions to address the strategic realities shaping private capital and cross-border dealmaking.

As conference chair, I am pleased to present the insights from this year’s gathering. In a world where politics are being redefined and alliances are stressed, PEMACOM 2026 explores what this means for markets and transactions.

Key topics included cross-border investment dynamics, AI’s impact on software and defense technology, due diligence frameworks for AI and cybersecurity, and geopolitical forces. Private equity faces the paradox of headline values climbing while deal flows contract. Technology, industrial manufacturing, energy transition, and defense spending present opportunities, but geopolitical tensions, trade uncertainties, and inflation will impede deals.

Reed Smith lawyers led, among others, sessions on cross-border investment, European dealmaking, AI implications for transactions in the software industry, cybersecurity diligence, and defense technology. Below are the key insights from those sessions.

Contents

1. Cross-border investment: Strategic buyers, private equity, and global capital flows
2. Cross-border dealmaking in a changing European market
3. AI reshapes the software investment thesis
4. AI, data, and cybersecurity: A new diligence playbook
5. Growth and innovation in the defense sector
6. Defense technology and the rise of dual-use investment
7. Recession-triggered crises and opportunities
8. Transaction finance: Market insights on recent trends
9. Mittelstand: Succession in a state of constant global crisis
10. The strategic M&A play
11. The new European playbook: Why investors need to look to Brussels
12. Dealmaking in life sciences and health care: Trends and developments

1. Cross-border investment: Strategic buyers, private equity, and global capital flows

Rob Fox and David Hayes

The cross-border investment landscape is evolving, with strategic buyers increasingly competing with private equity sponsors for opportunities and capital movements between Europe and the United States undergoing subtle changes.

Strategic buyers may have an advantage where acquisitions are driven by the need for a U.S. operating presence, supply-chain proximity, or tariff protection, rather than conventional financial-return objectives. Sponsors remain highly relevant where complexity, structuring, and execution are the differentiators, although foreign sponsors can face greater timing and clearance risk.

Germany remains a significant source of private equity capital, much of which is deployed outside the domestic market. For U.S. managers, the opportunity lies in presenting cross-border investment opportunities in a way that addresses both how managers can lawfully engage with investors and how investments will be structured for tax and reporting purposes.

Capital flows are also changing, with European institutions reassessing U.S. exposure while U.S. capital continues to move into Europe. European caution appears focused more on policy risk, currency exposure, and dollar assets than on dissatisfaction with U.S. private equity managers, while U.S. investors continue to see opportunities in European consolidation and platform-building.

Limited partners are also using co-investments, continuation vehicles, deal-by-deal sponsor backing, and GP stakes to gain more targeted exposure and address financing or liquidity constraints. The cross-border consideration is that direct participation can recreate tax and structuring issues that do not arise at the fund level.

Looking ahead, investors will be watching the rollout of new foreign investment screening regimes, whether European caution toward U.S. assets extends into private capital, and whether changes in national laws reopen deal structures that were previously considered settled.

2. Cross-border dealmaking in a changing European market

Tom Whelan

Geopolitical developments – armed conflicts, rising fuel prices, increasing or changing tariffs, and shifting political dynamics – are impacting the investment landscape in Europe and raising questions about the future of dealmaking.

Europe remains attractive for investment despite the current geopolitical environment. In addition to the five largest economies in Europe (the UK, Germany, France, Italy, and Spain), investors continue to look for opportunities elsewhere, such as in the Nordics, the Netherlands, Switzerland, Poland, and Portugal, as well as wherever investors see asset pricing offering relative value compared with non-European markets, especially the United States.

Opportunities do exist at a sector level, with investments in tech and AI, digital infrastructure, leisure-related assets, defense, robotics, and health care cited as potentially good places to invest, while energy transition and renewables investing attracts more contrarian views. It is clear that AI is having a growing influence on investment strategies, with the biggest consideration for investment committees being whether or not AI disruptors will impact the investee business positively or negatively.

Given that the US Federal Reserve recently raised interest rates, the expectation is that European markets will follow suit, so it will be important to consider the impact of increased borrowing costs and likely credit tightening on go-forward investment strategy. It will also be important not to overleverage assets, given where the debt markets are likely to go.

In conclusion, although we live in a less certain and more complex world, investors are still investing in Europe, and there are opportunities to be found there. It is also still possible to achieve an exit in the current market for the right assets, notwithstanding that deal process times have lengthened.

Ultimately investors are looking for growth when they invest, and the plea from investors in Europe to European politicians is for European government bodies to deliver a growth agenda by adopting and shaping policies that facilitate growth and thereby attract more investment in Europe.

3. AI reshapes the software investment thesis

Bernd Dreier

AI is reshaping the software investment thesis, affecting margins, pricing models, valuation, and exits.

For software providers, the marginal cost of delivering AI-led software has significantly changed. The high gross margins traditionally associated with software are increasingly dependent on how effectively engineering teams route, cache, and size models. Delivery models and hosting arrangements are therefore becoming more important.

Recurring revenue remains important, but fixed subscriptions with metered usage on top may become the prevailing model, and outcome-based pricing is gaining traction but remains relatively small. New AI business models currently represent only a small proportion of SaaS spend, while models continue to be shipped with a contractual subscription floor.

AI is also significantly reducing development costs. Significant development speed improvements can be observed, with some businesses seeing substantially greater gains. At the same time, token usage needs to be monitored because the expenses incurred by using large language models (LLMs) can increase as usage grows.

For investors, the key questions in their investment decisions increasingly include whether a target’s solution can perform a process directly, whether a customer can insource the capability, whether a start-up can replicate the product faster or more cheaply, and whether a competitor can use AI to take market share.

The upside can come from AI features that customers are willing to pay for, hard-to-replicate functionality, or a product moat that enables adjacent products to operate more efficiently through data governance. Retention before and after the LLM era, replacement cycles, realizable ACVs, and KPI-led development can all provide evidence of resilience and AI efficiency.

The fundamentals of valuation remain broadly unchanged; however, there is greater focus on underlying business quality and resilience. A base case that only works if an additional AI growth layer materializes should not be treated as a base case; the business-as-usual case needs to work and provide acceptable returns.

For management teams, AI adoption requires more than simply introducing new tools. It requires an AI-agile organization, faster development, customized demonstrations, pricing updates, and greater automation across go-to-market activity.

4. AI, data, and cybersecurity: A new diligence playbook

Friederike Wilde-Detmering

AI compliance is no longer a future consideration for deal teams. With the EU AI Act’s transparency obligations now live, and high-risk system requirements pushed to December 2027, the design and documentation decisions that determine compliance are already being made.

For private equity sponsors acquiring AI-enabled businesses, this means compliance debt can compound quickly. Retrofitting governance into systems already in production can be significantly more costly than building it in from the outset.

Data protection due diligence has similarly become a valuation consideration rather than simply a legal checkbox. A target’s approach to data collection, consent, cross-border transfers, and breach history can directly affect deal value. Buyers acquiring non-compliant systems may also inherit material exposure under both the GDPR and the EU AI Act.

Cybersecurity is also moving from a back-office issue to a boardroom priority. With NIS2 expanding cybersecurity obligations across sectors, breach preparedness is becoming a core diligence consideration, including whether a target has appropriate governance, incident response capabilities, and supply-chain oversight.

The broader takeaway is that AI governance, data protection, and cybersecurity can no longer be assessed in isolation. For private equity and M&A practitioners, treating them as an integrated diligence exercise is not just best practice – it is becoming a pricing discipline.

5. Growth and innovation in the defense sector

Anders Nilsson

Smaller, technology-native defense companies are emerging alongside growing defense-focused private capital. When structuring investments in a sector dominated by large primes and government procurement, sector expertise and experience are key.

The growing share of defense contracts being awarded to start-ups may represent a genuine challenge to the traditional primes in the industry, and emerging companies may ultimately scale into neo-primes or become acquisition targets for existing primes. Against this backdrop, it is easy to see why European defense start-ups are recording strong funding levels.

We hear from start-up defense contractors that the traditional defense procurement process and its legal framework contrast sharply with the more agile and customer-involved process that these new companies want to apply. Another question to consider is how newly founded and relatively thinly capitalized contractors will be able to meet traditional offset obligations, for which the traditional primes have developed structures over decades of operation.

The traditional primes also still have the upper hand in terms of their embedded position and relationships with end customers and at the political level, potentially acting as a barrier to new and smaller entrants. However, many end customers see the benefits of a diversified portfolio of suppliers, creating room for new entrants.

6. Defense technology and the rise of dual-use investment

Matt Evans

Defense technology is moving from being “restricted by default” to “permitted unless prohibited,” although the ecosystem remains at an early stage.

Defense and dual-use technology are emerging as increasingly investable for European private funds. Capital is following the political sentiment, but the practical infrastructure required to support the sector is only now beginning to develop.

Fund documentation is also catching up. The discussion highlighted the tension between ESG frameworks that can still penalize defense exposure and growing LP appetite for resilience and dual-use investments. GPs and LPs are therefore navigating new territory in balancing these considerations within fund agreements.

Another notable theme was the increasing flow of U.S. capital into Europe. U.S. investors are increasingly backing European deep tech without necessarily requiring companies to relocate to the United States.

This reflects a broader realignment in investment priorities. With industrial policy diverging on both sides of the Atlantic and European buyout entry multiples remaining below U.S. levels, European GPs are positioning Europe as a stable home for long-duration capital.

7. Recession-triggered crises and opportunities

Tamas Lorinczy

Europe is navigating structural turbulence that extends beyond a traditional distressed cycle. Weak growth, high energy costs, geopolitical uncertainty, trade tensions, and refinancing pressure are combining with fundamental competitiveness questions in industrials, automotive, chemicals, and energy-intensive manufacturing.

Distressed investors succeed by adapting companies to the new reality faster than current owners – not simply by finding low valuations. The diligence process is critical, although it must be very targeted in a fast-moving process. Winning transactions requires execution certainty, credibility, and the ability to spot operational levers that others may miss. An improvement in management is typically also critical. Over the next 12 to 24 months, corporate restructuring will create further carve-out opportunities for private equity.

8. Transaction finance: Market insights on recent trends

Dr. Oliver Hahnelt

Despite continuing geopolitical challenges and macroeconomic turbulence, there is still financing activity in Germany, and financiers and investors remain open to providing financial accommodation in general. However, they have become more cautious and selective, and transactions therefore often take more time. 

Health care, software, and technology still account for a large number of transactions. The dynamics of transactions have somewhat shifted though, and we see an increasing number of financings of roll-ups of traditional craft businesses (Handwerksbetriebe).

9. Mittelstand: Succession in a state of constant global crisis

Dr. Germar Enders

Succession solutions for German Mittelstand companies continue to offer great investment opportunities for both strategic and financial investors. However, in the current environment, succession planning and related investment decisions increasingly need to be considered alongside a company’s resilience to geopolitical, economic, and technological disruption.

For owners and investors, resilient business models tend to be better positioned to navigate a transition in ownership and protect and further develop long-term value. Four characteristics may be regarded as particularly relevant:

• Structural cost leadership: A sustainable cost position can provide greater resilience and is ideally supported by appropriate and moderate leverage.
• Technological leadership: Proprietary technology, specialized know-how, and other capabilities that are difficult for competitors to replicate can significantly strengthen a company’s position and – if a succession is desired – make it more attractive to potential investors.
• Geographical independence: Companies with diversified markets, suppliers, and operational footprints may be better equipped to manage geopolitical disruption and changing trade conditions. On the demand side, it may make sense to strategically prioritize specific geographical markets.
• Flexibility: The ability to adapt quickly to changing customer demands and market conditions is increasingly important. SMEs typically benefit from lean decision-making processes. When integrating an SME into a broader corporate organization or as an investor’s portfolio company, corporate governance should be implemented in a way that – within the necessary framework, for example as required under financial covenants – still allows for lean decision-making processes and encourages entrepreneurial freedom.

The broader takeaway is that succession should not be viewed in isolation from the resilience of the underlying business. For owners considering a transition and investors assessing potential opportunities, the ability of a company to withstand disruption while adapting to changing market conditions can be an important component of long-term value.

10. The strategic M&A play

Tom Strassner

Strategic appetite remains strong, but capital is more selective and deal financing is harder to secure. The current environment represents a selective recalibration rather than a recovery. More weight is being placed on price, cash generation, and post-closing funding needs. Ambition still drives deals, but successful transactions are those that actually close.

The traditional “buy or build” question has evolved into “partner, invest, or acquire.” For corporate venture and strategic collaborations, the focus now is on determining when a partnership or minority stake should convert into full ownership. In health care, digital health, AI-native platforms, and traditional life sciences are merging into a single capability stack, meaning today’s data or software partner can become tomorrow’s most contested acquisition target.

AI tools are already saving considerable time and cost in deal sourcing, information screening, and large-volume document review. AI speeds up diligence but does not replace judgment. Deal teams still verify the findings, and AI is not expected to gain a seat on the investment committee.

“Strategic” must not become a polite word for “expensive.” Disciplined buyers partner when they need faster access to expertise, products, or markets. They acquire only when owning the business adds a capability that would take too long to build themselves.

Culture and integration ultimately decide whether value is realized. The tension between entrepreneurial speed and corporate governance exists even within collaborations, well before any conversion to full acquisition. Integration planning must be grounded in operational reality, as synergies are always easier to find in spreadsheets than in real business life.

11. The new European playbook: Why investors need to look to Brussels

Christian Filippitsch

The narrative that Europe is “uninvestable” is increasingly outdated. Brussels should be seen not only as a potential constraint on investment, but also, perhaps counterintuitively, as an investment opportunity in its own right. Several key themes emerge.

First, Europe’s regulatory framework – spanning merger control, FDI screening, the Foreign Subsidies Regulation, and sector-specific rules – pursues legitimate objectives: leveling the playing field, securing supply chains, and managing the digital transition. These are not new dynamics; the EU has always had regulated markets. What matters is that the rules remain transparent and predictable, allowing investors to plan accordingly. Indeed, a clear, rules-based framework grounded in the rule of law is an asset that is becoming increasingly rare globally.

Second, EU policy priorities are actively generating investable deal flow. Energy and grid infrastructure, AI and data, semiconductors, defense and dual-use technology, and digital sovereignty are all areas where Brussels is directing – and in many cases unlocking – substantial private capital. The challenge for investors is distinguishing durable, policy-backed themes from politically driven hype.

Third, this investment narrative is increasingly echoed at the highest political level. In her State of the Union address on September 16, 2026, Commission President Ursula von der Leyen backed a bold economic agenda with concrete figures: €200 billion mobilized through InvestAI, €10 billion in public funding for seven AI gigafactories to crowd in €20 billion more in private capital, and a target to double Europe’s share of electricity by 2040 – cutting the fossil-fuel import bill by €260 billion per year. On AI, she identified five priority sectors for industrial AI initiatives – health care, transport, agri-food, advanced manufacturing, and defense and space – citing AI-supported breast cancer screening as a tangible example. On China, the tone was firm: A trade deficit of €1 billion per day has reached “a tipping point,” with over 80% dependence on Chinese critical raw materials. On defense, spending has surged 80% in five years, backed by the €150 billion SAFE program and a new European Instrument for Strategic Enablers. To finance these ambitions, von der Leyen stressed the need to unlock Europe’s deep pool of private savings through the Savings and Investments Union, announced a new Banking Package to simplify and defragment Europe’s banking system, and pointed to the Scaleup Europe Fund to channel venture capital into deep-tech start-ups. The signal is clear: Brussels is actively directing where the next wave of investment must go – and in doing so, creating unique opportunities for private capital to lead the way.

Finally, the panel converged on a forward-looking proposition: Regulatory sophistication can become a source of competitive advantage – a form of alpha. Investors who integrate Brussels policy analysis into their diligence process alongside financial, commercial, and legal analysis, and who start early on strategic planning to manage regulatory requirements, will be better positioned to identify and capitalize on assets, sectors, and consolidation opportunities before others.

The closing verdict: Brussels is a net asset – and one that is creating extraordinary and lucrative investment opportunities – provided you understand the new European playbook.

12. Dealmaking in life sciences and health care: Trends and developments

Marc Holtorf

Increasing energy costs, armed conflicts, and the constantly changing tariff situation have an impact on dealmaking in the life sciences and health care sectors. However, the number and value of deals in 2025 and 2026 show that life sciences and health care are relatively resistant to external challenges. The more important drivers for dealmaking in the two sectors – such as the aging population in Europe, particularly in Germany, the upcoming patent cliffs, and the resulting need for innovation – remain unchanged. That is one of the reasons why the outlook for 2027 is cautiously optimistic.

As in almost any sector, AI is a very hot topic. AI has the potential to substantially improve the speed and quality of innovation and the provision of services, reduce costs, and increase margins, for example in the development of medicinal products. The consequences of AI and its significant potential to drive further improvements create many opportunities for dealmaking in a fast-changing environment.

Looking at Germany, Europe’s largest economy, one can see that the country remains a key source of innovation. The number of newly established start-ups reached a record high of more than 3,000 in the first half of 2026. Moreover, in summer 2026 the federal government released a start-up and scale-up strategy, including improvements for such companies in relation to financing, access to public procurement, and the reduction of bureaucracy. The vibrant start-up and scale-up scene guarantees a strong deal flow for next year and beyond.