Based on the Mergermarket and S&P statistics, Q1 2026 data paints a nuanced picture for UK and European M&A: deal volumes have declined across Europe, while UK deal values have risen (although this increase in deal values is not reflected across the rest of the European market), as compared to both Q1 2025 and Q4 2025.

Following on from tariff rises last year, the global business ecosystem has been impacted this year mostly by the Iran conflict and the resulting closure of the Strait of Hormuz. This has pushed up oil and gas prices and may yet lead to shortages of diesel and jet fuel, which in turn are expected to lead to increases in inflation and interest rates in due course, although not to the levels seen following the period after the start of the Russia-Ukraine conflict. In addition, “Saaspocalypse” (a widespread repricing of software-as-a-service businesses due to the expected impact of AI on such businesses) remains a factor and continues to impact deals and pricing in the tech sector.

Although the deal landscape is mixed, investor capital is flowing principally into financial services, industrials, energy, telecommunications, tech (particularly AI), education, health care, services, infrastructure, and defence. The number of deals in tech has reduced due to the impact of “Saaspocalypse”, with sellers wanting higher prices and buyers looking to pay reduced multiples for assets. Notwithstanding this, whilst financial services investing is currently the leading sector in Europe, tech deals still account for a large percentage of deals being done in the European M&A market, given the ability of tech and AI to transform and grow businesses.

Despite investment in industrials and manufacturing having jumped significantly following the tariff wars of last year, a question mark remains on whether this recovery will be sustained given their greater exposure to energy price rises and supply-chain constraints. Retail and consumer businesses are less buoyant due to concerns around consumers having less money in their pockets as a result of the spectre of rising inflation. The services sector remains relatively buoyant, in part because of the significant cost efficiencies that AI and technology can unlock.

In addition to the Iran conflict, the continuing conflict between Russia and Ukraine, perceived threats to the stability of Europe posed by Russia, and US pressure on European nations to ramp up spending on their own security have led to an increase in defence investment. PE funds are increasingly willing to back defence assets, a sector historically considered off limits, under the so-called ESSG tag, with the second “S” standing for “Security”. Governments across Europe are actively courting private capital to accelerate defence modernisation to help support defence sector expansion, including new defence technologies, and this is consequently attracting new PE investment. For example, Germany has pledged to allocate 3.5% of GDP annually to defence and security, and has created a €500 billion infrastructure fund, illustrating the scale of the opportunity available to investors willing to enter this space in Germany. The UK has also recently announced contracts with various defence tech start-ups, which could lead to some of these companies becoming unicorns in the future.

Continuation vehicles remain a prominent structural theme in 2026, with sponsors increasingly rolling portfolio companies into successor funds. Fund-to-fund transfers between vehicles under common management have also become more frequent. In most cases these transfers are effectively being treated as an exit and therefore a liquidity event. Bringing in a meaningful third-party co-investor alongside the new vehicle can go some way to validating the transfer price, but a degree of scepticism persists among LPs where no competitive auction has been conducted.

Interest rates on debt, although they have fallen slowly over the course of the year, are more likely to rise at this point owing to the expected increases in inflation triggered by the Iran conflict and the passing on of higher energy costs to consumers. At this stage, any rises look muted and are not expected to hit the interest rate highs that were seen in the months following the start of the Russia-Ukraine conflict. There also appears to be more liquidity in the debt market today compared to the position in 2022 after the conflict started. Greater debt availability is enabling sponsors to deploy more leverage in their transactions.

Despite the expected muted impact of interest rate rises, a significant number of businesses remain burdened by unsustainable levels of debt that will require restructuring before they can attract fresh investment. Some airline related businesses are looking more vulnerable due to increased fuel costs and a lack of supplies, and there are a fair number of consumer and retail businesses looking to restructure.

Conditions in the fundraising market have gradually been easing. Investors with a proven track record can raise capital, but need to set realistic targets. Unsurprisingly, the larger established funds continue to draw substantial capital inflows, taking up most of the market capacity in the process.

Although a mixed bag, many sponsors and investment banks still expect to see M&A activity levels in Europe continuing to pick up as we head into the last two quarters of the year, with plenty of pipeline, and many observers are hoping for a relatively speedy return to normality and the reopening of the Strait of Hormuz. Only time will tell, although the latest indications for that reopening don’t look good in the short term, given the recent resumption of hostilities.

Client Alert 2026-112