Outlook on the EU Investment Landscape: Strategic Opportunities in a New Regulatory Era

Today, European economies are facing unprecedented pressure from multiple directions. On one hand, rising geopolitical tensions and a challenging new era in transatlantic relations are driving a shift toward a more continental approach and reduced globalization. Slogans like "Europe for Europe" and "Buy European" reflect a move away from globally interconnected economies toward a more European-focused economic model. On the other hand, the EU and its Member States must accelerate growth in key industries critical to the future. Sectors such as defense, emerging technologies, and infrastructure require massive investments to remain competitive and resilient against potential threats from Europe’s adversaries. Amid these heightened geopolitical tensions and economic volatility, international investors are seeking clear guidance on Europe’s fast‑evolving regulatory landscape and market outlook.

Against this backdrop, EU regulation operates in a dual capacity. On the one hand, it functions as a constraint on transaction execution, introducing additional layers of scrutiny, timing considerations, and information requirements. On the other hand, it serves as a strategic instrument of industrial policy and capital allocation, actively steering investment into priority sectors and providing access to funding and regulatory facilitation.

This article reflects both perspectives. It first outlines the evolving regulatory landscape shaping foreign direct investment and M&A activity, before turning to current dealmaking dynamics and practical implications for investors. The final section provides a forward-looking assessment and an execution-oriented checklist.

Regulatory landscape shaping FDI and M&A

Europe is becoming more rules‑intensive and security‑focused while at the same time deploying targeted incentives, with economic security and industrial policy advancing in tandem. FDI screening at both EU and national level is tightening, and the Foreign Subsidies Regulation as well as the proposed Industrial Accelerator Act introduce additional, information‑heavy review tracks for larger transactions. Although these regimes can be complex and are evolving in response to volatile geopolitical, economic and technological developments, they can be navigated effectively with early planning and appropriate legal support. At the same time, they should not obscure the fact that the EU’s investment‑promotion agenda offers significant opportunities in strategic sectors – not least in Germany’s energy transition and industrial technology base.

FDI Screening

Foreign direct investment (FDI) screening has shifted from a niche check to a central gating item for cross‑border M&A in Europe, especially in Germany, where reviews run by the Federal Ministry for Economic Affairs are anchored in administrative law but, in sensitive cases, shaped by geostrategic and industrial policy considerations. A deliberately broad “likely impairment of public order or security” test gives authorities wide discretion; while the rules are formally neutral, certain jurisdictions and sectors attract closer scrutiny. The EU FDI Screening Regulation adds an EU‑level cooperation layer, so investors increasingly face parallel filings, standstills, and information requests. Even though prohibitions remain rare, filings have surged. In practice, regulatory risk tends to manifest not as outright deal blockage, but as extended timelines, increased information requirements and the need to agree on mitigation measures. 

These developments are particularly visible in three areas: foreign direct investment screening, the control of foreign subsidies and the emerging Industrial Accelerator Act framework. The starting point for this development is the EU FDI Screening Regulation (Regulation (EU) 2019/452), which has created a common framework for national screening mechanisms.

EU FDI Screening Regulation (Regulation (EU) 2019/452)

Investment screening, as an important instrument of economic security law, lies within the primary responsibility of the Member States. These are national administrative procedures that, historically, have been designed quite differently across the EU. Until just a few years ago, only about half of the Member States even had a mechanism to review foreign direct investments. This regulatory patchwork, together with the steadily growing importance of foreign direct investment with (potential) impacts on national security interests, prompted Germany, France, and Italy to jointly call on the European Commission to create an EU-wide framework for investment screening. On October 11, 2020, the EU FDI Screening Regulation (Regulation (EU) 2019/452 of the European Parliament and of the Council of March 19, 2019, establishing a framework for screening foreign direct investment into the Union) entered into force. Since then, the Regulation has set the regulatory framework for Member States that choose to introduce rules for screening foreign direct investment. In the meantime, 23 Member States have introduced such mechanisms, while legislative processes are still ongoing in the remaining states.

However, as national screening mechanisms differed in terms of scope, thresholds, deadlines and procedures, and as geopolitical and technological developments highlighted the need for improvements, the EU undertook a review of the regulation. In December 2025, the Council of the European Union and the European Parliament reached a provisional political agreement on a revised EU FDI Screening Regulation in the course of the trilogue negotiations with the European Commission. The revision is intended in particular to further harmonize the existing rules across Member States and to tighten them in certain respects. The revised regulation is expected to enter into force later this year and will apply directly in all Member States from 2027. As an EU regulation, it does not require transposition into national law in order to take effect, although it is likely that its provisions will be reflected in national legislation.

In Germany, there are efforts by the current Federal Government to implement the revised framework at national level through a new Investment Screening Act. However, no concrete draft legislation has been published so far. Until the revised EU FDI Screening Regulation enters into force, the existing rules therefore continue to apply, under which FDI screening in Germany is governed by foreign trade law.

National FDI screening – Germany

Germany’s FDI screening regime, grounded in the Foreign Trade and Payments Act (AWG) and Ordinance (AWV), runs on two tracks: a cross‑sectoral review that applies across industries and a sector‑specific review for defense and certain IT‑security functions. Procedurally, both are identical: following a notification, voluntary filing, or ex officio awareness, the Federal Ministry for Economic Affairs has a two‑month initial review window and may open an in‑depth Phase 2. The substantive test differs—“likely impairment of public order or security” for cross‑sectoral reviews versus “essential security interests of the Federal Republic of Germany” for sector‑specific cases. Most matters proceed under the cross‑sectoral regime, where certain sensitive activities trigger mandatory filings and others can be voluntarily notified to secure execution certainty. Outcomes range from clearance or a certificate of non‑objection to negotiated mitigation; if concerns cannot be resolved, the ministry can impose conditions or prohibit the acquisition.

In competitive processes, bidders who present credible mitigation and disclosure readiness early often gain an edge.

While the existing FDI regimes focus primarily on security and public order, the Commission’s proposed Industrial Accelerator Act would add a distinct, more industrial‑policy‑driven layer to the screening landscape.

EU Industrial Accelerator Act

The Commission’s proposed Industrial Accelerator Act (IAA) would shift EU FDI screening from a security‑centric tool toward an industrial policy instrument embedded in the Clean Industrial Deal, aimed at strengthening EU manufacturing competitiveness, including a target for industry to reach at least 20% of GDP by 2035, and aligned with “Buy European” requirements and subsidies.

The IAA demonstrates the future direction of EU investment policy. Although it is still in the proposal stage and is subject to further legislative development, it signals a potential shift away from a purely security-driven screening approach towards a framework that is more explicitly driven by industrial policy. Screening would be triggered when four cumulative conditions are met:

1. an investment of at least EUR 100 million,
2. the investment is in designated strategic manufacturing sectors such as batteries, electric vehicles, solar PV and critical raw materials,
3. the investor’s home country controls more than 40% of global capacity in the relevant sector, and
4. the investment confers control at or above 30%.

Procedurally, national investment authorities would assess admissibility and transmit cases to the Commission, which may issue opinions on both admissibility and approvability. Final approval would depend on the investor agreeing to at least four of six conditions, including caps on ownership, limits on joint ventures, intellectual property licensing commitments, dedicating 1% of revenues to EU research and development, maintaining a workforce of at least 50% in the European Union and implementing a strategy to source 30% of inputs in the European Union.

A “comply or explain” mechanism requires national investment authorities to wait for the Commission’s opinion or the expiry of its deadline and, if they deviate from that opinion, to reassess within two months and justify their decision. In practice, these changes enhance the Commission’s influence and contribute to dynamics sometimes described as “centralization by stealth”.

The Commission may also take over assessments on request or on its own initiative for cases with significant cross‑border implications or those exceeding EUR 1 billion, set conditions for subsidiary‑led investments and issue the final decision in multi‑jurisdictional cases where Member States cannot agree. However, legal ambiguities and overlaps with the revised FDI Screening Regulation risk parallel or even conflicting requirements, which underscores potential implementation and coordination challenges across regimes.

At the same time, the proposal remains subject to legal and political uncertainty, and its practical interaction with existing screening regimes has yet to be fully defined.

Taken together, these instruments show how investment screening is evolving into a central pillar of the European Union’s economic security architecture. In parallel, the Union has also moved to address another major gap in its toolbox, namely the control of foreign subsidies.

Screening of foreign subsidies

Prior to 2023, foreign subsidies granted by non‑EU governments were not subject to any dedicated scrutiny at EU level, whereas subsidies granted by EU Member States were already closely monitored under the EU State aid rules. To address this regulatory gap, the Foreign Subsidies Regulation (FSR) has been in force since 2023, with the aim of preventing distortions of competition in the EU internal market caused by foreign subsidies.

The FSR establishes three key review mechanisms. First, major corporate acquisitions (concentrations) are subject to a mandatory notification requirement to the European Commission if certain revenue and foreign financial contribution (FFC) thresholds are exceeded. FFCs broadly cover any direct or indirect financial support granted by non‑EU public authorities or state‑linked entities. Second, a comparable disclosure and review regime applies to public procurement procedures, in order to prevent subsidized underbidding and unfair advantages in tender processes. Third, the Commission may initiate investigations on its own initiative, regardless of whether a notification has been filed. Where the Commission finds a distortion of competition, it can in principle impose a wide range of measures, from behavioral or structural commitments to exclusion from procurement procedures or even a prohibition of the transaction. While the notification thresholds are relatively high and therefore mainly capture larger, internationally active groups, the ex officio powers allow the Commission to review transactions below the thresholds in cases of particular concern.

In practice, enforcement has so far focused on commitments and conditions rather than outright prohibitions. This is illustrated by recent high‑profile M&A cases, such as the acquisition of a telecommunications company operating in several Member States (PPF) by a UAE‑based telecommunications group controlled by a sovereign wealth fund (e&). Another example is the takeover of the German chemical group Covestro by the national oil company of the Emirate of Abu Dhabi (ADNOC). In these and other cases, the Commission has relied primarily on conditions, in particular relating to compliance with the parties’ own commitments. Nevertheless, compliance obligations remain significant, especially for parties subject to reporting requirements, given the breadth of the information to be provided and the resulting complex, time‑consuming data‑collection process.

Pro‑investment and industrial policy tools

The European Union is not only tightening screening and subsidy control but is also increasingly pursuing an integrated pro‑investment and industrial policy aimed at channeling private capital into strategic sectors. The following instruments work in tandem to achieve this: they open up market access, secure supply chains, speed up approval procedures and improve access to capital. Overall, it is evident that these tools significantly reduce project development risks, particularly through greater planning certainty, shorter implementation times and stronger government support. At the same time, an increasingly ‘policy-driven’ investment environment is emerging.

New free trade agreements

The EU has recently launched a large number of free trade agreements. The much-publicized and protracted Mercosur agreement is set to enter into provisional application – as regards the trade policy provisions – from 1 May 2026. The interim trade agreement with Chile came into force in February 2025. The agreements with India and Australia are in the final stages prior to ratification. What these agreements have in common is that they are intended to improve the framework conditions for trade and investment: depending on the agreement, this involves removing or reducing barriers to investment and trade, improving investment protection and legal certainty, and, in some cases, facilitating access to strategic sectors and raw materials.

Net‑Zero Industry Act (NZIA)

The Net-Zero Industry Act is a key tool for advancing climate-neutral industries across the EU. First, it improves the overall framework for all net-zero technology projects by significantly accelerating and better coordinating authorization procedures. For example, the Regulation sets strict deadlines for approval procedures, and national "single points of contact" create a one-stop shop that centralizes communication with authorities. Its defining feature, however, is the ability to designate a project as a "Strategic Net-Zero Project." Projects with this status enjoy preferential access to the "Net-Zero Europe Platform," which provides targeted support for mobilizing capital. They also receive administrative priority, meaning closer regulatory support, even faster approvals, and a designation of "overriding public interest," which can significantly influence public decision-making in the project's favor.

Critical Raw Materials Act (CRMA)

The Critical Raw Materials Act (CRMA) aims to secure the long-term supply of critical raw materials—such as rare earths, lithium, and cobalt—and reduce dependence on non-EU countries. The CRMA also accelerates and improves the coordination of authorization procedures. In addition, it establishes transparency and risk-management obligations along supply chains, giving investors a stronger information base for strategic decisions. Projects granted “Strategic Project” status—available by applying to the European Commission—are particularly important. Similar to the NZIA, these projects benefit from prioritized approval procedures, closer regulatory support, and easier access to financing.

​​​​​​​​​​​​​​EU Chips Act

The EU Chips Act is the European Union’s flagship industrial policy instrument for strengthening the semiconductor industry, securing supply chains, and achieving technological sovereignty. Unlike the CRMA and the NZIA, it focuses on large-scale, capital-intensive projects. More broadly, the Chips Act improves investment conditions across the entire semiconductor value chain—most notably by mobilizing substantial public funding and applying state-aid rules more flexibly, enabling Member States to provide greater support for strategically important semiconductor products. It also accelerates and better coordinates approval processes. In addition, it provides targeted support for research and pilot lines, giving investors access to state-of-the-art innovation infrastructure.

As with the other regulations discussed, projects with special status—particularly “Integrated Production Facilities” and “Open EU Foundries”—benefit from prioritized regulatory treatment and easier access to public funding.

Another defining feature of the Chips Act is its integrated crisis mechanism, which enables the EU to closely monitor supply chains and grants broad intervention powers in the event of shortages, such as prioritizing certain orders. For investors, this adds an additional factor to consider in long-term risk assessments.

​​​​​​​Funding

There are extensive funding programs at both the EU and national levels, with a particular focus on innovation projects and initiatives aimed at achieving climate neutrality.

For example, the EU supports innovation through its dedicated Innovation Fund, which offers an estimated budget of approximately €40 billion in direct, non‑repayable grants. A large share of overall financing for green and technological investments is also channeled through the Member States under the EU State aid framework. Greater flexibility in State aid rules plays a key role here: it enables targeted subsidies for strategic sectors to be granted more quickly and allows the EU to respond to global subsidy competition. This includes, in particular, support under relevant State aid frameworks and the General Block Exemption Regulation (GBER), complemented by national programs in Germany that build on and expand EU‑level instruments.

In parallel, the Capital Markets Union and initiatives under the Listing Act aim to gradually improve equity financing options for growth‑oriented companies and assets, thereby broadening funding sources beyond traditional grants and subsidies.

In addition, a wide array of current federal and state programs in Germany, as well as relevant EU calls and funding windows, offer further financing opportunities for innovation and transformation projects.

Beyond providing financial resources, policymakers are increasingly focused on reducing bureaucratic hurdles and streamlining procedures to make access to funding instruments faster and more efficient for companies and investors. This is especially true for innovation projects and climate‑neutrality initiatives, where public funding programs create particularly attractive incentives for investors.

M&A investment climate and trends

Dealmaking conditions across Germany and the broader EU are gradually improving. Stabilizing interest rates, abundant private credit, and ongoing corporate portfolio restructuring are reopening transaction pipelines, particularly in the mid-market.

Against this backdrop, EU FDI screening, FSR, and sanctions regimes are reshaping deal structures, timelines, and risk allocation, albeit with materially different legal effects. FDI screening typically operates as a transaction-blocking or condition-imposing regime. The FSR functions as a case-by-case distortion control framework with noteworthy data and timing uncertainty. Sanctions regimes, by contrast, constitute hard prohibitions that may render transactions legally impermissible. Execution certainty is therefore dependent on early, regime-specific regulatory analysis rather than post-signing mitigation.

ESG and trade compliance requirements constitute a parallel regulatory layer that shapes sourcing strategies and supply chain resilience. Frameworks such as the EU Deforestation Regulation (EUDR) and related due diligence regimes are not only relevant for compliance purposes but also affect commercial structuring, supplier dependencies, and post-closing integration planning. As a result, regulatory feasibility and execution certainty have become core determinants of transaction viability alongside valuation and strategic rationale.

Overall, European M&A is steadily characterized by the need to integrate regulatory analysis into deal execution from the earliest stage, rather than treating it as a closing condition.

A Market Driven by Capital Pressure and Structural Reallocation

Several macro-financial dynamics continue to support a gradual rebound in European M&A activity. Lower interest rate volatility and the stabilization of European Central Bank (ECB) policy have improved planning certainty for bidders and sponsors. Private credit has become an established financing channel, particularly in mid-market leveraged transactions, with unitranche and hybrid structures partially substituting traditional syndicated lending.

Private equity remains under deployment pressure due to historically high levels of dry powder. Extended holding periods have increased the use of continuation funds, dividend recapitalizations, and portfolio rotations as liquidity management tools.

Despite subdued overall volumes, Germany remains a core European investment market. “Mittelstand” succession dynamics, corporate carve-outs, and fragmented industry structures continue to generate a stable pipeline of opportunities. At the same time, corporates now divest non-core assets to fund transformation and capital expenditure.

Financing structures continue to evolve with private credit, W&I insurance, and structured equity solutions playing a central role in bridging valuation gaps and allocating execution risk. W&I insurance remains particularly prevalent in competitive auction processes, where it facilitates cleaner exits and reduces residual liability exposure for sellers.

In parallel, transaction documentation has shifted to reflect a more complex regulatory environment. Conditions precedent are now routinely structured on a regime-specific basis, clearly distinguishing between merger control, FDI screening, FSR review, and sanctions-related requirements. This reflects the fragmentation of regulatory approval requirements across multiple legal regimes with distinct timelines and substantive tests.

In regulated or strategically sensitive sectors, buyers are oftentimes required to accept enhanced efforts obligations, including commitments to remedies or behavioral undertakings, and in some cases “hell-or-high-water” standards. This shifts the execution risk from the seller towards the buyer. While “hell-or-high-water” provisions remain transaction-specific in the European market, their use is more frequently observed in competitive or cross-border settings.

Material adverse change (MAC) clauses are now often excluding foreseeable regulatory developments. In parallel, reverse break fees and earn-outs are used to allocate regulatory and market-access risk economically, thereby enhancing execution certainty.

Representations and warranties have expanded, particularly in relation to beneficial ownership, state-linked capital exposure, and compliance with FDI, sanctions, and foreign subsidy regimes. In technology-driven transactions, this is complemented by warranties relating to data protection, cybersecurity, and AI governance.

Sector hotspots: Opportunity meets regulatory friction

Attractive sectors for private capital and investors are often exposed to regulatory scrutiny. In many competitive scenarios, the key constraint is not strategic rationale, but the ability to obtain timely and reliable regulatory clearance.

​​​​​​​​​​​​​​Energy Transition & Infrastructure

The energy transition remains a central driver of European deal activity. Investment is concentrated in grid infrastructure, renewable generation, storage capacity, heat transition technologies, and hydrogen-adjacent value chains.

These assets are typically developed and financed through consortium and platform structures. Many qualify as critical infrastructure, bringing transactions within the scope of national FDI regimes implementing Regulation (EU) 2019/452. As a result, early-stage regulatory analysis and proactive engagement with competent authorities have become standard components of transaction planning.

​​​​​​​Industrial Automation & Advanced Manufacturing

Industrial automation, robotics, sensors, controls, and power electronics continue to benefit from reindustrialization trends, supply chain localization, and decarbonization-driven capital expenditure.

Dual-use technologies and export control sensitivity are expanding the regulatory perimeter. Investment control regimes are now relevant not only for defense-adjacent assets but also for advanced industrial technologies with potential strategic applications.

​​​​​​​Technology, Software & Data/AI

Vertical B2B software, cybersecurity, and industrial IoT remain highly active areas for both private equity and strategic investors.

The EU AI Act, in conjunction with GDPR and sector-specific cybersecurity requirements, introduces additional compliance layers that are directly relevant for due diligence, target valuation, and post-closing integration. Businesses qualifying as “high-risk AI systems” require enhanced regulatory scrutiny.

​​​​​​​Healthcare & Life Sciences

Healthcare services, contract development and manufacturing organizations (CDMOs), diagnostics, and specialized life sciences segments continue to attract investor interest, driven by demographic trends and market fragmentation.

Regulatory density in this sector is primarily technical rather than geopolitical. Transactions often require detailed analysis of product approvals, GMP compliance, reimbursement frameworks, and, where applicable, change-of-control notification requirements.

The sector is expected to remain active, particularly in relation to consolidation strategies and buy-and-build platforms.

​​​​​​​​​​​​​​Mobility & Electrification

Investment in mobility is focused on electrification, charging infrastructure, and selective consolidation within the automotive supply chain.

Transactions are often driven by the need to access software capabilities, electrification technologies, and advanced driver assistance systems. At the same time, the sector is characterized by margin pressure and demand volatility, resulting in more conservative valuation approaches and increased transaction structuring complexity.

A significant portion of deal flow is linked to restructuring situations, including carve-outs and asset-deal transactions.

​​​​​​​Distressed & Special Situations

Energy-intensive industries, particularly chemicals, steel, glass, cement and paper, as well as commercial real estate, office and energy-intensive property portfolios, are generating opportunities in distressed and special situations.

Transactions in this space require careful structuring in light of insolvency law considerations, including liability allocation in asset deals and the use of restructuring frameworks under applicable national regimes.

​​​​​​​​​​​​​​Politically Supported but Highly Regulated Sectors

Semiconductors, defense, aerospace, and critical raw materials benefit from strong policy support and public funding across the EU. At the same time, these sectors are subject to heightened scrutiny under FDI screening regimes and the FSR Regulation. Transactions in these sectors typically require detailed disclosure of ownership structures, funding sources, and potential links to third-country state support.

In defense-related transactions, additional considerations arise in relation to national security, export controls, and access to sensitive technologie.

Outlook 2026/2027

​​​​​​​Three Scenarios for Deal Execution

The trajectory of European M&A will depend on the interaction between macroeconomic conditions and regulatory intensity.

In a soft-landing scenario with easing rates, deal volumes are expected to increase, supported by renewed take-private activity. Regulatory strategy will become a front-loaded workstream, with early engagement on merger control, FDI, and FSR approvals essential to avoid late-stage disruption. Competitive pressure continues to drive the use of locked-box structures with limited conditionality, often replacing extensive post-closing purchase price adjustments. A defining feature is the use of locked-box interest or equivalent value accrual mechanisms, reflecting the time value of money between the locked-box date and closing. While such mechanisms enhance price certainty and avoid post-closing purchase price adjustments, they shift economic and legal focus toward the robustness of the anti-leakage regime. This, in turn, increases the importance of carefully negotiated leakage definitions, clear carve-outs for permitted payments, and effective covenant protection. In cross-border transactions, the interaction between locked-box mechanics and regulatory long-stop timelines requires particular attention where extended approval processes affect the economic balance of the transaction.

In a higher-for-longer environment, activity will remain concentrated in carve-outs, special situations, and private credit-backed transactions. Greater emphasis will be placed on downside protection in transaction documentation, including detailed risk allocation provisions, earn-out structures, and tailored conditions precedent.

In a more fragmented geopolitical environment, regulatory scrutiny is likely to intensify. Cross-border transactions may require alternative structuring approaches, including joint ventures, minority investments, or co-investments with local partners. Regulatory strategy will need to address also broader considerations such as governance structures, information access, and long-term compliance commitments.

​​​​​​​​​​​​​​Conclusion

Across all scenarios, the ability to anticipate regulatory outcomes and reflect them in pricing, conditionality, and risk allocation mechanisms is becoming a key differentiator in competitive processes. Another key question, beyond strategic and commercial attractiveness, is whether a transaction can be structured and executed within a complex, multi-layered regulatory framework.

ESG and trade compliance requirements constitute a structural layer of cross-border transactions, shaping supply chains, sourcing decisions, and supplier relationships. Their impact is not limited to compliance but also directly influences commercial value and post-closing integration success.

Action checklist for foreign investors

In terms of execution, it is advisable to start data collection for regulatory clearance procedures as early as the NDA stage to reduce friction in later phases and across multiple transactions. Early mapping of relevant investor and target related information helps to identify potential red flags and to shape the overall regulatory strategy.

ESG and supply chain-related requirements should be fully integrated into commercial due diligence given their impact on sourcing continuity, supplier dependencies, and post-closing integration planning.

Transaction documents should explicitly coordinate FSR, FDI, and antitrust timetables in the SPA to avoid misaligned closing conditions and unintended sequencing issues. Regulatory risk should be directly embedded into transaction documentation through tailored conditions precedent, MAC carve-outs, enhanced efforts obligations, and, where appropriate, reverse break fees or earn-out mechanisms, in order to ensure robust risk allocation and preserve execution certainty throughout the transaction lifecycle.

Over time, we would recommend that deal teams closely monitor evolving notification practice, typical RFI scope, and emerging timing benchmarks, and reflect these developments in their internal playbooks, transaction planning, and board‑level communications.

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