150 THE US-ISRAEL | Legal Review 2025/26 The emergence of AI adds a further layer of both urgency and opportunity. Leading PE firms are racing to unlock meaningful value in their portfolios through generative AI tools. While most portfolio companies remain in early-stage experimentation, an increasing number are identifying tangible use cases with the potential to produce real returns on investment. Private investors representing $3.2 trillion in assets under management have reported that a majority of their portfolio companies are in some phase of generative AI testing and development, with nearly 20% having operationalized generative AI use cases. Given the trajectory of these emergent technologies, there is strong reason to believe that software growth will continue to accelerate over the long term. However, valuations already reflect elevated expectations, competition for deals has never been more intense, and an uncertain macroeconomic environment continues to cloud the shorter-term outlook. PE funds must approach this sector strategically and cannot afford to rely on a growth-only thesis for value creation. Part III – The 2026 Market in a Time of Conflict As the conflict in the Middle East has intensified, the global M&A market has remained optimistic. By the time of US Operation Epic Fury and Israel Operation Roaring Lion, deal values were up on a year-over-year basis. The global conflict has not caused deals to pause; rather, timetables have been stretched and due diligence has become more focused. Tom Swerling, Global Head of Equity Capital Markets at Deutsche Bank, noted: “At the end of the day, we have a lot of clients that still need to do deals.” A clear example of the confidence investors have in the Israeli market, is the closing of the Vix acquisition in March 2026. With respect to deal structuring, transactions in the region in 2026 are anticipated to feature more complex earn-out structures, deferring a portion of the purchase price until the business demonstrates resilience in a post-conflict environment, thereby bridging the valuation gap between cautious buyers and optimistic sellers. Due diligence is also expected to require deeper “Operational Stress Testing,” with advisors evaluating how a business handles supply chain blockades or sudden increases in maritime insurance premiums. Representations and warranties insurance (“RWI”) insurers are further expected to begin scrutinizing, and in some cases excluding, risks associated with the evolving US/Israel/Iran conflict. This may take the form of targeted exclusions, heightened diligence on supply chain and operational exposures, or narrower coverage for impacts connected to regional instability. For well-capitalized PE funds, there are still significant opportunities. While some cyclical sectors may experience temporary distress, others — particularly those focused on cybersecurity, energy logistics, or defense technology — may actually see a valuation uplift as the region prioritizes security and sovereignty. Israel’s industrial base has also reached a level of maturity that positions it as a compelling destination for US PE funds. Established Israeli companies across the aerospace and defense, retail, technology, renewable energy, and healthcare sectors have demonstrated sustained growth trajectories and deep sector expertise. These are attributes that align closely with the return profiles PE funds are targeting in the current cycle with the volume of dry powder available for deployment. As the current conflict subsides and new peace agreements reshape the region’s geopolitical landscape, the conditions for cross-border investment are expected to improve materially. The normalization of diplomatic and commercial relations — building on the framework established by the Abraham Accords — is anticipated to accelerate US PE fund deployment into Israel, as reduced geopolitical risk premiums, expanded market access, and strengthened bilateral economic ties create a more favorable environment for deal origination, execution, and exit. As Adam Katz, CIO at Irenic Capital Management, noted: “Time is risk and there is no reason to believe opportunities available today will necessarily be available tomorrow.” Part IV – Sheppard at the Intersection of Private Equity, Regulated Industries and Israel Sheppard’s global PE practice advises funds across the full transaction cycle — from structuring and financing through portfolio management, capital markets, and exit. Sheppard’s experienced, full-service sector teams support PE funds and corporate clients across key industries, including aerospace and defense, retail, healthcare, technology, life sciences, energy, and food and beverage, bringing deep transactional experience that helps funds move quickly in competitive processes without cutting corners on diligence or regulatory risk. These capabilities are particularly valuable in crossborder contexts. Sheppard’s Israel practice works closely with companies and investors operating in and across Israel and the broader region, drawing on the firm’s sector depth and cross-border experience to navigate the legal, regulatory, and transactional landscape unique to the market. This includes foreign investment approvals, defense and security-related regulatory frameworks, intellectual property protections, and commercial
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