2026 ACG NY DealSource Series: A&D and GovCon – An Inside Perspective
Tess discussed the impacts of increasing defense budgets and Department of War (DOW) acquisition reforms on merger and acquisition (M&A) dynamics in her opening intelligence brief. Near-term, fast-paced opportunities stemming from the Scalable Homeland Innovative Enterprise Layered Defense (SHIELD) contracting vehicle have incentivized rapid consolidation of key command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) technology developers in 2025. Acquisition reform has reshaped the Defense Contracting space, delivering new opportunities for smaller companies and positioning these innovative and agile vendors as lucrative M&A targets for the large, legacy prime contractors that have traditionally dominated the market.
Tess also highlighted the rapidly emerging investment opportunities within the Military Space market, capitalizing off strong demand tailwinds from the Golden Dome initiative. Both the total volume and value of PE and venture capital (VC) investments in the Space market jumped considerably in 2025 as investors vied for a share of the high-demand Space Defense, Space Technology, and Space Manufacturing segments. M&A activity likewise grew over the same period as companies looked to rapidly reposition portfolios to serve space-based contracting opportunities.
The ADGS M&A market is well-positioned for strong growth in 2026, displaying unique resilience in the prior year despite facing powerful headwinds that suppressed dealmaking activity across the wider middle market. Capstone expects 2026 to be a banner year for M&A activity within the A&D and GovCon markets, supported by tailwinds including volatile multi-hemisphere geopolitical conflicts, easing pressure on contracting opportunities, government initiatives driving reinvigoration of the domestic U.S. industrial base, and broader favorable economic conditions.
Acquisition Strategies Hone in on Government Modernization Technologies, Warfighter Enablement Software, and Autonomous Systems
Capstone spoke with industry leaders at PE firm Sagewind Capital and defense technology developer Forterra to gain insights into the M&A perspectives of both financial and strategic buyers for 2026. The insights provided by Sagewind and Forterra suggest reinvigorated resolve among ADGS M&A dealmakers, and the actions of these firms and their counterparts will likely serve as strong signals for the current and future health of these sectors. Particular areas of interest for the firms centered on next-generation technologies that bring efficiency and efficacy to government agencies, warfighters, and defense systems. More details are highlighted in the conversations below.
Joshua Coonin, Principal at Sagewind Capital
Capstone spoke with Joshua Coonin, Principal at Sagewind Capital, to discuss the PE firm’s investment criteria and thesis in the A&D and GovCon markets. Josh has been with Sagewind Capital since 2018, bringing experience in M&A, capital raises, and sponsor-backed transactions. As Principal, Josh works to support the firm’s purpose-built, operationally-focused, and relationship-driven investment thesis.
Sagewind Capital targets equity investments of $10-$150 million in companies with up to $40 million in EBITDA within the Government Technology and Defense Technology markets.
What is your current investment thesis for the A&D and GovCon markets? At Sagewind, our thesis is centered on backing strong management teams and differentiated, technology-driven businesses whose solutions address mission-critical needs for the defense and government customer. We look for companies with durable competitive advantages, whether through proprietary technology, specialized domain expertise, or deep customer intimacy, that make them genuinely difficult to displace. We are particularly drawn to businesses operating in areas where the government’s reliance on advanced technology is only growing: autonomous systems; command and control [C2]; intelligence, surveillance and reconnaissance (ISR); space; and digital modernization of legacy infrastructure, among others.
We invest across the middle market, where we believe there is the greatest opportunity to add meaningful strategic value. We take a long-term, patient approach to value creation, typically targeting holding periods of five to 10 years, which we believe is particularly well-suited to the cadence of the Government Technology market.
Are there specific areas of the A&D or GovCon markets that you are actively targeting/expecting to target in 2026? We remain highly active across several areas that we believe are at the intersection of compelling mission need and secular growth. On the Defense side, we are focused on companies supporting next-generation capabilities in areas such as Space Systems, Electronic Warfare, Missile Defense, Counter-Unmanned Aerial Systems (C-UAS), and Synthetic Training Environments. The modernization of the U.S. military, and the corresponding effort to build and sustain warfighter readiness, creates a compelling and durable demand signal across all of these verticals.
On the Government Technology side, we continue to target businesses driving digital transformation across federal agencies, particularly where we can leverage artificial intelligence (AI) to increase productivity and reduce costs for customers. This includes information technology (IT) modernization, data analytics, and software solutions that improve how government delivers services to citizens, veterans, and warfighters alike.
Across all of these areas, we prioritize companies led by exceptional management teams that are well-positioned to grow both organically and through acquisitions.
How do you expect the A&D and GovCon M&A markets to fare in 2026, particularly compared to 2025? We expect 2026 to be a more active M&A year for the sector than 2025. Last year had uncertainty with the presidential administration change, Department of Government Efficiency (DOGE) and then a prolonged government shutdown. This year has already started off strong with companies coming to market, and we are seeing increased willingness from business owners, particularly founders and entrepreneurs who built their companies over many years, to engage in discussions around partnership and what the next chapter looks like. At the same time, Financing markets have improved relative to the elevated rate environment of 2023 and 2024, which is enabling buyers to be more decisive.
Do you expect increased competition in the M&A market from strategics in 2026, given government initiatives including DOW acquisition reform? Efforts to streamline procurement, reduce bureaucratic friction, and accelerate the transition of innovative technology to the warfighter have the potential to expand the addressable market for a number of our portfolio companies and prospective investments. To the extent that reform reduces barriers to entry for non-traditional contractors and smaller technology-forward businesses, it should also increase the pool of attractive acquisition targets for both strategics and financial sponsors.
We do expect strategics to remain active in pursuing acquisitions of differentiated technology companies that can accelerate their own capabilities and help them win in a reformed acquisition environment. However, we do not view this as a headwind for middle market-focused investors like Sagewind. Our flexible, patient capital model resonates with founders and management teams who may not be ready for a full strategic exit and want a second bite at the apple. In many cases, we see ourselves as a natural first institutional partner, helping companies scale and professionalize before eventually attracting broader strategic interest.
What are the key macroeconomic, regulatory, legislative, or geopolitical factors you expect to influence the 2026 A&D and GovCon M&A markets? The sustained elevation of the defense budget, driven by ongoing conflict in the Middle East and geopolitical tensions in Europe and the Indo-Pacific, continues to create a durable demand environment for defense-oriented businesses. Bipartisan support for defense spending has remained relatively consistent, which provides a measure of stability that investors in the sector can underwrite with confidence. In addition, the broader push toward modernization and technology adoption within the military creates a favorable backdrop for software, data, and autonomy-focused businesses.
DOGE-driven government efficiency initiatives and potential budget reallocations across civilian agencies introduce some near-term uncertainty for certain government contracting businesses. We are thoughtful about this exposure in our underwriting and prioritize businesses whose value proposition is tied to outcomes and efficiency, rather than legacy contracts that may face greater scrutiny.
Capstone spoke with Justin Gans, Head of Corporate Development at Forterra, to discuss its M&A outlook and plans for 2026. Justin joined Forterra in 2025, bringing experience in investment banking, business development, and corporate development at firms including Capstone Partners, AeroVironment (Nasdaq:AVAV), Elbit Systems (Nasdaq:ESLT), and Northrop Grumman (NYSE:NOC). Justin brings real-world experience and perspective to his role, having served as a U.S. Navy SEAL for 11 years.
Forterra’s November 2025 Series C capital raise of $238 million, led by Moore Strategic Ventures, brought the company’s post-money valuation across the $1 billion mark.
What is your current investment thesis for the A&D and GovCon markets? We are actively looking for potential acquisitions that would help us improve our capabilities, strengthen our supply chain, or move us into adjacent markets.
Are there specific areas of the A&D or GovCon markets that you are actively targeting/expecting to target in 2026? We are focused on the broader market of autonomous systems, primarily specific systems, sensors, or capabilities that enable complex systems to perform better or work together cooperatively.
How do you expect the A&D and GovCon M&A markets to fare in 2026, particularly compared to 2025? We think it will continue to be a strong market, especially with the catalyst of the Iran war.
Do you expect increased competition in the M&A market from larger strategics in 2026, given government initiatives including DOW acquisition reform? We don’t think there will be any prime-to-prime large acquisitions, but we do think the prime contractors will be active in buying smaller companies.
What are the key macroeconomic, regulatory, legislative, or geopolitical factors you expect to influence the 2026 A&D and GovCon M&A markets? With the U.S. wanting to buy “American,” and with Europe reviving its defense industrial base and wanting to buy from European companies, we expect there to be more cross-national acquisitions or joint ventures.
Capstone’s ADGS banking team actively attends the latest conferences, trade shows, and events occurring across the U.S. To connect with Tess Oxenstierna or the wider ADGS banking group, please contact the team.
To discuss the market implications of DOW acquisition reform, provide an update on your business, or learn about Capstone’s wide range of advisory services and ADGS industry knowledge, please contact us.
Brendan Bradley, Associate, was the lead Market Intelligence contributor to this article.
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