By Nabeil Samara, Quorum Cyber
Private equity firms have become attractive targets for cybercriminals. They are perceived as treasure troves of sensitive client and market information and often operate within a complex network of relationships with investors, banks, legal partners, and their portfolio companies. This places them in a unique position of vulnerability, where a single weakness can lead to significant impact across a wide portfolio.
In the realm of private equity, balancing strategic opportunities and risk mitigation is a delicate act. Making timely and informed decisions is crucial; it can determine whether a business becomes robust and profitable or suffers losses, significant setbacks, and reputational damage.
The typical investment cycle in private equity involves raising funds, investing in portfolio companies, nurturing them for growth, and eventually exiting through a sale or Initial Public Offering (IPO). Each stage depends on multiple factors, and a single miscalculation—whether from a cyber breach or operational vulnerability—can have serious negative consequences. Such missteps could jeopardize not only individual investments but also the firm’s overall performance and reputation.
Given that the investment cycle usually spans three to five years, General Partners and Investment Committees must remain vigilant, navigating various challenges and obstacles at each stage. Every risk must be expertly managed with the long-term goal in mind: to create resilient, high-growth businesses.
It’s complex enough without taking cyber risk into account. Today’s unpredictable cyber threat landscape presents every board with another complex risk to mitigate. A single serious cyber incident at any stage of the investment cycle can cause immense financial and reputational damage—a risk that firms cannot afford to take. Fortunately, this risk is not entirely beyond their control. Every organization can and should take responsibility for its cybersecurity and cyber resilience.
As with any risk, it’s essential to understand the adversary. Cybercriminals are as skilled in their illicit activities as professionals in any legitimate career. They possess the necessary technical expertise and thoroughly research their target sectors. They invest time in understanding which firms are investing in or acquiring specific portfolio companies. They recognize that, just as critical decisions and actions need to be timely, the precise timing of their cyberattacks can help them achieve their malicious goals. Navigating the complex web of cyber threats is indeed a significant challenge for private equity firms.
A treasure trove of valuable information
Private equity firms’ vulnerability is due to the nature of their investments. Many portfolio companies are start-ups or scale-ups that often lack mature security infrastructures. One survey revealed that 52% of private equity firms reported a decline in their client’s stock value due to data breaches in acquired companies. Additionally, 49% indicated that undisclosed breaches led to collapsed deals. Furthermore, 82% believe that robust cybersecurity infrastructure enhances a company’s assessed value.
A successful attack on one portfolio company can potentially compromise others, including the private equity firm itself. Stolen data can be exploited for malicious activities such as insider trading, strategic business sabotage, and operational disruptions, all of which can be detrimental to the bottom line. The high volume and value of financial transactions managed by these firms present lucrative opportunities for attackers. The consequences of a cyberattack can be devastating, leading to the collapse of client projects, reputational damage, and hefty fines. Building brand reputation and investor trust takes years, but a single security lapse can significantly diminish investment value and impact the firm’s ability to leverage or pursue acquisitions.
One global IT service company reported that 68% of private equity houses experience an increase in cyber incidents during the month of deal closure, with incidents jumping by up to 116% post-close. The frequency of incidents continues to rise in the following month, which can seriously impact private equity houses’ buy-and-build strategies and hinder further acquisitions in the same industry.
Private equity firms are particularly vulnerable to business email compromise (BEC) attacks, where fraudsters deceive businesses into transferring funds to their accounts. Recent advancements in artificial intelligence (AI) have led to sophisticated impersonations via email, voicemail, and video. With the latest generative AI (GenAI) tools, criminals can impersonate a person with just three seconds of audio and seven seconds of video, significantly lowering the barrier to conducting successful spoofing attacks.
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Prevention is better than cure
General Partners, who oversee the daily operations and investment decisions of private equity firms, are now taking proactive measures to safeguard their businesses against today’s most significant cyber threats. Limited Partners, who have a vested interest in the security of their investments and the portfolio companies, are increasingly demanding transparency on how these assets are protected from cyber risks. Consequently, there are numerous compelling reasons for firms to regard cyber risks with the same level of seriousness as market and legal risks. A successful cyberattack on a portfolio company can jeopardize the reputation and financial stability of both the firm and its investors.
Firms face vulnerabilities on multiple fronts, including their vendors, third-party suppliers, and portfolio companies.
Safeguarding the investment lifecycle
Private equity firms understand the critical importance of the investment lifecycle, and cybercriminals are equally aware of this. Preparing for the acquisition and sale of any company is crucial. Ensuring robust cybersecurity can enhance a company’s valuation, while recognizing that cybercriminals may target companies at pivotal moments, such as just before a sale, is equally important.
By professionally managing the cybersecurity of their portfolio companies, private equity firms can minimize risk, maximize exit value, and maintain their reputation. In the face of a rapidly expanding cybercrime economy, proactive cybersecurity measures are no longer optional but an absolute necessity for private equity firms.
Creating a portfolio-wide cyber security culture and strategy
Companies can significantly enhance their security by implementing a portfolio-wide strategy to mitigate cyber risks. This involves cultivating a culture of cyber awareness, offering comprehensive training for employees across both the private equity firm and its portfolio companies, and forming partnerships with trusted cybersecurity experts.
Adopting a threat-centric approach to cybersecurity is essential. Firms must evaluate the potential impact of a breach on each company’s brand, reputation, and strategic value, while also considering the current threat landscape and deploying appropriate protective measures.
The cyber risk throughout the investment cycle can be mitigated by strengthening cybersecurity and cyber resilience across a firm and its portfolio of companies. However, this is possible only if the board and the chair of the Risk Committee take accountability for cyber risk and take decisive action early.
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