The Importance of Cybersecurity in Private Equity Investments

In an era characterized by rapid digital transformation, businesses across the spectrum are leveraging technology to fuel progress, growth, and competitive advantage. In particular, private equity investors have actively harnessed technology to streamline portfolio company performance. However, the technological advancements accompanying this growth also open the door to many potential cyber threats targeting sensitive data and critical assets. To preserve investment value and ensure the long-term success of private equity investments, it is essential for investors to recognize the importance of cybersecurity in safeguarding their valuable assets.

The Critical Role of Cybersecurity

Recent cyber threats have underscored the significance of cybersecurity in private equity investments. Merely focusing on the financial aspects of an investment is no longer sufficient. Instead, attention must be given to protecting sensitive information and the very foundation of the investments themselves.

Private equity firms have increasingly found themselves in the crosshairs of cybercriminals. In one example, cyber attackers targeted three private equity firms via wire transfers, ultimately resulting in the loss of $1.3 million. According to Accenture, 68% of organizations see an uptick in cyber incidents the month of a deal closure, and mid-market companies are hit the hardest. In the Huntress The State of Cybersecurity for Mid-Size Businesses in 2023 report, 1 in 4 mid-size companies suffered a cyber-attack or didn’t know if they did, within the last 12 months. On top of that, 61% do not have a dedicated cybersecurity expert within their organization. The alarming surge in cybercrime activities targeting PE transactions and portfolio companies has reinforced the need for enhanced focus and support to tackle cybersecurity challenges.

Challenges in Private Equity Cybersecurity

Private equity firms face several challenges while addressing cybersecurity risks in their portfolio companies:

1. Limited visibility: Firms often have inadequate insight into the cybersecurity posture of their portfolio companies.
2. Evolving nature of cyber threats: Adversaries are constantly refining their techniques, making it difficult to keep pace with increasingly sophisticated attacks.
3. Varying degrees of maturity: Private equity target companies have different levels of maturity when it comes to existing cybersecurity systems and procedures.
4. Lack of standardized practices: Absence of consistent standards and frameworks to support cybersecurity assessments makes it difficult to implement and enforce these processes.
5. Portfolio companies’ reluctance: Portfolio companies may resist dedicated cybersecurity initiatives, citing financial constraints or other concerns.

Amid these challenges, private equity funds must navigate the complexities of industry-specific compliance requirements while establishing a common risk management framework to manage cyber risks across their entire portfolio.

Private Equity Firms and Portfolio Companies as Prime Targets for Cybercriminals

Cyber criminals perceive private equity firms and their portfolio companies as attractive targets for a variety of reasons:

• Deal announcements and cash: The prospect of a deal and the existence of ready cash draw the attention of cyber attackers.
• High-value data: Both private equity firms and their portfolio companies possess sensitive and proprietary information, making them prime targets for cybercriminals seeking to exploit such data.
• Perceived vulnerabilities: Smaller and mid-sized portfolio companies often have limited financial resources and comparatively weaker cybersecurity systems, which make them attractive targets.

Building Cybersecurity Resilience in the Private Equity Transaction Lifecycle

To cultivate cyber resilience and mitigate cybersecurity risks across the transaction lifecycle, private equity firms are urged to take the following steps:

• Due diligence: Conduct rigorous pre-acquisition diligence on a target company’s cybersecurity posture and compliance ecosystem to assess and manage potential risks.
• Announcement: Ensure that portfolio company leadership and security teams are aligned on the required cybersecurity measures during the post-acquisition phase.
• Value creation: Implement robust cybersecurity initiatives throughout the ownership period to systematically reduce portfolio companies’ exposure to cyber risks.
• Exit: Maximize the value of private equity investments by showcasing enhanced cybersecurity measures as a selling point, and by proactively addressing potential pitfalls that could hinder the sale of the portfolio company.

Three Pillars of Cybersecurity

Private equity investors must be proactive in addressing cybersecurity risks to both safeguard their investments and ensure the long-term success of their portfolio companies. By developing robust cybersecurity strategies and actively engaging with portfolio companies, private equity firms can effectively mitigate cyber threats and maintain a competitive edge in an increasingly complex digital landscape. This approach must factor in the three major pillars of cybersecurity: People, Process, and Technology.

There is no silver bullet when it comes to implementing a strong cybersecurity defense. Instead, cybersecurity should encompass a blend of these three aspects, recognizing that neglecting one area will compromise the effectiveness of the others:

People: Human factors are often the most significant weakness in a security chain, as a considerable portion of cyber incidents occur due to human errors or lack of awareness. To address the People aspect, private equity firms should prioritize ample resources for regular training and awareness, establish transparent communication channels, and hire skilled cybersecurity experts to oversee risks.

Process: Implementing and managing systematic processes is vital in building a resilient cybersecurity posture. By regularly assessing security processes and identifying areas of improvement, private equity firms and their portfolio companies can fine-tune measures that prevent or quickly address security threats.

Technology: Technology acts as a protective shield against cyber threats, and staying up-to-date on investments in security tools is a must. The private equity portfolio companies should customize settings on network devices while leveraging leading security tools to enhance their cybersecurity posture and avoid security gaps.

By adopting an integrated security strategy that gives equal importance to People, Process, and Technology, private equity firms can create a stable and well-balanced cybersecurity architecture that protects both their investments and their reputation in the market⁵.

Cybersecurity with E78 Partners

Third-party providers like E78 possess the expertise and experience to offer an unbiased, objective assessment of your cybersecurity program. Collaborating with E78 brings key benefits, including:

• Holistic evaluation: Third-party providers take a comprehensive approach by examining your organization’s cybersecurity posture in terms of People, Process, and Technology aspects. This method helps detect gaps, vulnerabilities, and areas for improvements across all facets of your cybersecurity framework.
• Industry best practices: External providers have extensive experience working across industries and are well-versed in the latest global best practices and security standards. Their guidance helps align your organization’s cybersecurity processes with established industry benchmarks.
• Fresh perspectives: An external provider can identify issues or risks that may have been overlooked by internal teams, offering a fresh viewpoint that can uncover new opportunities to increase overall cybersecurity effectiveness.
• Regulatory compliance: Third-party reviews ensure your cybersecurity program adheres to relevant regulatory requirements and industry-specific compliance standards, thereby reducing the risk of non-compliance and potential penalties or reputational damage.
• Continuous improvement: A third-party review can also help organizations establish an ongoing process for monitoring and measuring cybersecurity performance, enabling the identification of inefficiencies and establishing best practices for continuous improvement.

E78 can provide protection at every stage of the transaction lifecycle, deliver valuable insights, improve your overall cybersecurity posture, and ensure your organization’s assets and sensitive data remain well-protected. From due diligence and managed IT services to project management and interim IT leaders, we are here to support every step of the way.

Contact us for a free assessment or to learn more.