Private Equity Cyber Security: Key Threats and Solutions

Introduction 

Cyber security is a critical concern for private equity firms due to the sensitive data they manage and the high stakes of their transactions. Today, cyber security is recognised as a significant investment risk. General Partners must assess a company’s security posture before finalising a deal, to determine if it is immature, poorly governed, or compromised.

This article explores the current cyber threats facing private equity firms and their portfolios, and outlines key steps to establish an effective cyber security strategy for now and the future. Navigating these complexities is essential, and with the right approach, it can be simplified.

Why is Cyber Security for Private Equity Important? 

Cyber security is crucial for private equity firms due to the sensitive financial and personal data they handle. These firms are prime targets for cyberattacks. For example, a cybercrime group called Florentine Banker successfully stole $1.3 million from three private equity firms in 2020 through wire transfers, using advanced social engineering tactics.

Private equity firms face unique challenges. Many employees work remotely, making it hard to control access to sensitive information. Middle-market firms often invest in companies with limited IT security resources, increasing vulnerability.

To protect themselves and their portfolio companies, private equity firms must focus on cyber security during the due diligence process. A data breach or ransomware attack can significantly reduce the value of an acquisition and harm the firm’s reputation. Therefore, improving cyber security practices and promoting a security-conscious culture within the firm is essential.

Who Might Target the Private Equity Sector 

Private equity firms face various threats from entities aiming to steal funds, access sensitive information, or extort. These threats can arise from direct attacks on the firm or their portfolio companies, vulnerabilities in their suppliers, or exploitation of personal devices used by staff.

Cybercriminals 

The primary threat to private equity firms comes from cybercriminals driven by financial gain. These attackers range from sophisticated, professional groups to small-scale fraudsters. Many cybercriminals purchase ready-made services from experienced counterparts, eliminating the need for advanced technical skills. This has led to a surge in cybercrime, with criminals targeting numerous organisations using largely automated tools that require minimal expertise.

Nation States 

Nation states engage in cyber activities to further their national interests or disrupt entities involved in activities contrary to their agendas. Countries like Russia, Iran, and North Korea have been known to use criminal actors for state objectives, employing criminal malware techniques to raise funds and cause disruption. Private equity firms, especially those involved in sensitive sectors or operating in hostile regions, are at risk. State actors, such as those from China, have used cyber techniques against institutions for intellectual property theft, posing additional risks for firms handling valuable intellectual property.

Hacktivists 

Hacktivists, driven by specific causes, use cyberattacks to advance political or personal agendas or protest perceived injustices. The growing hacktivist community targets firms that represent organisations at odds with their agendas, such as life sciences or energy. Private equity firms investing in such sectors may find themselves targeted by hacktivists.

Insider Threats 

Cyber Threats to Private Equity Firms

Private equity firms face both direct and indirect cyber security threats, often due to outdated or unmanaged practices. Below are some of the most common cyber security threats encountered by private equity firms.

 Phishing Scams 

Phishing attacks involve cybercriminals using information about individuals or organisations—often gathered from social media—to send targeted messages. These messages appear to come from trusted sources, luring recipients into clicking malicious links or downloading files infected with malware.

In the private equity sector, phishing is a major concern, leading to data breaches, financial theft, and identity fraud. Hackers typically use impersonation emails to request sensitive information such as financial data and personally identifiable information.

To protect against phishing attacks, private equity firms should enforce robust password practices, avoid password reuse, and implement multi-factor authentication. Prompt action by network security providers is essential to mitigate the risk of data breaches resulting from phishing scams.

 Business Email Compromise (BEC) 

BEC is a significant threat to private equity firms, where intercepted emails are exploited by cybercriminals. Attackers craft convincing emails impersonating legitimate sources such as investors, portfolio companies, or colleagues, often requesting money or sensitive data. Interaction with these emails can lead to credential theft or malware installation. BEC attacks rely on psychological manipulation and social engineering tactics to enhance authenticity and increase compliance with demands.

Protecting against BEC scams requires email authentication, employee training, multi-factor authentication, strict verification procedures, and advanced monitoring tools.

Ransomware 

Due to the sensitive information handled by private equity firms, such as bank account numbers, personal addresses, and account information, ransomware is a prevalent form of attack within the industry. Hackers steal data and hold it for ransom, demanding payment before releasing it. This not only incurs significant financial costs but also undermines investor trust and can cause irreparable harm to the firm’s reputation.

Spyware is another major concern in private equity, as it covertly records actions, capturing passwords, login information, financial data, and private market and research data.

Antivirus software and keeping all software fully updated are essential measures to protect your organisation against ransomware. Additionally, having a robust backup plan is crucial to re-establish key systems and preserve data in the event of such an attack.

Data Breaches 

The impact of a data breach can be devastating for a private equity firm. Financially, the average cost of a data breach is 2023 was $4.45 million. However, the reputational damage can be even more severe. What company would want to partner with an investor who cannot protect their data?

Preventing data breaches requires robust user security policies and tools, including access control, antivirus software, communication security measures, intrusion prevention systems (IPS), and security information and event management (SIEM) solutions. These measures not only help prevent data breaches but also facilitate swift response and mitigation in case of security incidents.

Steps to Mitigate Cyberattacks 

The integrity of a private equity firm’s digital infrastructure is crucial for maintaining portfolio value and confidentiality. But, where do you start? What must you know? Below are our key strategies to get you started:

Comprehensive Risk Assessments

Start by conducting thorough risk assessments to identify vulnerabilities within your own systems and those of your portfolio companies. This process begins with evaluating the current security measures of each company to understand their security postures. By assessing these measures, you can determine the effectiveness of existing protections and identify areas that require improvement.

Next, it is crucial to identify potential threats specific to each company. Understanding these risks allows you to tailor your cyber security strategies to address the unique challenges faced by each portfolio company.

Finally, develop and execute mitigation strategies to address the identified vulnerabilities. Implementing these plans ensures that both your firm and your investments are protected against cyber threats.

Cyber Due Diligence During Acquisition

During acquisitions, cyber security due diligence is essential to assess the maturity of target companies. This process involves conducting comprehensive security audits to evaluate the existing cyber security measures in place. By thoroughly examining these measures, you can determine the effectiveness of the target company’s current protections and identify any gaps that need to be addressed.

Ensuring compliance with relevant regulations and standards is another critical aspect of due diligence. This involves checking that the target company adheres to industry-specific regulations and cyber security standards, which helps mitigate legal and financial risks associated with non-compliance.

Additionally, reviewing the target company’s history of security incidents and their responses is crucial. Analysing past breaches and how they were handled provides valuable insights into the company’s resilience and preparedness to deal with cyber threats. This historical breach analysis helps in understanding the potential risks and the effectiveness of the company’s incident response strategies.

Post-Acquisition Cyber Security Integration

Integrating newly acquired companies into your existing cyber security framework is crucial for maintaining a unified and secure digital environment. This process begins with aligning security policies across all entities. Standardising these policies ensures that every part of the organisation adheres to the same security standards, reducing the risk of vulnerabilities.

Implementing necessary security controls is the next step. Deploying advanced security technologies across the newly acquired companies helps to protect sensitive data and systems from potential threats. These controls should be tailored to address the specific needs and risks of each entity while maintaining overall consistency.

Continuous monitoring is essential to detect and respond to threats in real-time. Setting up robust monitoring systems allows for the early identification of suspicious activities and enables swift action to mitigate potential breaches. This proactive approach ensures that the entire organisation remains resilient against cyber threats.

Employee Training and Awareness

Investing in training programmes to educate employees on cyber security best practices is essential for maintaining a secure environment. A key area of focus should be phishing awareness. Teaching employees how to recognise and avoid phishing attempts is crucial, as these attacks are a common method used by cybercriminals to gain access to sensitive information. By equipping employees with the knowledge to identify suspicious emails and links, you can significantly reduce the risk of successful phishing attacks.

Third-Party Risk Management

Managing risks introduced by third-party vendors is crucial. This process begins with conducting thorough vendor assessments to evaluate the security practices of all third-party vendors. By understanding their cyber security measures, you can identify potential vulnerabilities that could impact your firm.

Incorporating cyber security requirements into contracts is also needed. Ensure that all vendors comply with your cyber security standards by including specific security clauses in your agreements. This not only helps to mitigate risks but also ensures that vendors are held accountable for maintaining robust security practices.

Strong Governance and Leadership

Establishing strong leadership and governance structures is essential for overseeing cyber security efforts. This begins with appointing a Chief Information Security Officer (CISO) to lead cyber security initiatives. If budget constraints are a concern, consider hiring a virtual CISO at a fraction of the cost, ensuring that your firm still benefits from expert guidance.

Involving the board of directors is also crucial. Make cyber security a regular agenda item for board meetings to ensure that it receives the attention and resources it requires. This top-down approach reinforces the importance of cyber security and promotes a culture of security throughout the firm.

Conclusion 

Cyber security in private equity is a multifaceted challenge that demands a comprehensive and proactive approach. By integrating robust cyber security measures into their due diligence processes, operations, and portfolio management, private equity firms can protect their assets, maintain investor confidence, and ensure regulatory compliance.

At OneCollab, we are dedicated to helping private equity firms secure their organisations and the IT environments of the companies they own. Book a Discovery Call to find out how we can streamline your cyber security management and strengthen your defences against cyber threats.