Cyber Security Strategy for Private Equity: Cost-Effective Solutions across the Investment Lifecycle

Introduction 

Private equity firms are increasingly focusing on their cyber security strategy for portfolio companies. Historically, they have underestimated the cyber risks specific to different industries, prioritising investments and operational improvements over cyber security.

Today, enhancing a company’s valuation requires robust cyber security systems, protocols, and procedures. This has become as essential as strengthening accounting, supply chain, or customer service functions, especially with the rising threat of cybercrime.

This article explores key cyber security strategies tailored for private equity firms and their portfolio companies, offering practical solutions to mitigate risks and protect valuable data throughout the investment lifecycle.

Understanding the Cyber Security Landscape for Private Equity Firms

A robust cyber security strategy is essential for private equity firms, as cyberattacks and data breaches are among the biggest risks they face. In 2023, eight private equity firms were posted to various ransomware blogs on the Dark Web. A report by Accenture supports this, finding that 68% of its private equity clients experience an increase in cyber incidents during the month of a deal closure.

For cybercriminals, private equity-backed firms are ideal targets. Deals often make headlines, the companies involved have substantial financial resources, and buy-and-build activities can create vulnerabilities in IT systems. The consequences of such attacks can be devastating, severely impacting operations, value creation, and incurring significant costs to rectify damage and losses. Additionally, the reputations of both the portfolio company and the private equity firm are at risk.

Unique Challenges Faced by Private Equity Firms

The key cyber security challenges for private equity firms and their portfolios include:

• Sensitive Information: Private equity firms handle a wealth of sensitive data, including financial information, customer data, and confidential business plans. This information is highly valuable to attackers, who can use it for financial gain or competitive advantage
• High Net Worth: Managing large sums of money makes private equity firms attractive targets for cybercriminals looking to steal funds
• Complex Supply Chains: The involvement of third-party vendors and partners in complex supply chains introduces vulnerabilities that attackers can exploit to gain access to a firm’s network
• Limited Security Resources: Compared to larger financial organisations, private equity firms may have fewer security resources, making them more susceptible to attacks
• Remote Work: The rise in remote work has increased the risk of attackers exploiting vulnerabilities in home networks to access a private equity firm’s network

By understanding and addressing these unique challenges, firms can better secure their operations, protect sensitive data, and maintain the trust of their stakeholders.

Managing Cyber Security Strategy Across the Investment Lifecycle

A Cyber security strategy is essential for private equity firms at four key stages of the investment lifecycle:

• Pre-Deal Cyber Due Diligence: The period when the firm evaluates a potential portfolio company and the impact of its current cyber maturity
• Post-Deal Cyber Security Integration: A time of heightened cyber risk and an opportunity to establish strong cyber practices
• Long-Term Value Creation: A three- to five-year period to systematically reduce cyber risk and increase value
• Exit Strategy: Ensuring a clean breach record and strong cyber security to enhance the attractiveness of the sale

Pre-Deal Cyber Due Diligence

During acquisitions, cyber security due diligence is crucial to assess the maturity of target companies. Simple check-the-box questions are no longer sufficient. Comprehensive security audits are needed to understand current measures and gather key performance indicators of the company’s cyber programme. These indicators can be tracked and improved throughout the investment lifecycle.

A robust cyber due diligence includes:

• Assessing Technical and Regulatory Risks: Evaluate the company’s business model, history of incidents, and resources needed to address security gaps. Identify the next steps to reduce risk and estimate the cost of improvements
• Conducting Comprehensive Security Audits: Thoroughly examine existing cyber security measures to determine their effectiveness and identify any gaps
• Integrating Diligence Findings: Incorporate findings into the company’s onboarding process to prompt immediate action and align on long-term improvements

Post-Deal Cyber Security Integration

Integrating newly acquired companies into your existing cyber security strategy is crucial for maintaining a unified and secure digital environment. There are often quick wins that can significantly enhance the resilience of the portfolio company without requiring major interventions. Building internal capacity is neither fast nor necessarily useful. Instead, consider having a third-party Managed Security Service Provider (MSSP) implement the integration for you.

A robust post-deal cyber security integration includes:

• Short-Term Technical Risk Mitigation: Rapidly deploy continuous monitoring and threat detection to the newly acquired company’s network and ensure all software is up-to-date on all devices. Enable multi-factor authentication on critical systems and applications
• Establishing Strong Security Policies: Develop a solid and realistic plan by integrating available information. Implement leaders’ diligence observations during the post-sign and post-close periods
• Creating a Cyber Awareness Programme: Tailor the programme to the newly acquired company’s needs. Educate employees about increased risks and conduct phishing campaigns to keep them alert

Long-Term Value Creation

A strategic approach to cyber security oversight can create value by leveraging economies of scale to reduce expenses. Sharing services and coordinating purchases of new products can help firms reduce costs, and eliminate redundancies across the portfolio. Common products or services to share across the portfolio include:

• Managed Security Service Providers (MSSP)
• Cyber security insurers
• Virtual CISO
• Cyber security solutions and assessments

Sharing aggregated data and benchmarks collected across the portfolio can help individual portfolio companies improve their cyber security programmes. This approach also allows them to optimise their investments.

Exit Strategy

To prevent value erosion at the time of exit, firms must be well-prepared. Investing in cyber security during the value creation period generates successes and data that demonstrate reduced risk. Maintaining a clean breach record and using clear documentation and reporting tools is crucial. Consistent reporting serves as invaluable proof of a robust cyber security posture. Detailed documentation of the cyber security roadmap, including past achievements and future plans, further strengthens this proof. A Virtual CISO can be instrumental in clearly and precisely explaining these aspects.

Preparing for exit involves equipping portfolio company security teams to handle intense scrutiny during the M&A process. They must present a clear narrative to potential buyers, highlighting programme strengths, improvements, gaps, and future plans. This reduces the risk of cyber security issues becoming a sticking point in negotiations.

Conclusion 

With cybercrime on the rise, private equity firms must demonstrate effective governance of their portfolio companies’ unique cyber security challenges. While the maturity level of each portfolio company may vary, private equity firms should adopt a holistic approach to ensure all companies meet an acceptable minimum threshold of cyber resilience.

Private equity executives must set the tone at the top to drive action. Those who do will not only enhance the chances for a profitable exit, but also demonstrate proper governance to their investors. Highlighting these capabilities will be advantageous when it is time to raise capital.

Looking to improve your cyber security strategy across the investment lifecycle? At OneCollab, we simplify complex cyber security challenges for private equity firms. Book a Discovery Call to see how our solutions can benefit you and your portfolio.