Private Equity and the Burden of Cyberattacks

RESEARCH REPORT | SEPTEMBER 2024
5 MINUTE READ

Summary

• Growing Threats: Non-state actors are explicitly targeting the private equity industry.

• Portfolio Vulnerabilities: Many portfolio companies lack adequate cyber defenses to detect and respond to incidents.

• Efficient Risk Mitigation: PE firms can address these risks effectively without slowing operations.

• Emerging Solutions: New models offer scalable cybersecurity capabilities across portfolios to minimize exposure and enhance resilience.
  
  

What makes private equity firms vulnerable

The announcement of a deal and the appeal of ready cash can attract cyber attackers the same way an open purse attracts pickpockets.

• 52% of firms experience a spike in cyber incidents around deal closures.

  During deal closures, private equity firms experience heightened cyber threats, as attackers exploit transitional vulnerabilities and increased digital activity to target sensitive financial and operational data.

• 1 in 2 companies lack cyber insurance, and claimants often face rising premiums.

  Half of companies lack cyber insurance, leaving them exposed. Even those with coverage often face higher premiums post-claim, increasing the cost of recovery after an incident.

• $1M+ is the typical ransom paid by mid-sized companies during attacks.

  Mid-sized companies face an average ransom exceeding $1 million, reflecting the significant financial impact of ransomware attacks that can disrupt operations and jeopardize deal timelines and valuations.

Consequences of Cyberattacks in Private Equity

1. Reputation Risk:
   Both the portfolio company and the private equity (PE) firm face reputational damage, impacting trust with investors, clients, and stakeholders, which could have long-term effects on business growth.

2. Value Creation Impact:
   Cyberattacks can undermine the value creation potential of the acquired portfolio company, dragging down the overall value of the PE firm's holdings and harming long-term returns.

3. Repeat Targeting:
   Once a ransom is paid, threat actors may return, targeting the PE firm or breaching other portfolio companies, leading to additional financial and operational risks across the entire portfolio.

4. Confidence Gaps:
   While many business leaders are aware of cyber risks, only 27% feel confident their organization is resilient enough to withstand and recover from cyber incidents, indicating a significant vulnerability in preparedness.

Cyber Pioneers have emerged in Private Equity Industry

Mid-sized companies, which are a key focus for private equity (PE) investments, often have limited budgets for cybersecurity, making them highly vulnerable to attacks. As PE firms seek rapid growth, they may overlook or undervalue cybersecurity during acquisitions, exposing these portfolio companies to significant risks. This leaves many companies categorized as "Cyber Risk Takers."

The drive for fast-paced growth can lead to a temptation to cut corners on cybersecurity, which can result in substantial financial, operational, and reputational damage. However, simple and cost-effective cybersecurity measures can make a considerable difference in mitigating these risks.

Companies that prioritize cybersecurity, referred to as "Cyber Champions," are more successful at preventing attacks and facing less disruption. By implementing strategic, low-cost cybersecurity investments, firms can safeguard their operations, protect their reputation, and reduce the likelihood of financial loss from cyber incidents.

Five Steps to Strengthen Cybersecurity Before Deal Closures

Drawing from our experience with over 3,100 clients worldwide, we recommend five key steps to enhance a portfolio company’s cybersecurity capabilities before finalizing deals. These measures help firms prepare for the anticipated rise in cyber incidents and foster cyber resilience, forming a robust digital foundation.

1. Reevaluate the Cybersecurity Model
   Building internal capacity can be slow and inefficient. Instead, consider outsourcing the key tasks of monitoring and defense to experts who specialize in cybersecurity.

2. Enhance Due Diligence Processes
   Private equity firms can streamline due diligence to one week, allowing more time to focus on remediation strategies before announcing a deal.

3. Implement Basic Security Practices
   Simple, quick wins—such as enhancing password policies or updating software—can significantly improve a portfolio company’s resilience without requiring major investments or time-consuming interventions.

4. Limit Access and Minimize Risk Exposure
   Ensure that not everyone has unrestricted access to sensitive data. A thorough review followed by one-time corrective actions can prevent unnecessary exposure.

5. Prepare for Incident Response
   Having a well-tested incident response plan in place is crucial. Attacks often cause more damage due to poor communication and uncoordinated actions during the response phase.
   

Improve Resilience Quickly and Effectively

Cyber threats have elevated risks for private equity firms and their portfolios. Beyond the direct financial costs, reputational damage can be far-reaching. The good news is that cybersecurity improvements can be implemented quickly and without significant disruption, preparing firms for potential cyberattacks, managing risk, and accelerating time to value before deals close.

If you're looking to enhance cyber resilience across your portfolio while reducing cybersecurity insurance costs, TEWAG and its partners, with over 7,000 global cybersecurity professionals, is considered as a top provider in the field.

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