Securing the Future: Cybersecurity Risk Management and Compliance for Private Equity Firms and Their Portfolio Companies
Key Takeaways
- Early cybersecurity risk assessments during due diligence are essential.
Identifying vulnerabilities upfront helps mitigate risks and avoid costly surprises post-acquisition. - Consistent portfolio-wide policies streamline operations and mitigate risks.
Centralized cybersecurity frameworks enhance efficiency and ensure uniform protection. - Proactive measures enhance portfolio value and improve exit outcomes.
Robust cybersecurity postures increase valuation, attract buyers, and ensure smoother transactions.
From my experience supporting private equity firms and their portfolio companies, I’ve seen how a single cyber breach can jeopardize an acquisition, disrupt operations, and erode trust with investors. Cybersecurity isn’t just about protecting systems—it’s about protecting the value of the investment itself. Unlike other industries, private equity operates in a high-stakes environment where cybersecurity is critical to a successful investment strategy.
As cybersecurity operators working closely with private equity firms and their portfolio companies, we’ve witnessed firsthand how cyber threats and compliance challenges can disrupt even the most well-structured investments throughout the lifecycle. Cybercriminals are targeting portfolio companies with increasing sophistication, while the pressures of tighter regulations and rising insurance requirements add complexity for both portfolio companies and private equity firms. Addressing these challenges requires more than just implementing technical safeguards — it demands integrating cybersecurity into the DNA of the private equity investment process to protect value and drive sustainable growth.
Cybersecurity risks must be addressed early, starting in the due diligence phase. The private equity firm and the portfolio company bear liability for the risk of a cyber breach, making proactive cybersecurity a shared responsibility critical to safeguarding investments.
The Rising Threats to Portfolio Companies
It is well known that portfolio companies, regardless of size, are frequently targeted for cyberattacks due to their risk profiles and perceived vulnerabilities. Recent data shows that 73% of mid-sized businesses experienced cyberattacks or data breaches in 2023, with average global breach costs reaching $4.45 million. Large, sophisticated companies like Kaseya and SolarWinds—backed by private equity—have fallen victim to devastating cyberattacks. It’s no longer a matter of “if” but “when.”
Private equity firms’ stakes are heightened during mergers and acquisitions (M&A). According to Accenture, cyber incidents rise by 68% during deal-making and spike up to 116% in the months following a deal’s closure. More concerning, 1 in 2 attacks successfully breach companies without proper cybersecurity remediation. This is a red flag for private equity firms during the diligence process and underscores the importance of early action.
Industry-Specific Challenges
Different industries face unique cybersecurity challenges, adding complexity for private equity firms managing diverse portfolios:
- Healthcare: Compliance with regulations like HIPAA and GDPR creates additional layers of complexity. Data breaches involving sensitive patient information incur financial penalties and risk reputational damage.
- Manufacturing: Operational Technology (OT) systems, critical to manufacturing processes, are particularly vulnerable to ransomware attacks and other disruptions. These systems often rely on legacy infrastructure, which is harder to secure and monitor.
- Financial Services: Financial institutions within private equity portfolios face intense scrutiny from regulators and higher risks of phishing and fraud due to their access to sensitive financial data.
Understanding these industry-specific risks is vital for tailoring cybersecurity strategies to protect each company effectively.
Insights from Private Equity Clients and Portfolio Companies
Over my 17 years of experience supporting private equity firms and their portfolio companies, I’ve identified several recurring challenges in addressing cybersecurity and compliance:
- Lack of Clarity on Needed Cyber Services: Portfolio companies often struggle to identify essential cybersecurity measures, leading to piecemeal approaches that leave vulnerabilities unaddressed.
Example: A company invests in endpoint protection but neglects identity access management, exposing critical systems to attack. - Limited Understanding of Risk Profiles: Without thorough assessments, companies fail to prioritize vulnerabilities or align cybersecurity risks with business operations.
Example: A manufacturing company underestimates the risks of outdated operational technology, leaving systems vulnerable to ransomware. - Challenges with Cyber Insurance: Inaccurate or incomplete documentation for insurance applications can result in denied coverage or higher premiums.
Example: A company reports having an incident response plan but cannot demonstrate regular testing, voiding coverage after a breach. - Overreliance on Non-Expert IT Providers: Many companies delegate cybersecurity to IT teams or managed service providers (MSPs) that lack specialized expertise.
Example: An IT provider recommends generic antivirus software but fails to address advanced threat detection needs. - Misaligned Budgets: Cybersecurity spending often focuses on visible tools rather than critical measures like secure configurations or employee training.
Example: A company heavily invests in firewalls but neglects endpoint detection and exposes devices. - Cost Barriers: Hiring seasoned cybersecurity professionals or building a Security Operations Center (SOC) is often seen as too costly, leading to gaps in protection.
Example: Instead of hiring a fractional CISO, security oversight is given to an IT manager with limited expertise. - Reactive Approaches: Many companies address cybersecurity issues only after incidents occur, increasing costs and operational disruptions.
Example: After a ransomware attack, a company invests in backups and recovery solutions that should have been implemented proactively. - Compliance Challenges: Meeting regulatory requirements like GDPR, HIPAA, SOC 2, or CCPA is resource-intensive, and many companies lack the bandwidth to maintain compliance.
Example: A healthcare company struggles to ensure HIPAA compliance due to gaps in its audit processes, risking penalties.
Proactive Strategies for Mitigating Cyber Risks
These challenges highlight the urgent need for proactive measures. To safeguard portfolio companies and drive value creation, private equity firms should focus on these key strategies:
1. Assessing Cyber Risks During Due Diligence
Cybersecurity must be a core focus during due diligence, not just a “check box.” Early, thorough cyber assessments help identify vulnerabilities and opportunities for improvement. These assessments are key to avoiding unforeseen risks post-acquisition and ensuring a smooth transition for both parties.
2. Standardize Cybersecurity Across the Portfolio
Implementing consistent cybersecurity policies across the portfolio strengthens defenses and drives operational efficiency. Centralized Security Operations Centers (SOC) and standardized incident response protocols ensure portfolio-wide risk mitigation and cost-effective management.
3. Leverage Advanced Technology
Investing in AI and automation enhances real-time threat detection and reduces the cost and complexity of maintaining a robust security posture. By adopting advanced tools, portfolio companies can stay ahead of evolving threats.
4. Enhance Insurance and Compliance Preparedness
Navigating regulatory and insurance challenges requires accurate risk profiling and proactive measures. Regular audits, comprehensive documentation, and collaboration with insurers ensure adequate coverage and reduce compliance gaps.
5. Focus on Incident Response Readiness
Testing and refining incident response plans through regular simulations ensure companies can react decisively to breaches, minimizing downtime and financial losses. This proactive preparation limits the fallout from inevitable attacks.
6. Build a Cybersecurity Culture Across Portfolio Companies
Fostering a culture of security through training and leadership-driven initiatives instills awareness at all levels. This reduces the likelihood of breaches caused by human error and strengthens overall resilience.
7. Partner with Cybersecurity Experts
Collaborating with specialists ensures tailored solutions that align with each portfolio company’s unique risk profile. A “one-size-fits-all” approach doesn’t work—customized strategies based on individual company needs are essential.
Cybersecurity as a Value Driver
By addressing cybersecurity risks proactively, private equity firms protect their investments, increase portfolio valuation, and improve exit outcomes. Buyers are scrutinizing cybersecurity postures more during diligence, and firms with robust strategies stand to benefit from smoother transactions and more substantial returns.
Proactively managing cybersecurity protects a firm’s reputation, ensuring stakeholder confidence and long-term growth in an increasingly complex threat landscape.
Whether acquiring your next portfolio company or addressing risks across your portfolio, proactive cybersecurity can secure your investments and reputation. Contact us to learn how we can help.
Rich Ferraro, CEO & Managing Director, Compello Partners
[email protected]