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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
rferraro@compellopartners.com

In the dynamic private equity world, regulatory compliance and transparency are more critical than ever. With new regulations from bodies like the U.S. Securities and Exchange Commission (SEC), private equity firms must adapt their practices to ensure compliance and maintain investor trust. This article delves into the significance of these regulatory changes and how firms can effectively update their operations to meet new standards.

The Impact of New Regulations

The SEC has introduced a series of regulations to increase transparency and accountability in the private equity sector. These regulations are designed to protect investors by ensuring that firms disclose critical information about their operations, investments, and performance. Emphasizing transparency helps mitigate risks and fosters a more trustworthy investment environment​ (Allvue Systems)​​ (MS Learn)​.

One of the significant changes involves stricter reporting requirements. Private equity firms must now provide detailed disclosures about fees, expenses, and conflicts of interest. These disclosures are intended to give investors a clearer understanding of how their money is being managed and the associated costs. By enhancing transparency, these regulations aim to prevent potential abuses and ensure fair treatment of all investors​.

Adapting Investor Relations

Private equity firms are revising their investor relations practices to comply with the new regulations. This includes implementing more robust communication strategies to inform investors about fund performance and operational changes. Regular updates and transparent reporting are essential to building and maintaining investor trust.

For example, firms increasingly utilize advanced digital platforms to streamline communication and reporting. These platforms can automate the generation of performance reports, making providing accurate and timely information to investors easier. Additionally, digital tools can facilitate more interactive and personalized communication, allowing firms to address investor queries more effectively​ (Microsoft Adoption)​​ (MS Learn)​.

Updating Back-Office Processes

Compliance with new regulatory standards also necessitates significant updates to back-office processes. Private equity firms invest in advanced technologies to enhance operational efficiency and ensure accurate reporting. This includes adopting AI-powered tools and automation to manage complex regulatory requirements and streamline data management.

Microsoft Copilot, for instance, offers a suite of tools that can assist in automating compliance tasks and improving data accuracy. By integrating Copilot into their operations, firms can ensure that all financial reports, compliance documents, and investor communications are prepared with the highest precision and consistency​ (Microsoft)​​ (MS Learn)​.

The Role of Technology

The role of technology in regulatory compliance cannot be overstated. Advanced analytics and AI-driven insights help firms identify and proactively mitigate potential compliance risks. By leveraging technology, private equity firms can comply with current regulations and stay ahead of future regulatory changes.

For instance, Microsoft Copilot’s data analysis and document automation capabilities can significantly reduce the manual effort involved in compliance tasks. It can analyze large datasets to identify discrepancies, generate compliance reports, and predict potential regulatory issues based on historical data. This proactive approach helps firms maintain compliance and avoid costly penalties​ (Microsoft Adoption)​​ (MS Learn)​.

Ensuring Long-Term Viability

Ultimately, enhancing regulatory compliance and transparency aims to ensure the long-term viability of private equity firms. By adopting best practices in investor relations and back-office processes, firms can build a solid foundation of trust and accountability. This attracts more investors and strengthens the firm’s reputation in the market.

Investing in compliance infrastructure and technology is about meeting regulatory requirements and positioning the firm for sustained growth and success. As regulatory landscapes evolve, firms prioritizing transparency and compliance will be better equipped to navigate challenges and seize new opportunities.

Conclusion

In conclusion, the new SEC regulations represent a significant shift towards greater transparency and accountability in the private equity sector. By updating investor relations and back-office processes, private equity firms can enhance compliance efforts, build stronger relationships with investors, and ensure long-term viability. Embracing advanced technologies like Microsoft Copilot can further streamline these processes, making regulatory compliance more manageable and effective.

For more detailed insights and implementation guidance, you can explore the Microsoft Copilot Scenario Library and Empower Your Workforce with Copilot for Microsoft 365 Use Cases from Microsoft.

Microsoft Copilot significantly enhances operational efficiency, streamlines processes, and drives value creation for private equity firms. Firms must constantly seek ways to improve their operational workflows and decision-making processes in the highly competitive and fast-paced private equity environment. Private equity firms review hundreds of prospective targets, and optimizing the due diligence process through accelerated financial modeling and document processing increases decision-making efficiency, saving valuable time and money.

Leveraging advanced technologies such as Microsoft Copilot can provide a substantial edge. Copilot, an AI-powered assistant integrated into Microsoft 365 applications, utilizes machine learning and natural language processing to automate routine tasks, enhance productivity, and facilitate collaboration. Copilot offers real-time assistance and insights by seamlessly integrating with familiar applications like Outlook, OneNote, and SharePoint, making complex tasks more straightforward and efficient. This capability allows private equity professionals to focus on strategic activities that drive growth and value creation, ultimately leading to better investment outcomes and a competitive advantage in the marketplace.

How Copilot Can Help Private Equity Firms  Click here to learn more

1.  Streamlining Due Diligence Processes

• • • • • • Data Analysis: Automates the comparison of financial models in Excel, highlighting key differences and providing real-time insights.
          • Example: An analyst uploads multiple financial models into Excel, and Copilot generates a summary report of significant variations, allowing the analyst to focus on strategic analysis.

2. Document Processing

• • • • • • Reviewing and Summarizing Legal Documents: Processes large volumes of documents, extracting key terms and summarizing essential elements.
          • Example: A firm uses Copilot to review legal documents related to a potential acquisition, generating summaries and highlighting discrepancies for a thorough evaluation.

3. Enhancing Communication and Collaboration

• • • • • • Email Drafting: Draft professional emails based on context and previous communications.
          • Example: An investment manager uses Copilot to draft an update email to investors, ensuring professional and consistent communication.

4. Meeting Summaries

• • • • • • Automatic Summaries in Teams: Generates concise summaries of meetings, capturing key points and action items.
          • Example: After a strategy meeting, Copilot generates a summary including key discussion points and assigned action items, ensuring alignment among team members.

5. Optimizing Portfolio Management

• • • • • • Performance Tracking: Monitors the performance of portfolio companies with real-time insights and customizable dashboards.
          • Example: A portfolio manager sets up a dashboard with Copilot to monitor financial health, receiving real-time updates on key metrics.

6. Scenario Analysis

• • • • • • Running Simulations for Strategic Planning: Assesses the impacts of market changes or strategic initiatives on portfolio companies.
          • Example: Before an acquisition, a firm uses Copilot to run simulations, modeling different scenarios to predict outcomes.

7. Supporting Value Creation Initiatives

• • • • • • Operational Efficiency: Identifies inefficiencies and suggests optimizations.
          • Example: A logistics portfolio company uses Copilot to analyze supply chain operations, leading to improved delivery times and reduced costs.

8. Enhancing Regulatory Compliance

• • • • • • Compliance Monitoring: Continuously monitors regulatory changes and assesses their impact.
          • Audit Preparation: Automates compliance reports and audit documentation.
          • Example: A firm uses Copilot to generate required compliance reports during a regulatory audit, ensuring accurate and comprehensive documentation.

9. Improving Decision-Making

• • • • • • Data Integration: Integrates data from various sources into a unified platform.
          • Example: A firm aggregates data from different portfolio companies into a single platform, helping leadership quickly assess performance and make informed decisions.
          • Insights and Recommendations: Provides real-time data analysis and actionable recommendations.
          • Custom Dashboards: Creates dashboards displaying key metrics for leadership.

          Click here to learn more

Conclusion

Incorporating Microsoft Copilot into daily operations enhances efficiency, accuracy, and strategic capabilities for private equity firms. By automating tasks, providing real-time insights, and supporting decision-making processes, Copilot empowers professionals to focus on high-impact activities that drive growth and value creation. Leveraging advanced AI tools like Microsoft Copilot is essential for staying competitive and achieving long-term success in the evolving private equity landscape.

For more detailed insights and implementation guidance:

• Explore the Microsoft Copilot Scenario Library
• Empower your workforce with Copilot for Microsoft 365 Use Cases.

Sources:

• Microsoft AI for Business
• Case Studies on AI in Financial Services

By Jiju Johnson, Operations Practice Lead, Compello Partners

The number of different change management models is a veritable alphabet soup of acronyms. Each of these models is a valuable tool, but all boil down to some version of the following steps:

1. Identify the gap between the current and desired future states.
2. Plan how to get there.
3. Execute the plan.
4. Stabilize and reinforce the change.

Why, then, one might wonder, would anyone recommend yet another model?

Whether implementing a new ERP system, deploying a new WMS system, or making operational changes, a successful project depends on leading the organization through change. At the project level, “change” is a nebulous concept. However, at a task level, the word ‘change’ refers to concrete impacts on workflows, and it is only natural for the people in the organization to be apprehensive about these changes.

A savvy change management professional should be adept at engaging with the organization at this task level. A large portion of their job is to understand which changes can be abandoned in the face of opposition and which ones cannot. This is where the RHIP model is useful; it is a handy framework for understanding why a person may be resistant to a particular change.

RHIP stands for Risk, Habit, Identity, Power

Risk:

What risks does the person perceive this change as creating?

Example: Migrating from a niche ERP system that was designed for just-in-time (JIT) production planning to a mass-market general ERP system will create a real risk for Tier 1 automotive suppliers that they will not be able to fulfill their customers’ shipping release schedules.

Solution: Identify and mitigate the risks.

Habit:

How does the change impact the work habits of the person?

Example: In the legacy ERP system, the shipping manager physically walks the completed paper shipping documents from the dock to the accounting department for invoicing. The new system automatically invoiced completed shipments and does not require a paper workflow.

Solution: Give a simplified behind-the-scenes explanation of how their previous work function will be automated or why it isn’t necessary. Please give them a definite action to perform to replace their previous habit (In this example, instead of insisting that they discard the paper document, suggest storing it for three months. Filing away the document is a better replacement for the habit than the anxiety of not doing anything)

Identity:

How does the change impact how they define themselves?

Example: In the legacy production planning system, the Master Planner’s productivity was greatly aided by their impressive memory and intelligence – they knew each work center’s capacity by heart and could sequence the work neatly. They derived job satisfaction from being the person who solved puzzles to ease the lives of their colleagues. In the new system, work-center constraints are pre-programmed, and the scheduling board can automatically calculate efficient work sequencing.

Solution: Elevate the person’s role from task execution to that of a workflow architect. If guided correctly about the powers and limitations of the new system, this person’s output will far exceed that of any outside consultant.

Power:

How does the change impact a person’s power dynamics?

Example: In the legacy system, the warehouse manager could fulfill any open order in any sequence. By choosing what to fulfill, they could control the company’s revenue. In the new system, inventory allocation and shipment sequencing are controlled by business rules, and KPIs expose any operational inefficiencies. The change removed the power of revenue control from the warehouse manager and placed it in the hands of sales and order management teams.

Solution: This doesn’t have an easy answer. A person whose power dynamics are about to be disrupted is more likely to exhibit vehement objection to the change than any other motivation listed here. If the person cannot be persuaded, either they will not survive the change, or the change will not survive them.

Change management is almost always more expensive and time-consuming than the technical aspect of introducing new technologies to the organization. An insightful change management professional knows there will always be resistance to change; the RHIP model classifies these instances of resistance and helps find quicker solutions.

Ultimately, change must be acknowledged as an iterative and continuous process. Any well-functioning organization has operational momentum, and it’s disastrous to implement too much change too fast. Allowing some inefficiency from the legacy workflow for a smoother project implementation is prudent.

Inspired by a case study by Michaela Kerrissy and Masha Kuznetsova, “Killing the Pager at ZSFG,.” https://store.hbr.org/product/killing-the-pager-at-zsfg/PH2230