In the world of private equity (PE), managing strategic opportunities while mitigating risks is a delicate balancing act. Making the right decisions and taking the right steps at the right time can mean the difference between building robust, profitable businesses or incurring losses and facing significant setbacks and reputational damage.

The typical PE investment cycle involves raising funds, investing in portfolio companies, nurturing them for growth, and eventually exiting through a sale or Initial Public Offering (IPO). Each relies on multiple factors and one miscalculation, whether due to a cyber breach or operational vulnerability, can have a serious negative impact. A misstep could jeopardise not only individual investments but also the firm’s overall performance and standing.

As the investment cycle typically lasts from three to five years, General Partners and Investment Committees must remain vigilant – navigating many paths and overcoming lots of obstacles at each stage. Every risk needs to be expertly managed with the long-term objective in mind: to create resilient, high-growth businesses.

Cyber security risks

Add the cyber threat landscape into the investment mix and the board has another complicated risk to mitigate. One serious cyber incident at any stage of the investment cycle can cause immense financial and reputational damage – a risk that PE firms can’t afford to take. Luckily, it is a risk not completely out of their control. Every organisation can and should take responsibility for its cyber security and cyber resilience.

With any risk, it’s better to know the enemy. Cybercriminals are as adept at their specific ‘profession’ as anyone in a legitimate career. Not only do they have the technical skills required, but they do their research on their chosen target sector. They take time to understand which firms are investing in or acquiring which portfolio companies. And they know that just as great decisions and important actions need to be made at the right times, the precise timing of cyber-attacks can help them achieve their malicious objectives too. It’s no wonder that navigating the complex web of cyber threats is a huge challenge for PE firms.

Vulnerable periods in the investment cycle

Today, it’s not a case of ‘if’ but ‘when’ an organisation, in any sector, will experience a cyber-attack. However, during the investment cycle, there are arguably key moments when a PE house is more exposed to cyber risk. A survey by Accenture found that during the month of a deal closure, 68% of PE houses experience an increase in cyber security incidents.

An attack part-way through a funding round, when a PE house is actively raising capital, runs the risk of scaring off potential investors and can affect the confidence of already invested parties. Such scenarios spread panic. Stakeholders demand to know what’s happened, how the problem will be fixed, and when. Investors also demand an assessment of the damage and reassurance that it won’t happen again. In a flash, the investment cycle could crash to the ground before the fundraising stage has been completed.

Holding the house to ransom

Criminals know that later in the cycle, just after the PE house has acquired a stake in a business, one breakthrough could earn them a profitable return of their own. By successfully breaching a new portfolio company, stealing its precious data, and threatening to leak or sell its data on the dark web, it could earn a big pay-out.

Ransomware attacks, in which criminals steal data and sell or leak it on the dark web, have grown in frequency over the past few years. The Ransomware-as-a-Service (RaaS) model allows even relatively low-skilled criminals to conduct ransomware campaigns. With the portfolio company’s sales data or its customers’ data, or both, now in the hands of competitors, or available for free online, the value of a portfolio company would decrease and might even be worthless. Such a serious incident would no doubt also significantly damage the reputation of the PE firm due to stakeholders’ loss of trust and confidence. All this could potentially put other ongoing investments at risk as well.

When it’s finally time to sell a portfolio company or take it public through an IPO, a single cyber incident, such as a ransomware attack, during the sale process would be the worst-case scenario for every party involved. After years of building up the company’s value, it could be diminished at the drop of a hat.

Reducing the risk

The cyber risk throughout the investment cycle can be mitigated by strengthening cyber security and cyber resilience across a PE firm and its portfolio of companies. However, this is possible only if the board and the chair of the Risk Committee take accountability for cyber risk and take decisive action early.

By partnering with Quorum Cyber, PE houses and portfolio companies can build a stronger security posture, minimise the chances of a successful cyber-attack, and be ready to contain any compromise, and bounce back to business as usual as quickly and safely as possible.

Contact us today to discuss how we can protect your firm and its portfolio with our cyber security and data security services.