Private Equity: Cyber Risk Management for PE

Private equity firms face a cybersecurity paradox: they're responsible for protecting billions in portfolio company value, yet most lack direct visibility into their portfolio's cyber risk posture. Portfolio company breaches don't just destroy value—they create fiduciary liability, compliance headaches, and deal complications that can derail exits or acquisitions.

Approaches to address the challenge can vary dramatically, from light-touch guidance to full-on cybersecurity management. Although firms generally want to avoid full responsibility for their portfolio companies' cyber programs, most understand the importance of establishing and confirming minimum baseline cyber capabilities across their portfolio.

This guide highlights private equity cyber challenges and provides a practical framework for how private equity firms should approach cybersecurity across their portfolios, from initial due diligence through exit preparation.

A Private Equity Cyber Risk Framework

PE Profile

Portfolio Size: 10 - 30 Companies

Company Size: 1-10M EBITDA

Company Cyber Management: Limited in-house cyber management, cyber primarily the responsibility of CIO/CTO.

Due Diligence: Acquiring Cyber Risk

PE firms routinely conduct technology due-diligence during acquisitions, but cyber due-diligence often receives insufficient attention:

• Deals often lack a comprehensive cybersecurity assessment

• Technical debt and security gaps aren't properly quantified

• Incident history goes undiscovered

• Cyber insurance adequacy isn't validated against actual risk

It is not uncommon for technology due-diligence to be broad and focus on synergies and value points. Often, individuals with critical knowledge related to technology and cyber gaps are not included in the technology due-diligence exercise.

The resulting gaps create post-acquisition surprises: discovering that the target has no backup testing, inadequate access controls, or critical vulnerabilities due to tech debt. For the new owners, it creates unknown and unquantified portfolio risk.

Recommendations:

• Include a comprehensive cyber examination as part of due diligence.

• Examination should include third-party penetration and vulnerability scanning to confirm narrative of cyber capabilities.

• Confirm resiliency capabilities are in place and tested as part of cyber assessment.

• Ensure expertise exists within deal team to assess examination and relevant cyber risk.

Post-Acquisition: Confirm and Triage

Each acquired company should step through a post-acquisition cyber baseline assessment within 30 days of closing. This assessment, in combination with the buy-side technology and cyber due-diligence findings, should drive an accelerated action plan that addresses cyber weaknesses.

The baseline for assessment would mirror the standard cyber assessment applied to all companies in the portfolio with several important distinctions:

• Include a more in-depth interview process with technology and cyber staff.

• Include an in-depth confirmation of cyber and resiliency capabilities communicated during due diligence.

• Generate a triage list as appropriate to quickly remediate discovered issues.

  
  

Recommendations:

• Establish a post-acquisition cyber playbook.

• Leverage experienced IT and cyber resources to guide process.

• Establish relationships with cyber support vendors to support triage efforts.

Portfolio Risk Management: Establishing and Maintaining Baseline Cyber Capabilities

The objective of the framework is to reduce the probability of a successful cyber-attack and limit the financial and operational impact should an incident occur. The foundation of the framework is the control criteria established and applied to new acquisitions and existing portfolio companies. Control criteria should be based on controls proven to reduce risk (ex: CIS Center for Internet Security) and focus on the following areas:

• Endpoint & Device Security

• Vulnerability & Patch Management

• Email & Communication Security

• Access & Authentication Controls

• Cloud Security

• Third-Party & Governance

• Business Continuity

Once all the companies in the portfolio have completed the assessment process, either via an acquisition process or as part of the existing portfolio, a series of check point meetings should be established to monitor progress and appropriate remediation. At this stage, a portfolio wide risk evaluation will materialize and lead to prioritization and potential escalation of critical deficiencies. The private equity firm can tailor their approach based on the culture and investment philosophy that fits their overall strategy. A light-touch approach may an assessment and consultative support, but place the responsibility of prioritization, funding, and execution on the portfolio company. A heavier approach may layer in specific cyber technology solutions, expertise and third-party resources to execute against objectives.

Recommendations:

• Establish cyber assessment criteria based on proven controls. Ensure criteria include elements of cyber resiliency.

  • CIS Center for Internet Security

  • TAP: Cybersecurity Maturity Assessment

  • SOC 2 Overview of Controls

• Execute an initial assessment survey for each portfolio company to establish an evaluation of the portfolio's cyber capabilities and variability.

• Consult with cyber and technology management resources to tailor ongoing approach.

• Follow-up and monitor progress with the following key objectives:

  • Improve assessment scoring across the portfolio, particularly raising lower performers.

  • Reduce the variability within the portfolio, to establish a confirmed baseline uniformity of cyber capabilities.

    
    

Working with Technology Assurance Partners

Technology Assurance Partners specializes in helping private equity firms establish and manage portfolio cybersecurity programs. Our expertise enables firms to efficiently:

• Establish effective cyber assessment criteria based on proven controls.

• Execute assessment process to establish a quantified portfolio-wide view of cyber risk.

• Develop a tailored due-diligence, post-acquisition, and ongoing portfolio risk management program that effectively reduces cyber risk.

• Evaluate cyber partners and platforms aligned with the firm's cyber objectives and approach.

• Provide program oversight and portfolio company support (vCISO).

For more information, Contact Us and take our Cybersecurity Maturity Assessment survey.