Private Equity: How To Protect Your Investment Portfolio With Cybersecurity
April 06, 2022
Historically, PE firms have overlooked the importance of cybersecurity due diligence, but these behaviors are beginning to change. Many PE leaders have an increased awareness of threats to their portfolios, and numerous financial institutions have already had their daily operations compromised in the past.
For example, one report indicated that three British PE firms were tricked into sending more than $1.3 million into a fraudulent account. Another report indicated that between April and February of 2020, banks saw an increase in cyberattacks of more than 238 percent. Based on this information, it is clear that PE firms need to know how to protect their investment portfolios through cybersecurity.
What do private equity firms need to know about cybersecurity, and how can they prioritize network security?
Why Should PE Firms Care About Cybersecurity?
There are several reasons why all PE firms need to focus on cybersecurity. According to an interview published by Pricewaterhouse Coopers, the average time it takes for an organization to discover they have been breached is 8 months. This is a tremendous amount of time and creates severe vulnerabilities within an organization.
A few additional highlights to note include:
- There is a clear return on investment stemming from cybersecurity. This is a critical factor in completing deals, and firms should understand the value of cybersecurity due diligence.
- Governments are mandating cybersecurity precautions, with prominent examples being the California Consumer Privacy Act (CCPA) and the EU General Data Protection Regulation (GDPR).
- Due to the coronavirus pandemic, businesses have had to adapt quickly to changing operating models, including remote work. This increases the threat landscape of the digital world, leaving investments from PE firms exposed.
Clearly, PE leaders need to take charge and prioritize cybersecurity to keep the confidential information of the company, its employees, and its investors safe from harm.
How Should PE Firms Prioritize Cybersecurity?
Because cybersecurity is such a diverse landscape, PE firms might not know where to begin. There are several areas that should rise to the top of the priority list. These include:
Focus on Preventing Value Erosion of Portfolios
It can be difficult to measure comparative risks across multiple portfolios, a major data breach can erode investor confidence, impacting portfolio valuation. If PE firms invest in cybersecurity measures, they can reduce their risk while increasing investor confidence.
A few concrete benefits of investing in cybersecurity include:
- Create Historical Clarity: Prior cyberattacks can be resolved, addressing historical value erosion and putting prior problems to rest.
- Avoid Penalties: Businesses can prevent future value erosion by avoiding penalties that might take place if data breaches occur in the future.
- Reduce RIsk: Firms can prevent deals from collapsing due to cyber due diligence. Cybersecurity diligence provides actionable intelligence while identifying potential weaknesses in the digital network. This reduces the risk profile of the portfolio’s assets, preventing value erosion.
By injecting capital into cyber security, it is possible for private equity firms to prevent the value of erosion of their portfolios.
Maintenance Through Penetration Testing
Clearly, it is critical for PE firms to protect themselves against direct attacks. One of the best ways for private equity companies to deal with these attacks is to not only put strong measures into place but to test them regularly. Penetration testing has to be prioritized so that potential gaps can be identified and filled before they can be exploited by hackers.
Penetration testing should include:
- Comprehensive testing of the network's and server's endpoints
- Meticulous analysis of all applications to ensure there are no vulnerabilities
- Close inspection of network and mobile devices
- Practice attempts to intercept traffic and steal data
Then, if vulnerabilities are identified, they need to be rectified before they cause harm to the company.
Understand the Impact of the COVID-19 Pandemic
Similar to numerous other industries, PE firms have had their daily operations disrupted by the coronavirus pandemic. Many companies have shifted to remote formats, with many employees are using their home networks, which may not have the same security protocols in place. According to a recent report, remote workers have led to a security breach in 20 percent of surveyed organizations. Why is this the case?
Many employees are subject to phishing attacks. According to one report, close to a quarter of all phishing attacks worldwide targeted financial institutions. A phishing attack, according to the FTC, takes place when:
"Scammers use email or text messages to trick you into giving them your personal information."
These emails can use a variety of tactics to trick someone into surrendering their personal information. A few common examples include:
- They may say they've spotted a suspicious login attempt.
- They might include a fake invoice.
- They may say someone is eligible for a government refund.
Companies need to have strict rules in place to mitigate these risks. Having separate devices for work with extra security protocols can go a long way toward mitigating these threats. For example, companies might want to have their employees use two-factor authentication. Two-factor authentication requires someone to have two sets of login credentials to access confidential information. That way, if someone surrenders the first set of login credentials, the other set remains safe from harm, protecting the information.
Furthermore, companies may want to consider asking employees to use a VPN. VPN stands for virtual private network, and this protects someone's location and IP address from being tracked, making it harder for someone to hack into a network, including those of remote employees.
How Can PE Firms Prepare?
Given that there are so many risks in the current environment, what do private equity companies need to do to protect themselves? A few important steps to keep in mind include:
- Perform a cyber risk assessment regularly. Collect information on current lender abilities, devote resources toward filling them, and make sure the firm is in compliance with all government regulations.
- Businesses need to have an incident response plan. If the company falls victim to a cyber breach, what has to happen next?
- Audit all cybersecurity measures regularly. Maintenance and penetration testing need to be at the top of the priority list to identify holes before they can be exploited.
It is incumbent on all PE leaders to think about cybersecurity and how they can protect their assets from harm. This includes not only monetary assets but confidential information as well. That is where Havoc Shield can help you. Contact us today to learn more.