As the Cybersecurity Risk leader for CrossCountry Consulting and a longtime Chief Information Security Officer (CISO) advisor at a leading consulting firm, I’ve witnessed firsthand how the digital threat landscape has fundamentally transformed the way private equity firms approach investments and portfolio management. The stakes have never been higher: cyberattacks now routinely target PE funds and their portfolio companies, seeking to exploit vulnerabilities for financial gain, corporate espionage, or simple disruption.
Now more than ever, cyber threat evaluation and cyber diligence are not just prudent best practices – they’re cornerstones for PE success.
The Evolving Threat Landscape for Private Equity
PE firms and their portfolio companies are uniquely attractive targets for cyber adversaries. Attackers know that PE-backed organizations often undergo rapid change – acquisitions, integrations, and divestitures – which can create security gaps. The sensitive nature of deal data, intellectual property, and personal information handled by PE firms only increases the risk.
Moreover, attackers are increasingly sophisticated. Ransomware gangs, nation-state actors, and organized cybercriminals all recognize the potential payoff of breaching a PE firm or its portfolio. The interconnectedness of today’s business ecosystems means a compromise in one company can quickly cascade across the entire portfolio.
Why Cyber Diligence Must Be Integral to M&A
Cyber diligence is the process of rigorously assessing a target’s cyber risk profile during M&A. This capability is now a non-negotiable element of any deal. As a CISO advising PE clients, I’ve seen deals derailed or dramatically repriced due to undisclosed breaches, regulatory non-compliance, or the discovery of systemic vulnerabilities during diligence.
Critical Reasons Why Cyber Diligence Is Vital During M&A
- Valuation accuracy: Hidden cyber risks can significantly erode a company’s true value. Unaddressed vulnerabilities or a history of past breaches may lead to extensive remediation costs and regulatory fines, which was the case when Yahoo’s purchase price famously fell by $350 million after it failed to disclose two cyberattacks to its acquirer, Verizon.
- Regulatory compliance: Evolving regulations, such as SEC rules and global data privacy laws, mean acquirers could inherit serious liabilities if diligence is superficial.
- Operational continuity: Overlooked cyber weaknesses can derail business operations after acquisition, delaying integrations or tarnishing reputations.
- Exit strategy: Buyers in secondary transactions increasingly scrutinize cyber posture. A comprehensive cyber program can mitigate risk and enhance a portfolio’s attractiveness during secondary transactions.
What Comprehensive Cyber Diligence Looks Like
CrossCountry Consulting’s approach to cyber diligence is holistic and risk-driven. We move beyond basic checklist assessments to deliver actionable insights that inform investment decisions and post-close planning.
- Threat landscape assessment: Gain an in-depth understanding of sector-specific threats and recent attack trends relevant to the target.
- Technical vulnerability scanning: Leverage best-in-class tools (e.g., Tenable, Rapid7) to identify weaknesses in infrastructure, applications, and endpoints.
- Policy and governance review: Assess the maturity of cybersecurity governance, incident response planning, and regulatory compliance frameworks.
- Third-party risk evaluation: Scrutinize the exposure stemming from key suppliers and partners, which are often the weakest link in any security chain.
- Historical incident review: Examine prior breaches, the effectiveness of responses, and lessons learned.
- Remediation roadmap: Quantify the cost, timeline, and complexity associated with closing identified gaps, information that is crucial for both negotiation and integration.
Ongoing Cyber Risk Management: Beyond the Deal
Cyber diligence is not a one-time activity. The threat environment continues to evolve as portfolio companies grow, digitize, and adopt advanced technologies. Leading PE firms now require continuous cyber risk management across their portfolios.
Core Elements of Effective Portfolio Cybersecurity
- Baseline security controls: Adoption of enterprise-grade controls, such as multi-factor authentication, endpoint detection and response, and data loss prevention, is standard practice.
- Centralized monitoring: Dashboards and managed services provide real-time visibility over the cyber health of portfolio companies.
- Incident response readiness: Develop and test incident response plans to ensure rapid and coordinated action in the event of an attack.
- Ongoing training: Given that human error remains a leading cause of breaches, security awareness programs (e.g., KnowBe4) are an indispensable component of risk reduction across the portfolio.
- Regulatory and compliance tracking: Staying on top of global regulations is vital to avoiding fines, sanctions, and reputational damage. Tools like OneTrust help automate privacy and compliance management.
The Business Case for Proactive Cyber Risk Management
Embedding cyber diligence and ongoing risk management into PE operations yields undeniable benefits:
- Value preservation: Preventing catastrophic breaches preserves investment value, avoids costly remediation, and ensures operational continuity.
- Competitive advantage: Demonstrating a robust cyber program differentiates firms during deal sourcing and creates value at exit.
- Regulatory confidence: Proactive compliance instills confidence among regulators and reduces the risk of fines, sanctions, and reputational damage.
- Investor assurance: Limited partners (LPs) are increasingly demanding greater transparency and demonstrable assurance around cyber risk management.
Case Study: Turning Cyber Risk into Portfolio Value
A PE client responsible for a global portfolio of mid-market companies faced recurrent ransomware attacks that threatened operations and company valuations. By instituting a centralized cyber risk management program combining technical controls, continuous monitoring, and incident response readiness, they not only reduced the frequency and impact of incidents but also enhanced the attractiveness of their portfolio to future buyers. This case underscores that proactive cyber risk management is not just about damage control – it’s a robust value-creation strategy.
Recommendations for PE Leaders
Drawing on decades of experience as a CISO and cyber advisor, my advice to PE leaders is clear:
- Make cyber diligence mandatory: Integrate cyber risk assessment into every stage of the M&A process.
- Standardize security across the portfolio: Establish and enforce minimum security standards for all portfolio companies.
- Invest in talent and technology: Leverage top-tier cybersecurity tools and collaborate with experienced consultants who understand the nuances of the PE landscape.
- Foster a culture of cyber awareness: Regular training and executive engagement are essential to maintain vigilance.
- Prepare for the inevitable: Assume incidents will occur; readiness and rapid response are your best defenses.
Cyber Resilience as a Strategic Imperative
PE firms that integrate cybersecurity throughout their investment lifecycle will be best positioned to protect and grow value, satisfy regulators and investors, and forge resilient, future-ready portfolios. As cyber professionals, our role is to help PE firms use cybersecurity as a lever for growth rather than just a shield against threats.
If you’re a PE leader seeking to strengthen your approach to cyber risk, now is the time to act. With the right strategy, partners, and a commitment to continuous improvement, cyber risk can be managed – and even harnessed – to drive lasting value creation. Contact CrossCountry Consulting to get started.