Private equity and Cyber Security: The 3 Weak Points of the General Partner
February 26, 2015
If you are a private equity general partner, and not directly involved in cyber security, you may well be astonished by how frequent, how persistent and how well organised cyber attacks are. You may well also be surprised that a private equity general partner – as well as its portfolio companies – is of special interest to cyber attackers.
Private equity COOs and managing partners should consider the three main areas of the private equity business model that are susceptible to cyber attack:
Acquisitions and disposals
The cyber security threat around corporate finance transactions has already been recognised as a key issue by HM Government. M&A activity is a common target of espionage, ranging from corrupt competitors to foreign intelligence services. During the weeks or months leading up to a change in ownership, organisations on all sides of a deal face a heightened risk of cyber espionage from interested parties seeking to gain competitive advantage in the process.
The timing of these attacks does not necessarily correlate with the deal news going public; they frequently occur before this and it should be assumed that as soon as the idea of a merger or acquisition is discussed – even in private – there is a risk of a compromise. You may therefore wish to operate under the assumption you are at risk at all times, and put in place the necessary measures.
Private equity firms are at greater risk than most businesses when it comes to higher value fraud attempts via cyber attack. You are likely to hold financial and business information relating to your fund, your portfolio companies and your investors. All of this data has the potential to yield a high value return for an attacker.
Erosion of portfolio company valuation
All companies – whether private equity-owned or not – are at risk of cyber attack. We will look in subsequent blogs at which assets within a portfolio are most at risk, but suffice to say that cyber attacks, in particular due to the reputational damage they can cause, can have a tangible effect on company valuation.
A successful private equity general partner understands which risks might undermine success and cyber security is no different. The GP needs to consider the specific cyber threats facing the businesses in their portfolio, and ensure that these risks are being managed. This is not purely a technology challenge, but also involves people, information systems, processes, culture and physical surrounding – A holistic view needs to be taken. Understanding and managing these risks will allow PE to capitalise on the immense opportunity for growth and develop in a digital age.
To get a sense of the sheer scale of corporate cyber crime, I would recommend reading this Financial Times article by Caroline Binham, in which members of our cyber security team discuss the developing battleground of cyber warfare.
In subsequent blogs, I will look at which types of portfolio company represent the largest cyber security risk and what action financial sponsors should be taking to mitigate the various risks.
In the meantime, if you would like to discuss measures to safeguard against cyber crime, then please do get in touch. You can also find more information on this topic in our 'Guide to Cyber Security'.