Cyber Risk Now a Private Equity Hold-Period Threat
▼ Summary
– A Kroll survey found 80% of private equity firms experienced cybersecurity disruptions during the hold period, including unexpected costs and operational downtime.
– These incidents are increasing in frequency, with nearly 70% of firms reporting a year-over-year rise in cybersecurity events during the hold period.
– Cyber risks are directly affecting deal value, causing delays, valuation reductions, and even terminations in pre-investment and exit stages.
– The average financial impact of a cybersecurity incident is $2.1 million, with costs stemming from remediation, compliance, and reduced valuations.
– Large PE firms are more likely to enforce mandatory cybersecurity controls across portfolios, while smaller firms often lack consistent standards and dedicated oversight.
For years, private equity firms largely viewed cybersecurity as a routine IT maintenance task within their portfolio companies. This perspective is no longer sustainable, as ransomware attacks, data breaches, and increasing regulatory scrutiny now directly threaten value creation during the critical hold period. A new industry survey reveals that these risks are causing widespread financial and operational disruptions, fundamentally changing how firms must approach digital defense.
The data shows a clear pattern of interference. Eighty percent of private equity firms reported some form of disruption linked to cybersecurity risk over the past year. These issues ranged from unexpected costs for fixing inherited IT problems to significant business downtime, litigation, and failures in integrating acquired companies. The frequency is also rising, with nearly 70% of leaders noting an increase in incidents during the hold period compared to the previous year.
The hold period itself creates a perfect storm for risk. It provides ample time for accumulated security weaknesses to be exploited, for attackers to identify vulnerabilities, and for regulators to examine a company’s controls. The most common disruption was unplanned remediation spending, cited by 44% of respondents. Other frequent problems included struggles to integrate IT systems across portfolio companies and business interruptions caused by cyber incidents. These operational hurdles can delay important technology projects and create friction in shared services models, particularly in portfolios built through add-on acquisitions. Geographically, business downtime was most commonly reported in the U.S., while litigation and regulatory challenges were more frequent in APAC and European portfolios.
Cyber risk is now materially affecting deal value and outcomes. Nearly a quarter of firms experienced disruption during the pre-investment phase. Specific impacts included deal delays due to unresolved IT findings, valuation reductions after cyber issues were discovered, and, in a smaller number of cases, complete deal termination. Problems also surfaced at exit, with some firms reporting delays or price reductions when buyers identified cybersecurity shortcomings. Notably, smaller firms felt this impact more acutely; twenty percent of firms with under $1 billion in assets reported deal disruption at exit, compared to just 8% of firms above that threshold.
The financial consequences are substantial and widespread. While the average direct financial impact was reported at $2.1 million, experts caution this figure is only part of the story. The true cost extends into regulatory investigations, delayed deal timelines, and governance gaps that can affect long-term fund structures. The most common sources of financial impact were increased ongoing compliance spending and direct remediation costs. A significant number of firms also cited reduced valuation or exit price. Again, smaller firms were more vulnerable, with 44% of those under $500 million in AUM reporting valuation reductions, versus 17% of the largest firms.
A sharp divide exists in how firms of different sizes govern cybersecurity. Among the largest firms, those with over $25 billion in assets, 55% enforce a mandatory baseline of cybersecurity controls across their portfolios. This approach drops dramatically for smaller firms, with only 12% of those under $25 billion in AUM doing the same. Instead, over half of smaller firms handle controls on a case-by-case basis, and more than a third of the smallest firms have no defined baseline at all. Large firms also more frequently formalize cybersecurity procurement, often requiring portfolio companies to use pre-negotiated preferred technology and service providers.
Despite growing awareness, visibility and staffing remain persistent challenges. Many firms use dedicated platforms to monitor portfolio risk, but smaller firms rely heavily on manual methods like periodic interviews or outsourced managed service providers. Staffing is another critical gap, with many firms lacking a dedicated leader or team responsible for managing cyber risk across the entire portfolio. While larger firms are more likely to assign this ownership, the absence of dedicated oversight remains a systemic weakness that attackers can exploit.
(Source: HelpNet Security)
