Fortifying Private Equity investments with cyber security

In the current digital landscape, cyber security is not just a peripheral IT concern; it should also be a fundamental business consideration, particularly in the context of private equity (PE) investments. Given the unique structure of the PE sector and the high financial stakes involved, it is essential to take an elevated approach to digital security — particularly where technology is a major component of the business.

Integrating cyber security into private equity practices and due diligence isn't just a protective measure; it's a strategic move. Effective cyber security practices not only shield against cyber threats but also stand as a crucial differentiator in the market, adding substantial value to investments by ensuring the organisation’s cyber security posture remains resilient.

The role of cyber security in PE investments

Not too long ago, businesses were engaged in discussions about digital transformation as a relatively novel concept in the rapidly approaching digital age. Nowadays, modern businesses have moved beyond the debate on whether to digitise; their focus is on staying current with the rapidly advancing technology and, with that, safeguarding against cyber threats — whether that’s from vulnerabilities of implementing emergent technologies like artificial intelligence or cyber criminals seeking to cash in on their cyber blind spots.

A resilient cyber security posture is achieved by understanding your risks and implementing appropriate mitigations. It encompasses a comprehensive strategy that addresses threats at both the system and holistic levels, where resilience emerges as a key characteristic of that purposefully-designed cyber security framework.

The defensive strategy should form the basis for an action plan to improve areas of weakness. Included in the DNA of a good defensive strategy is the security review (to help businesses understand their current state) and regular threat and risk assessments to identify where effort and resources should be directed— ensuring the business continuously adapts to new threats and stays ahead of potential vulnerabilities.

Generally, businesses should conduct regular cyber security reviews, with many experts recommending an annual review at the minimum. However, industries with sensitive data (such as financial services and fintech or healthcare) or those subject to strict regulations may require more frequent assessments, potentially quarterly or even monthly.

Frequent reviews, updates, and rigorous testing of cyber security measures are essential for mitigating risks associated with potential data breaches, financial fraud, and other cyber threats that could significantly impact the value of an investment or the overall portfolio. Ensuring robust cyber security protocols not only protects the integrity of a PE firm’s investments but also enhances the trust of their investors and contributes to the long-term success and value preservation of their portfolio companies.

Cyber security considerations pre-deal and post-deal

Cyber is becoming increasingly important in the due diligence process and many PE firms choose to conduct a basic assessment of the cyber security posture of their target company. An important driver behind this is the relevant local and international regulations, specifically in how and by whom data is processed and stored.

However, comprehensive cyber due diligence is not yet a standard practice despite rising global cyber threats, increased regulatory compliance (such as Australia’s Notable Data Breaches scheme, General Data Protection Regulation, and California Consumer Privacy Act), and increasing requirements from insurance providers.

Ahead of finalising a deal, conducting a thorough assessment of potential risks can help private equity firms fully understand their target acquisition. This helps them gain a comprehensive view of their target acquisition and may, in turn, inform their returns strategy.

Striking a balance between investing in core cyber security components that are necessary for growth and protection, whilst avoiding over-investment in non-critical systems is crucial. The threat model produced in the due diligence stage will produce an overview of the inherent risks across the business and provide a prioritised list of system controls and actions to address. This aims to streamline the security budget, ensuring optimal use of resources and extracting maximum value from what the business may already have in place.

Following the deal, and as the portfolio company continues to scale, this action plan will guide the subsequent services. It ensures that the portfolio company has control over its security budget rather than relying on third-party service providers to dictate spend. The business will be able to manage its security costs through accurate scoping, only addressing the areas and vulnerabilities that are relevant and directly applicable to its specific operations. 

Our approach to identifying vulnerabilities

To identify cyber vulnerabilities and ensure clients receive timely and accurate answers, BDO employs a hybrid advisory approach leveraging a network of global specialists, including expert ethical hackers and Microsoft security enablement experts. This may include:

  • Penetration testing and security assessments for potential acquisitions: This involves identifying and addressing potential vulnerabilities during the due diligence stage. Penetration testing delves deep into the security infrastructure of target companies, offering invaluable insights into their resilience against cyber threats, helping shape PE investment decisions
  • Tailored security roadmaps and action plans: Through rigorous security assessments, PE firms can not only mitigate risks but also lay down a roadmap for enhancing security post-deal, ensuring a safer and more secure investment
  • Implementing defensive strategies: As cyber threats evolve, applying defensive security strategies will build resilient barriers against risks, ensuring both data and business continuity
  • Threat Risk Assessments: Evaluating the potential threats and vulnerabilities to determine the risk levels, guided by practices for ISO27001 and NIST’s Cybersecurity framework, to inform and prioritise remediation efforts.
  • Cyber Maturity Assessments: Assessing the current state of cybersecurity practices against best practices and standards to understand the maturity level and identify areas for improvement and inform a strategy and resource prioritisation.
  • Controls Gap Analysis: Analysing the existing security controls against industry best practices to identify gaps and areas requiring enhancement for a more resilient security posture
  • Comprehensive security approach via Chief Information Security Officer (CISO) functions: Our retainer based CISO security advisory provides multi-area and critical function coverage across protective and detective capabilities, change management, and awareness training
  • Enhancing security infrastructures with Microsoft Technologies and Security Tools: We leverage Microsoft's suite of security technologies to enhance a portfolio company’s security measures. This includes the implementation of Microsoft security tools, advisory on best practices, and future-proofing cyber security infrastructure.

Questions? Contact us

Strong cyber security measures will not only protect digital assets but also enhance a portfolio company’s intrinsic and strategic value, making it more attractive and competitive upon a PE firm’s exit. Ultimately, the goal is to stay proactive, adapt to emerging threats, and ensure that cyber security measures continue to align with the evolving needs and challenges of the business environment.

For help in your cyber security strategy, contact us to talk with our specialised team.