#USA #New York #Cybersecurity #Private Equity #Kroll

The Growing Threat of Cybersecurity in Private Equity

Overview

According to a recent report from Kroll, a prominent provider of financial and risk advisory services, private equity (PE) firms face significant challenges due to cybersecurity threats. With average financial losses amounting to $2.1 million per cyber incident, the implications for deal flow and valuation are increasingly severe. The findings underscore the pressing need for improved cyber risk governance, especially among mid-market and smaller PE firms, which often lack the necessary resources and protocols.

Key Findings from the Report

Kroll's study surveyed 325 executives from various private equity firms and revealed that 94% had experienced some form of financial impact stemming from cybersecurity risks. The damages stem from several factors, including:

• - Decreased Valuation: About 26% of respondents noted that cyber incidents led to reduced valuation or exit pricing due to the associated risks.
• - Increased Compliance Costs: 62% of PE firms incurred additional costs related to compliance and ongoing cybersecurity training.
• - Remediation Expenses: 46% faced unexpected costs for remediation or consultancy after a cyber incident.

A staggering 80% of these firms reported disruptions during the hold period, with nearly one-third experiencing outright business stoppages.

Rising Frequency of Cyber Attacks

The study highlighted an alarming trend: 68% of firms indicated that they have witnessed an increase in cyber incidents during the holding phase of their investments. These attacks often strike when businesses are most vulnerable—during transitions, mergers, or capital expenditures. Some additional disruptions included:

• - Unexpected Remediation Costs: 44% confronted such expenses after attacks.
• - Compliance Litigations: 29% faced potential litigation due to regulatory compliance breaches.
• - IT System Integration Challenges: 30% reported difficulties integrating their IT systems as a result of cyber incidents.

Kroll's expert, Dave Burg, emphasized the growing material risk cybersecurity poses to private equity transactions. He noted that the financial burden extends beyond immediate damages, enveloping costs associated with regulatory investigations, delayed deal timelines, and gaps in governance post-incident.

2026 Outlook and Implications

As we look ahead to 2026, expectations among PE firms are grim, with 96% anticipating an increased focus on portfolio cybersecurity over the next year. Additionally, 53% believe that the financial hit from cyber attacks will heighten, while 54% expect incidents to escalate in complexity.

Disparity Between Large and Small Firms

The report revealed a stark contrast in cybersecurity governance between larger and smaller private equity firms:

• - Governance Mandates: 55% of larger firms (those with assets under management exceeding $25 billion) enforce formal cyber risk governance, compared to only 12% of smaller firms.
• - Cybersecurity Due Diligence: 81% of larger firms integrate cybersecurity into their transaction due diligence; this figure plummets to just 29% among their smaller counterparts.
• - Dedicated Risk Management Platforms: Nearly 58% of larger firms utilize dedicated platforms to monitor cyber risks, contrasting sharply with just 9% of smaller firms.

This divide leaves smaller firms more exposed to potential threats, relying heavily on manual monitoring and external service providers, which can lead to overwhelming remediation costs and deal value loss. Eric Hasty from Kroll emphasized the importance of a structured governance model, combined with effective best practices, to combat these prevalent risks.

Conclusion

Cybersecurity is undeniably becoming a critical risk factor in the private equity sphere. As reports like Kroll's illustrate, firms that implement stringent controls, leverage dedicated monitoring platforms, and establish clear accountability can significantly mitigate exposure to cyber threats. In a rapidly evolving technological landscape, proactive measures are essential for PE firms to safeguard their investments and ensure sustained growth. Navigating the complexities of cybersecurity in the private equity space will be paramount as firms prepare for an impending wave of deal activity, making it essential to prioritize governance and risk management strategies in their operational frameworks.