Private Equity Firms Face Growing Concerns Over Cyber Risk as a Long-Term Liability

Cybersecurity Risks Escalate During Private Equity Hold Periods, Impacting Deal Value and Portfolio Performance

A recent survey of 325 private equity portfolio leaders revealed that 80% of firms experienced disruptions tied to cybersecurity risks during the hold period, resulting in unexpected remediation costs, litigation, downtime, and integration failures after acquisitions.

The Survey’s Findings

The survey, conducted by Kroll, found that hold-period risk is increasing in frequency, with nearly 70% of respondents reporting a year-over-year rise in cybersecurity incidents during this stage. A significant 22% of respondents described the increase as substantial.

The hold period, which typically spans several years, provides ample time for security vulnerabilities to surface, attackers to exploit weak points, and regulators to scrutinize portfolio controls. As a result, remediation costs and downtime have become common disruptions, affecting 44% and 40% of respondents, respectively.

Regional Differences

Regional differences emerged, with business disruption or downtime most prevalent in the United States, while litigation and regulatory burdens were more frequently reported in Europe and the Asia-Pacific region.

The Financial Impact

Cyber incidents are also influencing transaction outcomes, with nearly a quarter of respondents reporting disruptions during the pre-investment stage. Deal delays, valuation reductions, and even deal termination due to unacceptable cyber risk were among the consequences.

The financial impact of cybersecurity risks is substantial, with the average cost reaching $2.1 million. However, this figure only scratches the surface, as regulatory investigations, deal timeline delays, and post-incident governance gaps can have far-reaching consequences.

Smaller Firms More Vulnerable

Smaller firms, with assets under management (AUM) below $1 billion, reported a higher rate of deal disruption due to cybersecurity incidents, with 20% experiencing delays or valuation reductions. In contrast, larger firms with AUM above $1 billion reported an 8% disruption rate.

Cybersecurity Governance

The survey highlighted a significant split between large and small PE firms in their approach to cybersecurity governance. Firms with AUM above $25 billion were more likely to enforce a formal, mandatory baseline of cybersecurity controls across portfolio companies, with 55% adopting this approach. In contrast, smaller firms often handled cybersecurity controls on a case-by-case basis or had no defined baseline.

Large firms also tended to formalize cybersecurity procurement, with 52% having preferred security technology and services providers with pre-negotiated rates.

Monitoring and Staffing Gaps

Monitoring tools and staffing gaps remain a concern, with many respondents relying on manual monitoring methods or outsourced providers. Dedicated leaders or teams responsible for managing cybersecurity risk across the portfolio were often lacking, particularly in smaller firms.

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