Cyber threats continue to evolve at a rapid pace, challenging even the most operationally mature firms to properly manage the risks.
According to Tech Republic, the number of ransomware attacks increased by 105% in 2021, equating to over 623 million attacks worldwide.
With the ongoing surge in cybercrimes, private equity (PE) firms risk becoming part of an alarming statistic if they continue to ignore the effects of limited (or nonexistent) security. To better understand why private equity firms are at risk, the damages that are on the line, and how to ensure better protection moving forward, read on.
Why Are Private Equity Firms a Prime Target?
PE firms hold a wealth of sensitive client and market information and manage large sums of money. As the volume of deals continues to draw public attention, PE firms are becoming lucrative targets for attackers. Let’s take a closer look at why PE firms are the ideal victim for cyberattacks.
- Lack of Security: Historically, firms have not regarded cybersecurity as a high priority. PE funds and their general partners have been more focused on deal performance, and the reputational risk of successful cyberattacks has generally been perceived as low, leaving a gap in proper security measures.
- Profitability: Ransomware groups target private equity portfolio companies for the same reason why people rob banks: that’s where the money is. Cyber criminals recognize that private equity firms have more resources to pay up compared to a smaller stand-alone organization without a strong balance sheet.
- Mergers and Acquisitions (M&A): Since 2020, we’ve seen a 437% increase in cyberattacks, with many of those breaches occurring after a merger or acquisition announcement. Why? When vulnerabilities go undetected, serious security risks may be overlooked. M&A also creates a period of transition, where new ownership and leadership teams are coming into or out of their roles, presenting a perfect opportunity for cybercriminals to attack.
- Remote Work: Working from home is quickly becoming an industry standard, transforming cyber risk profiles. IT assets such as laptops and smartphones are being used more frequently outside the protections of an office. This means they can be lost or more easily accessed by malicious adversaries. And employees frequently access confidential intellectual information through the cloud, where internet security is less stringent if proper measures aren’t put in place.
With the rising threat of businesses falling victim to cybercrime, it’s important that portfolio companies take a more rigorous approach to cybersecurity.
What Damage Can Cyberattacks Cause?
Ransomware attacks have resulted in major losses, making cybersecurity a top priority at just about every business size and industry. Damages from cybercrime were projected to reach $6 trillion in 2021 and continue rising to an estimated $10.5 trillion annually by 2025.
Beyond the obvious consequences of direct financial loss and the costs associated with picking up the pieces, the act of responding to a successful attack is a very real and time-consuming disruption to business operations. Cybercriminals can use any number of ways to handcuff an organization’s normal activities. This could include infecting computer systems with malware that erases high-value information or installing malicious code that blocks website access, resulting in lost revenue.
Companies that fall victim to larger cyberattacks often find their brand equity significantly tarnished. Potential buyers may feel less secure leaving their sensitive information in the hands of a firm whose IT infrastructure was broken into before. This loss of trust in the fund and its management can be hard to overcome. In fact, studies report that data breaches lead to an average customer turnover of 3.9%.
Despite the damages a cyberattack can cause, a recent survey of 100 international private equity firms showed that, while more than 70% of respondents believed cybersecurity was a high operational risk to their business, only 23% had a fully operational and compliant cybersecurity program in place.
Failing to protect a business against cyberattacks is costly in more ways than one. As cybercrime becomes more sophisticated, PE firms will have to stay one step ahead.
Movement to Better Cybersecurity
In general, financial firms are increasing their budgets for breach mitigation and cyber-education. Despite this, many institutions are still underspending on their IT security efforts.
A recent decision made by the Securities and Exchange Commission proposed a new set of rules that would require concrete cybersecurity policies to help bring this segment of the financial industry up to speed. The proposed rules include:
- Requiring advisers and funds to adopt and implement procedures that are reasonably designed to address cybersecurity risks.
- Reporting significant cybersecurity incidents to the SEC to bolster the efficiency of evaluating effects and assessing further risks.
- Disclosing information about incidents on marketing materials and registration statements.
- Maintaining records related to the proposed cybersecurity risk management rules and the occurrence of cybersecurity incidents.
Taking a back-burner approach to cybersecurity is becoming a thing of the past. The new proposal from the SEC is setting an outlook for change for all companies within the financial sector.
Ascend Can Help
In today's world, you run the risk of falling victim to a cyberattack if you choose to forego proper security. However, creating more value on every investment is crucial.
If you'd like to discuss implementing cybersecurity for your PE firm, Ascend Technologies can help. Our experienced team has the resources and the know-how to protect your PE’s valuable data from a devastating attack. Contact us today for a free consultation.