Key steps for PE firms to mitigate cyber risks in portfolio companies

cyber

With the digital threat landscape ever-evolving, portfolio companies find themselves at the receiving end of 43% of annual cyberattacks.

According to ACA Group, companies with fewer than 1,000 employees bear the brunt of up to 82% of ransomware attacks, painting a target on PortCos due to their typically nascent cybersecurity measures and constrained resources to combat breaches. Such incidents not only inflict direct material losses but also disrupt operations, strain customer relationships, and tarnish reputations.

Given these risks, private equity (PE) sponsors play a crucial role in fortifying PortCos against cyber threats. By fostering robust cybersecurity frameworks and response strategies, PE sponsors safeguard their investments from potential cyber damages. Key to this is the development and continual refinement of an Incident Response Plan (IRP). Ensuring that PortCos have access to the right expertise, whether in-house or through vendors, and regular IRP reviews by cybersecurity professionals, are fundamental to prepare for effective incident responses.

Pre-emptive measures are essential. PE sponsors should insist on rigorous testing of IRPs through simulations like tabletop exercises, ensuring alignment with business objectives and identifying gaps in the plans. The designation of an incident commander is critical—someone ingrained in the PortCo with a deep understanding of the IRP, capable of leading through crises and communicating effectively with key stakeholders.

Establishing clear communication protocols is equally vital. In the chaos of a cybersecurity incident, the clarity and timeliness of internal and external communications can be the difference between swift recovery and prolonged disruption. PE sponsors should facilitate the creation of resilient communication channels and contingency plans that remain operable even during system outages.

Moreover, activating cyber insurance and forensic support promptly post-breach can significantly mitigate financial and operational repercussions. PE sponsors should ensure these resources are aligned with the specific needs of the PortCo and are ready to be deployed at a moment’s notice.

Financial preparedness is another cornerstone of effective cyber incident response. PE sponsors must ensure that PortCos have immediate access to additional funding to address and recover from cybersecurity incidents, establishing rapid funding approval processes to support affected PortCos efficiently.

Finally, learning from each incident is crucial. PE sponsors should commission independent after-action reviews to assess the response’s effectiveness and identify lessons learned. These insights should be shared across the portfolio to enhance overall resilience, align security measures with proven best practices, and allocate resources based on the quantified impact of the incidents.

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