The growing imperative of cybersecurity in private equity investments

ARTICLE | March 05, 2024

Authored by RSM US LLP

In an era where data is the new currency, the synergy between private equity investment and robust cybersecurity practices is indispensable.

While digital transformation fuels progress and portfolio company growth, it also increases potential threats to sensitive data. Private equity investors must recognize that safeguarding valuable assets extends beyond financial considerations—it's about protecting the very foundation of the investments themselves.

As private equity firms increasingly turn their attention to high-growth sectors like health care, insurance and technology, data protection becomes even more paramount. Drawing from RSM US LLP’s deep cyber-risk advisory experience and industry knowledge, here are considerations for building a proactive and resilient cybersecurity strategy within each of these sectors.

Health care: A breeding ground for data theft

In the health care sector, the digitization of patient records and the integration of cutting-edge technologies promise unprecedented advancements. Yet this digitization brings forth a new set of challenges, with cyberthreats looming over patient confidentiality and operational integrity. Private equity funds must ensure that the health care entities they invest in are equipped with robust cybersecurity measures to secure health information privacy and maintain patient trust.

However, the complexity of modern health care systems makes it nearly impossible to perform adequate diligence on potential targets. Therefore, funds should prioritize and budget for post-close remediation efforts as part of their 30-60-90 day plan to avoid holding onto an organization that has been or is likely to be breached.

Insurance: Balancing innovation and security

Insurance, another stronghold for private equity, is undergoing a digital revolution with insurtech innovations designed to streamline the industry’s business model. While technological advancements bring efficiency and personalized services, they also create entry points for cyberattacks. Private equity firms must prioritize cybersecurity diligence to protect vast datasets containing sensitive customer information. A breach in the insurance sector not only jeopardizes client trust but also has significant financial and regulatory implications.

Technology: Innovation and vulnerability

In the technology sector, private equity investments often focus on disruptive innovations. However, the very nature of groundbreaking technologies can expose companies to cyber risks. Whether it's a data breach compromising proprietary algorithms or a security flaw threatening user privacy, the consequences of inadequate cybersecurity can be severe. Private equity investors should take an active role in ensuring that the technology firms they support prioritize cybersecurity as an integral part of their business strategy.

Key challenges in cybersecurity for private equity

Navigating the cybersecurity landscape in private equity investments comes with its own set of challenges. Limited visibility into the cybersecurity postures of portfolio companies, the evolving nature of cyberthreats and the varying degrees of cybersecurity maturity among target companies pose significant hurdles.

While enterprise risk management practices have evolved over recent years, cybersecurity risks are not consistently reported. A lack of standardized practices across the private equity industry further complicates efforts to consistently apply leading cybersecurity frameworks. Private equity funds must navigate the growing complexity of industry-based compliance requirements while establishing a common framework to manage risk across their portfolios.

To manage cyber risks within a portfolio and drive investments, funds must establish a foundational expectation of maturity for a cybersecurity program. This includes continuously measuring and holding portfolio company leadership accountable for progress and outcomes against cybersecurity investments.

A secure future for private equity

As private equity continues to shape the future of investing, the role of cybersecurity cannot be overstated. It is not merely a protective measure; it is an enabler of sustainable growth and a guardian of investor trust. Private equity firms that prioritize cybersecurity in their investment strategies not only protect their financial interests but also contribute to the overall resilience of the sectors they influence.

In addition to making investments, private equity must be able to understand how funds provided to its portfolio companies are used to reduce risks within the cyber program. In working with trusted partners like RSM, private equity can establish, implement and report on metrics or dashboards within its portfolios’ cybersecurity program that showcase maturity development and its impact on risks over time.