The private equity reach is growing at neck-breaking speeds, with technology-centric business models taking a significant amount of investors’ attention. However, this also attracts bad actors waiting for an opportunity to strike. One popular scenario was when hackers tricked three British firms into sending them 1.3 million U.S. dollars.
Unfortunately, this is not an isolated incident, as cyber attacks don’t require noticeable flaws in your IT architecture before they happen. A seemingly overlookable error without a proper IT risk mitigation strategy is all it takes to be at the mercy of hackers.
In this article, we will explore common IT vulnerabilities in private equity, effective IT risk mitigation strategies, risk assessments' role in mitigating IT risks, and collaboration with IT consulting firms to mitigate risks.
Understanding IT Risks in Private Equity Organizations
Managing IT risks in private equity organizations is a complex and specific topic. Private equity firms are under intense public scrutiny from investors and fraudsters who seek profits. As a result, risks and coverage are often inflated compared to other similarly structured organizations. IT risks can arise from the inadequate due diligence of fund managers who later become members of the management team.
The same situation occurs when the loopholes in the IT system of an acquired startup become integrated into the central servers without comprehensive audits, leading to low-level risks quickly escalating. This is why IT risks are generally classified as human or IT-caused, be it cyber threats, volatility, credit risk and cash flow.
Consider appointing a CFO as chief risk officer (CRO) for a more holistic approach. This can help manage IT and private equity risks more effectively, minimize conflicts of interest, shorten the decision-making process, and expand the risk management horizon for your firm.
Common IT Vulnerabilities in Private Equity
Private equity firms face a range of IT vulnerabilities, which could, in turn, affect portfolio companies. These vulnerabilities include:
Cybersecurity: Businesses, particularly PE firms, can expect cyber incidents to occur. The attraction of having quick cash makes them vulnerable to various types of cyber attacks. These attacks can range from subtle port scans that look for weaknesses to severe ransomware attacks that can cause a company to close.
PE firms must be aware that cybersecurity incidents tend to increase by 68% within a month of closing a deal, as revealed by Accenture’s report on Private Equity and the Cost of Cyberattacks. Therefore, it's important for PE firms to make sure that their portfolio companies are taking the appropriate measures to protect themselves against cyber threats.
Supply Chain: Private equity firms need to ensure that their portfolio companies are managing their supply chains effectively. This includes ensuring that suppliers are meeting regulatory requirements and that there are no vulnerabilities in the supply chain that could lead to IT risks.
Valuations: Private equity firms need to ensure that their portfolio companies are accurately valuing their IT assets. This includes ensuring that there are no vulnerabilities in the IT infrastructure that could lead to inaccurate valuations.
Strategies for Effective IT Risk Management
Private equity firms can take a number of steps to manage IT risks effectively, including:
Value Creation Upfront: Use technical due diligence data to shape the roadmap and gather inputs for value creation. Think about exit options from the get-go, as hold times are shorter. Set KPIs and track progress using data to compare against the initial assessment and other assets in the portfolio.
Risk Assessments: If you're in private equity, it's important to do regular checks for IT risks. This involves digging into the IT setup and supply chain to spot any weak spots. Plus, you'll want to size up the chances of cyber threats coming your way.
Partner With Managed IT Services: IT consulting firms can partner with private equity professionals to provide managed IT services. This involves assisting with IT setup, identifying and addressing vulnerabilities, providing rapid incident response, managing firewalls, monitoring cyber risks, and promptly responding to incidents.
The Role of Risk Assessments in Mitigating IT Risks
Private equity investments involve navigating various market conditions, financial services landscapes, and potential risks. As such, risk assessments are critical to manage the risks that come with their involvement effectively. To navigate these challenges successfully, private equity firms must conduct regular and comprehensive risk assessments.
These assessments evaluate not only the financial risks but also delve into the IT infrastructure, supply chain vulnerabilities, and even environmental, social, and governance (ESG) risks. Risk assessments should be conducted in real time to ensure that the firm is aware of any potential risks as they arise.
Understanding risk exposure, interest rates, credit risk, or liquidity, empowers firms to make informed decisions. Furthermore, private equity firms can analyze key metrics like cash flow and valuations to assess the financial risk associated with an investment. Firms can better safeguard their investment portfolio by assessing IT and financial risks.
Collaborating with IT Consulting Firms for Risk Mitigation
Private equity firms can work with IT consulting firms to provide managed IT services and cybersecurity managed services. This includes managing the IT infrastructure, monitoring vulnerabilities, and providing incident response services. IT consulting firms can also provide advisory services to help private equity firms develop effective IT risk management strategies. Collaborating with IT consulting firms can be time-consuming, but it effectively manages IT risks in private equity organizations.
Private equity firms face a range of potential IT risks, including cyber threats, supply chain vulnerabilities, and inaccurate valuations. To manage these risks effectively, private equity firms should conduct regular risk assessments, work with IT consulting firms to provide managed IT services and cybersecurity managed services, and ensure that their portfolio companies are taking appropriate measures to protect against IT risks. By taking a holistic approach to risk management, private equity firms can mitigate potential IT risks and create value for their stakeholders.
Partner with ne Digital for Robust IT Risk Management Solutions
The least you could do to repay the faith and trust your limited partners have placed in you is to ensure their investments are safe. There are several challenges and key risks to doing this yourself. For these reasons, you should partner with an IT consulting firm with a track record of effectively managing risk.
ne Digital has a range of expert services to offer with adequately experienced staff to deliver premium services. Our team specializes in Cybersecurity Managed Services, IT Compliance Managed Services, Risk Assessments, and Advisory Services.
Don't let IT risks interfere with your investment strategies. Contact ne Digital today to learn more about managing IT risks in your private equity organization.
