Cybersecurity programs, data protection, and technology infrastructure
Cybersecurity has emerged as a critical operational concern for private equity managers, driven by regulatory expectations, LP due diligence requirements, and the substantive risk of cyber incidents. PE firms handle sensitive investor data, confidential portfolio company information, and significant financial transactions, making them attractive targets for malicious actors. Building appropriate cybersecurity capabilities requires understanding the threat landscape, implementing proportionate controls, and maintaining ongoing vigilance as threats evolve.
The SEC has increased focus on investment adviser cybersecurity, publishing guidance and conducting examinations that evaluate cyber practices. While comprehensive cybersecurity rules for advisers remain evolving, the SEC expects registered advisers to maintain written cybersecurity policies, conduct risk assessments, and implement controls appropriate to their circumstances. Examination findings and enforcement actions provide insight into regulatory expectations.
Institutional LP due diligence now routinely includes detailed cybersecurity questionnaires covering governance, technical controls, incident response capabilities, and vendor management. DDQs often reference frameworks like NIST, ISO 27001, or SOC 2, creating expectations that managers can demonstrate compliance with recognized standards. Cyber incidents at fund managers have contributed to heightened LP scrutiny.
Effective cybersecurity programs typically include governance structures, risk assessment processes, technical controls, and incident response capabilities. The specific implementation varies based on firm size, complexity, and risk profile, but common elements provide a foundation for cyber resilience.
Governance structures assign responsibility for cybersecurity, typically to a designated security officer or IT leader, with oversight from senior management. Written policies document security requirements and procedures, while regular reporting keeps leadership informed of security posture and emerging risks. Many PE managers include cybersecurity as a standing topic in management committee or board meetings.
Risk assessments identify threats, vulnerabilities, and potential impacts relevant to the firm's operations. These assessments should consider both technical systems and business processes, including deal activities, investor communications, and portfolio company oversight. Periodic reassessment ensures the security program addresses evolving risks.
Business email compromise attacks targeting PE firms have increased significantly. These attacks often involve compromising email accounts to intercept or redirect wire transfers, particularly during deal closings or capital call processes. Attackers may impersonate executives, counsel, or investors to request fraudulent wire transfers or changes to banking instructions.
Controls to address wire fraud include callback verification procedures for banking instruction changes, multi-party approval for significant transfers, and awareness training for personnel involved in financial transactions. Clear procedures for verifying wire instructions through known contact information, rather than information provided in potentially compromised emails, help prevent successful attacks.
PE managers increasingly recognize that portfolio company cyber incidents can affect fund returns through business disruption, remediation costs, and reputational damage. Many firms now include cyber due diligence in acquisition processes and monitor portfolio company security posture during the holding period.
The level of portfolio company cyber oversight varies by firm and may include cyber risk assessments, security questionnaires, incident reporting requirements, or technology investments to improve security posture. Some firms leverage portfolio-wide security initiatives to achieve efficiencies and share best practices across companies.
PE managers rely on numerous third-party service providers who may have access to sensitive data or systems. Fund administrators, legal counsel, auditors, and technology vendors all present potential cyber risk that requires management. Vendor due diligence should evaluate security practices before engagement, with ongoing monitoring for significant relationships.
Cloud services require particular attention, as managers increasingly utilize SaaS applications for deal management, investor communications, and data storage. Understanding cloud provider security responsibilities, configuration requirements, and data handling practices helps ensure appropriate protection for information stored in cloud environments.
Incident response planning prepares the firm to respond effectively when security incidents occur. Written incident response plans document notification procedures, containment steps, investigation processes, and recovery activities. Tabletop exercises test response capabilities and identify gaps before actual incidents occur. Many cyber insurance policies require evidence of incident response planning.
Security awareness training helps personnel recognize and respond appropriately to cyber threats. Training should address common attack vectors like phishing, social engineering, and wire fraud, with periodic reinforcement and simulated phishing exercises. Human factors remain a significant vulnerability that technical controls alone cannot fully address.