The Risks Have Never Been Higher
Imagine closing a major deal, one that could redefine your portfolio’s success. The numbers check out, the growth projections look good, and everything seems airtight. Then, a hidden cyber vulnerability emerges, turning your win into a multimillion-dollar liability. Private equity has always been about maximizing value, but today, that includes managing cybersecurity risks that evolve faster than traditional defenses.
At our Chicago Conference on January 23, 2025, we explored how AI and cyber threats are impacting private equity. For those who attended, this will reinforce key takeaways. For those who didn’t, here’s an objective breakdown of the critical risks and strategies we discussed.
Reality Check – Private Equity In The Crosshairs
Private equity firms are growing targets for cyber criminals and the risks continue to rise. This isn’t speculation, it’s already happening.
The Marriott and Starwood breach is a good example. A cyberattack discovered post-acquisition compromised 500 million guest records, exposing personal details such as credit card numbers, passport information, and other sensitive data. This triggered regulatory fines, lawsuits, and reputational damage. The UK’s Information Commissioner’s Office (ICO) fined Marriott £18.4 million under GDPR, underscoring the financial repercussions of inadequate security. Additionally, the company was forced to overhaul its cybersecurity measures, grappling with long-term operational disruptions.
Verizon’s acquisition of Yahoo also faced a major setback when it was revealed that Yahoo had been hacked even before the company was acquired. It was finally revealed all 3 billion of its user accounts were affected. The company was forced to reduce the acquisition price by $350million, to $4.48 billion. Yahoo had to pay out $117.5 million to settle a class action suit, and the breach attracted the attention of regulators and investors’ lawsuits. This incident showed that cyber risks are able to decrease the value of an acquisition and create long-term financial damages.
More recently, ASCO Industries was subjected toa ransomware attack that affected its operations and rendered it passive for a number of months, which led to the furlough of more than 1,000 employees. The breach delayed Spirit AeroSystems’ planned $650 million acquisition and ultimately was one of the reasons that led to the deal’s failure. The attack greatly reduced the value of ASCO which made it a less attractive acquisition target. Montana Aerospace finally acquired ASCO but at a price that was far lower than what had been expected. This case shows how cybersecurity incidents can harm a high-value M&A deal in the wrong direction.
The Threat Landscape for Private Equity Firms
These breaches remind us that cyber risks don’t stand still. They’re constantly evolving, becoming more sophisticated, harder to detect, and increasingly tied to financial and reputational fallout. For private equity firms, the challenge isn’t just about responding to incidents anymore, it’s about anticipating them. Understanding how the threat landscape is shifting is critical to avoiding costly surprises.
Third-Party & Supply Chain Risks
Third-party security weaknesses within portfolio companies remain one of the most overlooked risks in private equity. Many firms conduct extensive financial due diligence but fail to assess the cybersecurity posture of vendors and suppliers of acquired entities. After the acquisition, these unknown vulnerabilities can become major liabilities.
Ransomware & Business Disruption
Ransomware remains one of the most common attacks, capable of paralyzing financial and operational data within a short time. Business Email Compromise (BEC) schemes remain a persistent and growing threat. Attackers continue to refine their tactics to target financial teams and senior executives, using AI-generated emails and deepfake audio and video to impersonate decision-makers. Some of these attacks have been linked to nation-state actors, making them even more difficult to detect and mitigate.
AI-Powered Attacks & Data Manipulation
Traditional cyber threats remain a serious concern, but AI-powered attacks are rapidly changing the threat landscape, making them more sophisticated and scalable than ever before.
AI-Generated Fraud in M&A Due Diligence
In addition, AI-generated fake documents are adding a new layer of complexity to M&A due diligence. Advanced tools can now produce fraudulent financial statements, contracts, and regulatory filings that can be difficult to detect before closing.
Firms relying on inaccurate data may unknowingly inflate valuations, overlook hidden liabilities, or make poor investment decisions based on fabricated information. Fraudulent reports and contracts can manipulate deal terms, mask financial instability, or conceal regulatory risks, leading to costly missteps.
Beyond financial misrepresentation, it should be considered AI-driven deception can extend to compliance. Fraudulent regulatory filings and fabricated audit reports can mislead investors and auditors, obscuring risks that would have otherwise been flagged during due diligence.
As AI-powered fraud becomes more advanced and harder to detect, private equity firms must strengthen verification processes, implement AI-driven fraud detection, and apply rigorous document authentication to maintain trust in the data shaping their investment decisions.
The Action Plan – How PE Firms Can Defend Themselves & Their Portfolio Companies
Cybersecurity risk mitigation is no longer an afterthought, it’s a critical component of the investment lifecycle. Just as firms conduct extensive financial due diligence, cyber due diligence should be just as careful to ensure you aren’t inheriting legacy vulnerabilities that could jeopardize a deal’s value. A full cybersecurity audit should be a standard part of every acquisition. After closing, regular assessments help identify emerging risks within portfolio companies, and when preparing for an exit, strong cyber hygiene can increase investor confidence and enhance the company’s value.
A structured, proactive approach is key. AI-powered tools are becoming essential in identifying and stopping cyber threats before they escalate. Advanced anomaly detection systems can flag fraud attempts early, while behavioral monitoring helps detect internal risks before they turn into serious problems. Risk-scoring frameworks provide visibility across the entire portfolio, allowing firms to prioritize and allocate cybersecurity resources where they are needed most.
Building cyber resilience is no longer optional, it’s expected. Many firms are now using cybersecurity tabletop exercises to simulate ransomware attacks and train leadership teams on crisis response. AI-based behavioral threat detection can enable real-time monitoring of unusual activities and can help contain breaches before they spread. However, not all traditional cyber insurance policies account for AI-related risks, making it critical to reassess coverage to ensure adequate protection. Strengthening third-party vendor security is just as important, as supply chain attacks remain one of the weakest links in cybersecurity.
Cyber resilience isn’t just a technology issue, it’s a leadership mandate. Executive teams and investment professionals must be trained to recognize AI and cybersecurity risks, not just IT teams. Studies continue to show that human error is a leading cause of breaches, which means education is just as important as technology. By embedding security awareness into corporate culture, PE firms can ensure that cybersecurity isn’t treated as a compliance task but that it becomes a core part of risk management and investment strategy.
A recent study by IBM and the Ponemon Institute found that financial service firms paid nearly $5.97 million for an average data breach in 2022. This is significantly higher than the $4.82 million average for other critical infrastructure sectors. The higher cost shows the increased risks these institutions face, including private equity. They handle large amounts of sensitive data, making them an irresistible target for cyber aggressors. 1
The Importance of Cyber Insurance in Private Equity
A multi-layered approach to cybersecurity, including due diligence, threat monitoring, and risk transfer, can help PE firms navigate evolving risks. Cyber insurance is one tool firms may explore, though coverage and effectiveness can vary widely.
As cyberattacks become more sophisticated and AI-driven fraud increases, some firms explore cyber insurance as a tool for financial risk mitigation, breach response, and business continuity planning. However, not all policies account for emerging AI-related threats, making regular policy reviews an important part of risk management discussions.
Cyber incidents have impacted M&A transactions, as seen in the Marriott-Starwood, Yahoo, and ASCO breaches, where undiscovered cybersecurity vulnerabilities led to financial losses, compliance challenges, and reputational damage. These cases show how cyber risks can impact deal value and long-term investment outcomes.
Because insurance policies vary, firms may benefit from reviewing coverage in the context of AI-related fraud, ransomware, and supply chain vulnerabilities. Engaging with qualified legal and insurance professionals can help firms determine how cyber insurance fits within their broader risk management approach
The Future of PE Cybersecurity – Adapt or Be the Next Headline
Cybersecurity has evolved from a compliance issue to a fundamental investment risk that private equity firms should prioritize. Cyber incidents can stall deals, weaken valuations, disrupt transactions, and invite unwanted regulatory scrutiny. Ignoring cybersecurity is no longer an option.
Leading firms are integrating cybersecurity into almost every phase of the investment process, due diligence, portfolio risk management, and post-acquisition oversight. It’s not just about preventing breaches but ensuring long-term resilience and protecting investments.
Managing risk is at the core of private equity. Today, that means making cybersecurity as fundamental as financial and operational due diligence. Firms that recognize this and take a proactive approach will be the ones best positioned to protect deal value, maintain investor confidence, and navigate an increasingly complex risk environment.
About the Author: This content piece was authored by Laszlo, Gonc, Partner of Digital Risk Management, AI/ML and Cybersecurity at Sparc Partners & CEO of Next Era Transformation Group. Laszlo is a recognized seasoned leader in cybersecurity, AI/ML, and digital risk. A sought-after keynote speaker and advisor, he helps organizations navigate digital transformation, leveraging AI/ML to drive growth and cybersecurity to protect operations. Laszlo serves on several advisory boards, holds a CISSP certification, and is a Digital Directors Network QTE.
About Sparc Partners: Sparc Partners provides tailored executive search, leadership consulting, and a full spectrum of advisory services. We work closely with organizations in the Private Capital sector, including Private Equity (PE), Venture Capital (VC), Mergers & Acquisitions (M&A), and Family Offices. Connect to learn moreSparc Partners
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