The Hidden Costs of Ignoring Cyber Due Diligence in Private Equity Deals
Cyber Risk: The Silent Deal Killer
In the fast-paced world of private equity, investors thrive on identifying high-value opportunities and maximising returns. But in today’s digital landscape, ignoring cyber risks can turn a promising deal into a financial disaster.
A target company may appear profitable on paper, but hidden cyber security weaknesses can lead to operational disruptions, regulatory fines, reputational damage, and even deal failures. Without proper cyber due diligence, investors risk inheriting liabilities that can significantly erode their returns.
So, what are the real costs of overlooking cyber due diligence in private equity deals? Let’s break them down.
1. Financial Losses from Undiscovered Breaches
Cyber incidents can stay undetected for months—or even years—before an acquisition. If a breach is discovered post-deal, the acquiring firm is left to clean up the mess. This can mean:
Incident response and remediation costs
Regulatory fines and legal fees
Customer compensation and brand recovery expenses
A 2023 IBM study found that the average cost of a data breach is $4.45 million, but for businesses involved in M&A, that number can skyrocket.
2. Deal Renegotiation or Collapse
If cyber risks are discovered too late, they can delay or derail an acquisition. In many cases, buyers:
Negotiate a lower price to account for security weaknesses
Pull out of the deal entirely if the risks are deemed too severe
Require extensive remediation efforts before moving forward
For PE firms aiming for quick, high-value exits, such delays and devaluations can significantly impact ROI.
3. Reputational Damage and Investor Confidence
When a portfolio company suffers a cyber incident, the damage isn’t just financial; it’s reputational. Investors, partners, and customers lose confidence, making it harder to:
Attract new investments
Secure strategic partnerships
Successfully exit at a premium valuation
A single cyber security failure can taint an entire PE firm’s reputation, leading to long-term trust and credibility issues.
4. Increased Regulatory and Compliance Risks
With tightening cyber security regulations across many industries, non-compliance can lead to massive fines. If an acquired company lacks proper security measures, the acquirer inherits those compliance risks.
Case in point: In 2018, Marriott International was fined £18.4 million ($23.8 million) after acquiring Starwood Hotels, whose systems had been breached years earlier. The attack went unnoticed during due diligence, leaving Marriott liable.
5. Weakened Exit Strategy and Lower Valuations
Cyber risks don’t just affect acquisitions, they impact exits too. When it’s time to sell, buyers will scrutinize a company’s security posture. Poor cyber security:
Lowers buyer confidence
Reduces valuation multiples
Increases due diligence time, delaying the deal
On the other hand, companies that demonstrate strong cyber security governance attract higher valuations and command premium exit prices.
How Cyber Due Diligence Safeguards Your Investments
At Cyber Due Diligence, we help PE firms identify, mitigate, and manage cyber risks throughout the investment lifecycle. Our expertise ensures that:
Pre-deal risks are uncovered before they impact valuation
Mitigation strategies are implemented to protect portfolio companies
Regulatory compliance is strengthened to avoid fines and penalties
Exit strategies remain intact, maximising investment value
By embedding cyber security into due diligence, investors not only protect their assets but also unlock hidden value in their portfolios.
Cyber Security is Not a Cost… It is an Investment
In private equity, risk management is value creation. A robust cyber security assessment is not just about avoiding losses; it’s about enhancing resilience, securing competitive advantage, and driving long-term growth.
Are your investments protected? Contact Cyber Due Diligence today to ensure your next deal is a smart and secure one.
