Cyber Fraud: The Silent Killer of Investment Returns
The Growing Threat to Investors
Private equity firms and institutional investors meticulously analyse financials, market trends, and operational efficiencies before making investment decisions. Yet, one critical factor is often overlooked—cyber fraud. Unlike market volatility or economic downturns, cyber fraud operates in the shadows, silently eroding investment value before investors even realise the damage.
From business email compromise (BEC) scams to insider threats and data breaches, cyber fraud can significantly undermine portfolio performance, disrupt operations, and even lead to regulatory penalties. For investors, failing to address this risk isn't just negligent—it's financially devastating.
How Cyber Fraud Destroys Investment Value
1. Direct Financial Losses from Fraudulent Activities
Cyber fraud schemes can drain capital directly from portfolio companies, whether through:
Wire fraud and payment diversion scams
Invoice fraud targeting accounts payable departments
Unauthorised access to corporate financial systems
In 2023 alone, businesses lost over $50 billion globally to cyber fraud-related schemes. For PE-backed companies with lean finance teams, even a single breach can cause significant cash flow disruptions.
2. Reputational Damage Leading to Customer and Partner Loss
Trust is the currency of modern business. A portfolio company suffering from cyber fraud could face:
Loss of key customers due to security concerns
Supply chain disruptions as vendors hesitate to engage
Regulatory scrutiny and potential legal action
Once a company is labelled as “unsecure,” restoring confidence takes years—if not longer.
3. Regulatory Fines and Compliance Failures
Governments worldwide are cracking down on cyber fraud vulnerabilities with stricter regulations, such as:
GDPR (General Data Protection Regulation)
SEC Cyber Disclosure Rules
UK’s Financial Conduct Authority (FCA) Cyber Guidelines
A portfolio company that falls victim to cyber fraud may not just face financial loss—it could be hit with hefty fines and legal liabilities.
4. Eroding Exit Valuations
A cybersecurity incident discovered during M&A due diligence can drastically reduce a company’s valuation—or even kill the deal altogether. Acquirers are increasingly scrutinising:
Data integrity and fraud exposure
Financial misstatements caused by cyber fraud
Security postures of target companies
If a portfolio company has suffered unaudited financial losses due to cyber fraud, potential buyers will either lower their offer or walk away entirely.
Proactive Cyber Due Diligence: The Investor’s Best Defence
Assess Cyber Fraud Risk Before Investing. Perform cyber due diligence just like financial due diligence. Identify:
Weaknesses in financial controls
Insider fraud risks
Security gaps in third-party relationships
Embed Cybersecurity into Portfolio Governance
Investors should require all portfolio companies to:
Implement fraud detection tools
Mandate multi-factor authentication (MFA) for financial transactions
Conduct regular employee cyber security training
Monitor and Respond to Threats in Real-Time
Use threat intelligence to identify cyber fraud patterns before they cause financial loss. Encourage portfolio companies to:
Deploy continuous monitoring solutions
Set up rapid incident response protocols
Engage cybersecurity experts for regular audits
A Silent Killer No More
Cyber fraud is no longer just an IT issue; it is an investment risk that demands boardroom attention. Private equity firms and investors who fail to address cyber fraud will watch their returns dwindle, while those who take proactive cyber security measures will protect and enhance portfolio value.
Cyber Due Diligence are subject matter experts in helping investors identify, mitigate, and monitor cyber fraud risks across their portfolio companies; turning cyber security from a liability into a strategic advantage.
Is your investment portfolio secure? Let’s find out.
