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How Private Equity Firms Can Streamline Portfolio Optimization With CRQ

February 21, 2024

Table of Contents


  • With cyber events' financial damage soaring, private equity (PE) firms must take a more active approach to cyber risk governance and management to comply with reporting requirements and achieve solid portfolio cyber resilience.
  • A more proactive cybersecurity risk management plan safeguards PE firms' sensitive data, minimizes financial losses, preserves portfolio stability, and fosters proactive resilience against cyber threats.
  • Historically turning towards cyber insurance as a risk mitigation option, PE firms are becoming increasingly dissatisfied with the growing costs of premiums and skeptical about whether the policies match their unique risk profile and appetite. Moreover, partners keep questioning: is this truly a cost-effective policy? 
  • Cyber risk quantification (CRQ) emerges as a strategic tool, helping PE firms factor cyber risks into decision-making, ensuring optimized and resilient portfolios.
  • CRQ supports PE firms in aggregated portfolio cyber risk evaluation, individual company assessments, initiatives prioritization, cybersecurity insurance optimization, and pre-M&A assessments. 
  • Ultimately, on-demand CRQ platforms bridge the cyber knowledge gap for PE partners, providing financially quantified insights that help them govern and manage cybersecurity risks in a defensible business language. 

The Urgent Need for Greater Cybersecurity Risk Management Within PE Firms

Private equity (PE) firms have a unique power in the global marketplace, independently fostering innovation, creating jobs, and propelling economic growth. These entities infuse capital into a spectrum of industries throughout the business life-cycle, intent on delivering superior returns to investors while effectively navigating the complexities of the broader threat landscape.

Private Equity Firms’ Traditional Approach to Cybersecurity Risk

While not totally ignoring the benefits cybersecurity robustness, or lack thereof, may have on their portfolios, PE firms have traditionally prioritized funding decisions based on the more traditional aspect of operational risk. 

However, amidst their expanding digital reach and subsequent exposure levels, these financial entities have begun to realize the need to realign their focus and take up cyber risk governance and management as key practices both before investment and afterward to ensure portfolio optimization.

The Case for Proactive Cybersecurity Risk Management for PE Firms

With the expected global financial damage due to cyber events expected to reach $9.5 trillion by the end of 2024, the potential consequences of underestimating cyber risk have never been more apparent. Still, understanding that cybersecurity must be scrutinized to a greater degree and knowing how to do so are two very different challenges.

The Obstacles of Managing Cyber Risk Without a Cybersecurity Background

While PE firm managers and portfolio optimizers are accustomed to evaluating and managing the more traditional aspects of business risk and know how to navigate the financial market, cybersecurity risk often falls outside their realms of expertise. 

Indeed, cybersecurity risk management and governance are typically associated with complex technical terms and elaborate frameworks that, to those without specialized training or experience, can be confusing to interpret within a universal business context.

Additionally, because portfolio companies usually do not have personnel dedicated to cybersecurity who can help translate this more technical area of risk, understanding the role cyber activities can potentially play in ROI becomes even more of a challenge for PE firm partners. 

Unfortunately, more often than not, this knowledge gap results in cyber mitigation policies that inadvertently expose portfolio companies to otherwise avoidable risks. It also frequently leads to expensive, uneconomical cyber insurance policies that are too generalized and do not reflect the company’s unique cyber risk landscape.

Demystifying Cyber Risk Management With Cyber Risk Quantification (CRQ)

On-demand CRQ platforms can help bridge these knowledge gaps, not only providing PE firms with insights into those companies without cyber risk managers but also translating these insights into broader business terms, such as event likelihoods and financial damages, that non-technical partners can use to make data-driven business decisions. 

With financial cyber risk quantification, PE firms are readily equipped to manage the cyber risk of all their portfolio companies, negotiate for optimized cyber insurance terms and conditions, and ultimately discuss cyber mitigation strategies in a language with which they're already deeply familiar.

With financially quantified insights, PE firms of any size can easily factor cyber risk into their decision-making and governance processes, ensuring portfolios are optimized to reflect the increasingly ominous cyber risk landscape.

Holistic Evaluation of Aggregated Cyber Risk Across the Portfolio

With its multi-model CRQ loss analysis and extensive experience working with the largest cyber insurance portfolios worldwide, Kovrr's platform provides PE partners with an objective understanding of the level of cyber risk across their entire portfolio. 

Given this unique background and access to privileged insurance loss intelligence data, Kovrr's CRQ assessment offers a highly accurate forecast of how likely a PE firm's portfolio is to experience a cyber event, along with how much financial loss they are expected, on average, to incur within the upcoming year.

Evaluate crucial cyber risk metrics for your PE firm, such as AAL and event likelihoods.

This overview offers PE firms the data to create an initial roadmap for cyber risk governance and management, quickly allowing them to determine whether they need to invest more resources into cybersecurity. With these figures, they can also discern whether their current risk posture aligns with appetite and tolerance levels and, if not, start formulating plans to bring this posture down to a position they’re more comfortable with.

Prioritization of Cyber Risk Mitigation Efforts According to CRQ Insights

CRQ allows PE firm managers to create data-driven cybersecurity risk governance and management plans that prioritize efforts and recommendations according to their portfolios’ potential cyber events and respective severity. This information likewise empowers partners to address the highest-impact events across the portfolio, minimizing the likelihood of financial loss and reputational damage.

Nowadays, no organization or firm can secure itself fully against cyber events. Given this reality, business leaders must leverage objective information to distinguish which of their mitigation initiatives needs to be prioritized to ensure that portfolio companies can remain resilient in the face of an incident. 

Drilling Down to the Granular Cyber Risk Details of Portfolio Companies

On top of providing an aggregated portfolio view of cyber risk, on-demand CRQ solutions are also scalable, delving into the more specific cyber vulnerabilities faced by each portfolio company.

This granular capability enables an even more tailored approach to cybersecurity risk management and governance, ensuring resources are optimally invested. This multilayered view is extremely valuable, especially for PE firms with portfolio companies that may have limited funds to invest in cyber risk mitigation.

Review your portfolio company's cyber risk exposure according to specific loss scenarios.

CRQ gives risk managers the ability to divide up their allocated cybersecurity finances based on the upgrades and initiatives that are going to reduce risk levels the most while producing a positive ROI. Essentially, the granularity enhances strategic resource distribution, fostering cost-efficient cybersecurity enhancements for each of the portfolio companies. 

Benchmarking Cyber Risk Financial Posture Against Key Industry Peers 

By quantifying cyber risk, PE firms can discern how their portfolio companies' cyber posture ranks vis-a-vis the broader risk landscape. CRQ solutions offer key benchmarking insights broken down by business industry, revenue size, and various other firmographics, revealing crucial information that can guide cybersecurity investment budgeting.

CRQ solutions offer PE firms benchmarks to discern how portfolio companies' cyber posture ranks.

For example, a CRQ assessment may highlight that a specific portfolio company is much more likely than its industry peers to experience a high-severity cyber event. In that case, the PE firm may determine the company is not investing enough in cybersecurity and should reallocate resources accordingly to measure up to its peers. 

Optimization of Cybersecurity Insurance

Transferring cyber risk to a third-party insurance provider can be an extremely cost-effective, attractive option for PE firms. However, cybersecurity insurance policies are typically too generalized and expensive and do not account for the portfolio company's specific risk landscape. 

But, leveraging a CRQ solution, PE firms can ensure that terms and conditions are fit for purpose, with premiums, limits, and sub-limits appropriately calculated. Moreover, they can more easily determine how to distribute the allocated insurance budget optimally to maximize ROI and cost-effectiveness.

Harnessing metrics like the average annual loss (AAL), partners can determine whether their portfolio company's expected losses will exceed the deductible and, if not, pursue a lower deductible or limit. CRQ platforms like Kovrr's also break down financial damage according to standard insurance loss scenarios, allowing for more targeted investments into the coverage areas most likely to cause monetary ramifications. 

Optimize your PE firms' cyber insurance for portfolio companies with cyber risk quantification.

Discover how one PE firm managed to reduce its portfolio’s cyber insurance costs by 17% by leveraging CRQ! 

Facilitation of Informed Mergers and Acquisitions

An organization's cyber risk profile can and should be a crucial consideration when PE firms conduct their due diligence before acquisitions or consolidation. Cyber risk quantification helps partners to better understand the costs of doing business with the proposed company, giving stakeholders a more accurate notion of the level of risk they'd be taking on.

Armed with financial risk insights, partners can negotiate optimized deal terms and develop post-acquisition strategies ahead of time to mitigate and govern risk. Alternatively, they may decide that, after assessing the cyber vulnerabilities, the M&A is not worth pursuing. Ultimately, CRQ's contribution during M&A activities safeguards the portfolio's overall integrity.

CRQ’s Crucial Role in Cyber Risk Management and Optimizing PE Firm Investments

The integration of cybersecurity risk management and governance into private equity firms' core operations has become paramount for delivering positive returns. However, as one of the newest forms of business risk, many executives and partners often don't know how to develop a data-driven approach that cost-effectively addresses these vulnerabilities.

By embracing CRQ, PE firms quickly gain a nuanced understanding of both their portfolios' aggregated cyber risk landscape and that of each of the individual companies. Leveraging invaluable quantified information, partners can optimize their portfolios by enhancing cyber resiliency and safeguard investments by ensuring sustained growth.

To start assessing critical cyber risk data specific to your PE firm's portfolio and optimizing your investments, contact one of Kovrr's experts today or sign up for a free demo.

Yakir Golan


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