Managing cybersecurity and fraud risk for private equity and venture capital firms

Cybercriminals know where the money is, and they could be coming after your private equity or venture capital firm with increasing sophistication. The digitization of financial services has made PE and VC firms uniquely vulnerable due to the sensitive deal data and large capital sums they handle.

Strong cybersecurity and fraud prevention now directly impact your ability to attract limited partners, protect portfolio investments and maintain the trust that drives your success. What once seemed optional has become a business imperative.

The threats are real, but so are the solutions. With the right approach, you can protect your firm and portfolio companies, turning security into a competitive advantage.

Why PE and VC firms are high-value targets

Consider what makes your firm attractive to threat actors. You manage substantial investments and keep detailed files on confidential deal structures. For hackers, that's like having a road map to buried treasure.

Most PE and VC firms run lean operations without dedicated IT teams, creating gaps attackers exploit. Your portfolio companies — especially smaller, earlier-stage ones — may lack strong security, adding vulnerabilities throughout your investment network.

Your high-value executives could become personal targets because criminals know these leaders have both wealth and access to proprietary information. Meanwhile, limited partners and regulators expect you to carefully manage all of these risks. They're asking tougher questions about your security practices and want to see documented policies and incident response capabilities.

Key cyber and fraud risks for PE and VC firms

Business email compromise and wire fraud represent your biggest immediate danger. Nefarious actors are getting smarter about targeting your financial transactions through email. They'll impersonate people you trust — like your general partners — and they do their homework first. They might use account numbers that look almost identical to your real accounts, just one digit off. Or they time their attacks perfectly to coincide with your capital calls, when everyone expects money to move.

Data breaches can expose portfolio company intellectual property, merger and acquisition data or limited partner records — exactly the kind of information that makes PE and VC firms valuable targets. Beyond the immediate costs, these breaches can permanently damage the relationships you've spent years building with investors and entrepreneurs.

Ransomware attacks on your investments can create problems that ripple through your entire portfolio. When hackers lock up a company's systems, operations stop until someone pays the ransom or goes through a lengthy recovery process that can tank valuations.

Bad actors also use clever phone calls, texts, and other contact methods using "social engineering" to try to gain information from you or someone with sensitive information to gain access to financial accounts or trick people into sending money to a fraudster. Be wary of any incoming communication seeking information, whether a typical scam pretending to collect on a fake bill, or other subtle inquiries to gain personally identifiable information which can be used to gain access to systems.

Third-party and vendor problems may come from working with law firms, cloud providers and other partners who access your data. If any of these vendors gets breached, your security is compromised too. Insider threats from your own fund management or portfolio teams can be especially damaging because these people already have access to your most critical systems and information.

Proactive cybersecurity strategies

In today's threat landscape, reactive measures aren't enough — private equity and venture capital firms need to take a proactive approach to cybersecurity. The following strategies can help protect your firm, your portfolio companies, and your investors from increasingly sophisticated cyber threats.

1. Establish baseline cyber hygiene first. Start with the fundamentals that block most attacks. Set up multifactor authentication on all business accounts — this one step stops most automated attacks cold. Secure your communications with spam filtering and encrypted messaging for sensitive discussions. Make sure everyone uses strong, unique passwords and that all devices have endpoint protection software installed.

Train your team to spot suspicious email messages and always verify unusual financial requests through separate communication channels. Require verbal confirmation for any wire transfers or banking changes, regardless of how legitimate emails appear.

2. Prioritize due diligence enhancements. You probably already look at security when evaluating investments. Take this a step further to address today's more sophisticated threats. Ask specific questions: Have these companies recently tested their incident response plans? What security standards do they follow — NIST, ISO 27001 or something industry-specific? How do they control who has access to critical business data, and how do they train employees on security?

Look for companies that treat cybersecurity like a real business priority, not just something IT handles. Strong security practices usually signal good management overall. Once you've made an investment, don't let security oversight end there. Include ongoing cyber audits as part of your regular portfolio monitoring. Schedule annual security assessments and track progress on resolving issues.

3. Create your incident response plan. If you don't already have an incident response plan, create one. Make sure it covers the specific threats PE and VC firms face. Your plan should address scenarios like email fraud during funding rounds, vendor breaches that affect multiple portfolio firms and coordinated attacks across your investments.

Practice different attack scenarios with your team. The difference between a minor problem and a major crisis often comes down to how quickly you respond. When hackers hit one company, they often try to use that access to target others in your portfolio. Include your portfolio companies in this planning.

4. Look for third-party partnerships. Your expertise is in investments, not IT security, so build relationships with specialists who can fill those gaps. Partner with cybersecurity firms that understand financial services and can monitor your systems around the clock. Work with insurance providers who specialize in cyber coverage for investment firms. They'll know exactly what risks you face and how to structure policies that actually protect you.

Add forensic experts to your contact list before you need them. If you do face a breach, having established relationships with incident response specialists can make the difference between a quick recovery and a prolonged crisis.

5. Get the right cyber insurance. Look for coverage that addresses your firm's specific needs. Policies typically range from $1 million to $25 million depending on your size and risk level. Make sure your policy covers business email compromise, social engineering attacks and regulatory response costs. Many policies don't cover nation-state attacks, so ask about this if you have international operations.

6. Educate your staff. Your team is your first line of defense, but they need to know what to watch for. Train everyone on fraud awareness and phishing recognition. Attackers specifically target PE and VC firms because they know serious money moves through these organizations.

Show staff examples of business email compromise attempts targeting capital calls. Teach them to verify unusual financial requests through separate communication channels. The more your employees understand these threats, the better they can protect your firm.

7. Be brilliant on the basics. Ensure you and your team are using robust passwords; multifactor authentication for email and systems which store sensitive and personally identifiable information; keep networks secure and consider using a separate network for guests with unknown devices to keep sensitive information on a dedicated network.

Elevate risk management to a competitive advantage

Strong cybersecurity can actually help you win business. Limited partners routinely ask detailed questions about how you handle cyber risk. When you can show them solid security practices, you stand out from competitors who treat cybersecurity as something to worry about later.

This helps your investments, too. When you build stronger security, you're protecting your capital and potentially increasing its value. Companies with solid cybersecurity often get higher valuations when it's time to exit.

As a fiduciary, you have a duty to proactively manage cyber and fraud risks for your investors and portfolio companies. But beyond compliance, security and resilience become powerful differentiators when attracting limited partners and managing deals.

Taking action now, before you face a crisis, demonstrates the forward-thinking leadership that defines successful investment firms.

Connect with a private banker to learn more about Citizens' comprehensive solutions for private equity and venture capital firms.