Cybersecurity worry keeps PE managers up at night

Fund managers are increasingly concerned with environmental, social and governance issues, but action taken to tackle individual risks is disproportionate.

Cybersecurity and human rights issues at portfolio companies are the biggest causes for concern for private equity managers who participated in a PwC survey on responsible investing.

But there was a large disparity between the number of firms taking action taken to mitigate the two risks.

In total, 85 percent of respondents said cybersecurity at their portfolio companies was a source of concern, but just 27 percent were taking action to prevent an attack. This compares with 79 percent of firms that cited human rights issues as a worry, where 48 percent of firms were tackling the issue.

Climate risk was the responsible investment issue of least concern, with 46 percent saying it was caused disquiet. Just a quarter said they were taking action to reduce the carbon footprint of their portfolio companies.

The proportion of firms making a public commitment to invest responsibly has increased by 13 percentage points over the past three years, to 70 percent, while the share of firms with responsible investment policies increased by the same amount, to 68 percent.

This increase aligns with growing investor demands for responsible investors; 46 percent said the majority of LPs are interested in environmental, social and governance issues, more than double the 21 percent that said the same in 2013.

Managers are also prepared to pay a premium for a target company due to its strong ESG performance, while 40 percent said poor performance in the space has led to a material discount in a valuation and/or led to a decision not to invest.

“Pre-acquisition a firm is looking for the red-flag events that will create additional costs, fines, or reputational damage further down the line. Post-purchase, the focus shifts to reporting on progress as changes and improvements are made,” the report said.