Thu, Oct 5, 2023

Global Private Equity Risk Index Highlights Risky Insight From Digital Chatter

We will use this information to respond to your inquiry and process your data in accordance with our privacy policy.

In today’s highly volatile business environment, private equity firms are focused on both maximizing value creation and managing value preservation in order to ensure future limited partner funding. Digital chatter is emerging as an essential capability in private equity firms’ battle to reach their investment objectives.

As the term implies, digital chatter is the summation of online conversations that take place across the surface, deep and dark web. Analyzing this digital chatter at scale has become invaluable in proactively identifying risky events and threats across the whole private equity deal lifecycle. These risk events include environmental impacts, social issues, governance failures, financial instability and cyber attacks.

The Kroll Global Private Equity Risk Index provides vital insight on risks facing the world’s 300 largest PE firms. Risk levels are measured quarterly and based upon the risk signals found within digital chatter representing the summation of conversations happening online.

This also inspired us to formally provide private equity risk detection services in the form of digital chatter due diligence and digital chatter risk monitoring for our clients. You can read more about Kroll Private Equity Risk Detect here.

A Closer Look at the World’s Largest Private Equity Firms

During the last quarter Kroll reviewed 17 million items of digital chatter from July - September 2023, focusing on five key risk pillars that currently impact private equity firms the most:

Environmental Impacts

Environmental impacts, such as allegations, accusations or narratives related to pollution, deforestation, climate change, habitat loss or species extinction.

Social Issues

Social issues, such as allegations that part of an associated supply chain employs forced labor, uses conflict materials or trades with oppressive regimes.

Governance Failures

Governance failures, such as allegations relating to unethical practices, financial mismanagement, conflicts of interest, lack of transparency or inadequate oversight.

Financial Insecurity

Financial insecurity, such as potential monetary insecurity, corporate fraud, bribery, insider trading or allegations of tax avoidance or evasion.

Cyber Attacks

Cyber attacks, such as credible reports or allegations that the business or its suppliers have been the victim of cyber attacks and may be open to resultant fraud.

Key Findings

Findings from past indexes have shown evidence of digital chatter detecting an issue as early as six months in advance of a risk event happening. This quarter’s findings are no different. Higher scrutiny of portfolio companies resulting from global risk events has cast a wider spotlight on the investments of private equity firms:

  • Digital chatter about portfolio company governance failures is quickly corresponding to discourse about mainstream social issues and employees’ livelihoods.
  • Highly publicized striking unions are shining a bigger spotlight on worker’s rights and prompting online conversations about portfolio company labor practices.
  • Summer climate events have ended, but their lasting effect is amplifying online scrutiny about portfolio company environmental footprints and ESG policies.

Learn more about Kroll digital chatter risk detection services for private equity here.

Key Findings

Risky Digital Chatter Often Goes Undetected

Risky digital chatter often goes undetected

According to our analysis, digital chatter relating to risk events was detected, on average, 185 days before the incident peaked on notable mainstream media coverage. This delta represents vital time to prevent or mitigate damage to entities associated with the firm, including its reputation, its assets and especially its executives.

The following chart shows the wave of digital chatter that happened in the days leading up to, and following, an actual risk event. However, as often is the case, a revealing trail of risk signals preceded this trending topic. It’s in the “white space” that occurred in the weeks and months before the damaging wave of digital chatter materializes where private equity firms can gain an early-warning advantage over an emerging risk event.

Understandably, private equity firms struggle to keep pace with digital chatter. There’s simply too much of it, moving too quickly, across too many social media platforms. This leaves little time to detect and react, let alone validate whether or not the information is credible.

Risks Rarely Exist in Isolation

Governance failures pose a growing risk to PE firms

Our analysis looked at five key risk pillars. However, we found that when a crisis, on the surface, may seem like a singular issue it will often unearth other problems for a company, or even an entire industry. This knock-on effect from one risk pillar to another highlights how a singular problem, without successful and timely intervention, can develop into a complex web of crises for a private equity firm and its portfolio companies.

This was most evident this quarter with unemployment-related risks deriving from governance failures, which often saw corresponding volumes of online commentary relating to social issues. Discourse relating to workforce layoffs was prominent across a wide variety of industries, reflecting the impact of ongoing economic instability.

For example, highly publicized striking unions in the entertainment and automobile manufacturing industries amplified digital chatter about social issues in general. The recent attention of these strikes has resulted in wider digital chatter surrounding workers’ rights at portfolio companies, indicating the possibility of union-related discourse spreading to other industries.

ESG Scrutiny Rises With Summer Temperatures

ESG scrutiny rises with summer temperatures

A surge in environment-related risks correlated with the summer season in the northern hemisphere, where a wide variety of countries experienced recording-breaking temperatures and devastating wildfires. In turn this instigated digital chatter scrutinizing the role of portfolio companies in mitigating the damage caused by their environmental footprints.

Regional analysis of digital chatter indicates that risk surrounding environmental issues is more prevalent outside of the U.S. and Canada. This is likely due to extreme temperatures and wildfires occurring in many parts of the northern hemisphere during the summer.

The non-renewable energy industry saw the most overall environment-related digital chatter volume due to the intrinsic link between the energy demands of growing populations and the resulting environmental footprint.

Digital Chatter Is an Essential Source of Risk Detection

Despite the challenges digital chatter creates for private equity firms, a growing number of general and operating partners are recognizing that this same digital chatter can offer a strategic advantage as a vital source of risk detection.

Effective risk detection relies on knowing where to look, identifying who is behind the digital chatter and understanding what is in the context of the content. This can only be delivered through a combination of advanced technology and expert human review. Adopting an advanced risk detection capability to keep pace with today’s global digital conversation happening 24/7/365 is essential to protect a private equity firm’s investment objectives.

For nearly two decades Kroll has combined Artificial Intelligence and Machine Learning able to analyze over a billion items per week with Human Intelligence able to continuously label those items and interpret their risk signals on behalf of our clients. This enables Kroll to stay ahead of who, where and what is talked about online, putting digital chatter into contextual, executive-ready actionable risk intelligence and delivering it to our clients.

Download Now


Private Equity Risk Detect

Kroll protects clients throughout the entire deal cycle by scanning digital chatter to spot emerging risks and mitigate business impacts in real time. Kroll offers private equity digital chatter due diligence and risk monitoring, so that operating partners and deal teams are always first to know and first to act on a risk to their firm, funds, portfolio and third-party suppliers.