What Are Crossover Funds and How Do They Work?

Investors looking for exposure to both private and public markets often turn to crossover funds. These investment vehicles allow fund managers to participate in high-growth companies before and after they go public, potentially maximizing returns.

Their approach differs from traditional mutual funds or venture capital firms by blending elements of both, affecting risk, return potential, and market influence.

How They Combine Public and Private Investments

Crossover funds invest in private companies before they go public and can continue holding or increasing their stake once those companies enter the public markets. This flexibility allows fund managers to secure shares at lower valuations during the private phase and benefit from potential price appreciation post-IPO.

These funds typically participate in late-stage private funding rounds, such as Series C or Series D, when companies have established revenue streams and are preparing for a public offering. Investing at this stage reduces risks associated with early-stage venture capital. Once a company goes public, the fund can hold its position, sell shares to lock in gains, or increase its stake if further upside potential exists.

Managing liquidity is essential since private holdings cannot be easily sold. To meet investor redemptions, crossover funds maintain a mix of publicly traded stocks alongside private investments, ensuring cash flow while waiting for private holdings to become tradable.

Sectors They Target

Crossover funds focus on industries with strong growth potential, particularly those driven by innovation and scalability. Technology is a dominant area of interest, with investments often directed toward software, artificial intelligence, and cybersecurity companies, which tend to have rapid revenue growth and high margins.

Healthcare, especially biotechnology and medical devices, is another major focus. Many biotech firms require substantial funding for clinical trials and regulatory approvals, and crossover funds provide capital during late-stage development, anticipating value creation upon regulatory milestones or public listings.

Consumer and fintech companies also attract significant investment. High-growth brands in e-commerce, direct-to-consumer products, and digital media often secure funding as they scale operations. Fintech firms, particularly those involved in digital payments, lending platforms, and blockchain-based financial services, appeal to crossover investors due to their potential to disrupt traditional financial systems.

Industrial and clean energy investments have gained traction as well. Companies developing electric vehicles, renewable energy solutions, and advanced manufacturing technologies benefit from crossover funding as they transition from research and development to commercialization. With increasing regulatory support for sustainability initiatives, funds see opportunities in businesses positioned for the shift toward decarbonization and energy efficiency.

Typical Allocation Strategies

Crossover funds structure their portfolios to balance growth potential with liquidity, adjusting allocations based on market conditions, company maturity, and anticipated exit timelines. Public equities provide liquidity, while private investments offer opportunities for early-stage gains. The proportion dedicated to each shifts depending on IPO market strength, macroeconomic conditions, and fund redemption patterns.

Since private investments are less liquid and carry valuation uncertainties, funds often set limits on exposure to these assets. Some cap private holdings as a percentage of total assets to avoid over-concentration in companies that may take years to realize returns. Diversification across industries and company stages further mitigates risk.

Timing also plays a role in portfolio composition. In strong IPO markets, funds may increase private allocations, anticipating profitable exits. During periods of market volatility or weak public offerings, they may shift toward liquid assets to preserve capital. This dynamic approach allows them to capitalize on opportunities while maintaining stability.

Fees and Expenses

Crossover funds typically charge a combination of management and performance fees. The management fee, often around 1.5% to 2% of assets under management, covers operational costs, including research, due diligence, and portfolio management. Performance fees, usually 15% to 20% of profits, align manager interests with investors by rewarding strong returns. Some funds implement a hurdle rate, requiring returns to exceed a set threshold, such as 6% to 8%, before performance fees apply.

Private investments often involve legal and advisory fees related to deal structuring, while public market trades may incur brokerage commissions. Lock-up periods for private holdings may limit investor liquidity, with some funds restricting redemptions for extended periods. Redemption fees or gating provisions may apply to discourage short-term withdrawals that could disrupt portfolio stability.

Reporting Obligations

Crossover funds navigate complex reporting requirements due to their involvement in both private and public markets. Regulatory filings, investor disclosures, and valuation methodologies ensure transparency and compliance.

For public holdings, funds must adhere to securities regulations, such as filing quarterly reports with the SEC if they meet the threshold for significant ownership in a publicly traded company. If a fund acquires more than 5% of a company’s shares, it must submit a Schedule 13D or 13G, detailing its position and investment intent. Funds managing over $100 million in assets must file Form 13F, disclosing their public equity holdings quarterly. These filings provide insight into fund strategies and portfolio changes.

Private investments introduce additional complexities, particularly in valuation and investor reporting. Since these holdings lack market prices, funds must establish fair value estimates using financial models, comparable company analysis, or third-party appraisals. Investors typically receive periodic reports detailing fund performance, asset valuations, and liquidity considerations. Some funds also comply with GAAP or IFRS accounting standards to ensure consistency in financial reporting. As private holdings approach an IPO, funds may reassess valuations more frequently to reflect evolving market conditions.