What Is a Crossover Investor?

A crossover investor is a public equity market investor who is active in multiple segments of the private investment markets. This investor is involved from the non-public company pre-initial public offering (IPO) stage up to, through, and after the IPO. Crossover investors invest in traditional mutual funds, hedge funds, and family businesses among others.

Key Takeaways:

  • A crossover investor is involved in multiple segments of the private investment markets, from pre-IPO to the post-IPO stage.
  • Crossover investors invest in traditional mutual funds, hedge funds, and family businesses among others.
  • Crossover investors aim to achieve high returns in the short term.
  • Asset classes and market sectors with a high proportion of crossover investors suffer if there is a sudden drop in investors' appetite for risk.

Understanding the Crossover Investor

A crossover investor's goal is to realize the highest returns possible by investing in attractive companies at various stages (early, mid, late), for example, Series B and C funding rounds, mezzanine debt, or IPO—of the business life cycle. Crossover investing is different from buy and hold investing, where the investor does not trade during the period from when a security is first bought to when it is finally sold. Crossover investors aim to achieve high returns in the short term as opposed to buy and hold investors who are focused more on long-term growth.

Crossover investing strategies tend to be popular in the technology industry. Crossover investors will be committed to the company they are investing in and stick with these companies for years. A 2017 CB Insights report on the Top Crossover Investors in HR Tech Companies named Goldman Sachs, T. Rowe Price, and Silicon Valley Bank among the top four based on their deal activity during 2016.

Crossover Investing in Debt Markets

Crossover investing also applies to both public and private debt financing markets. In fixed-income markets, crossover investing describes institutional investors who participate in both investment grade and non-investment grade, or high yield, securities. In this case, crossover debt is bonds, notes, loans, and other fixed-income securities outstanding from companies that are on the cusp of investment grade. This might be because their credit ratings have recently been downgraded, and they are now “fallen stars,” or because they have been identified as “rising stars” with upgrade potential. The term crossover investor also describes those who invest in both developed market, (e.g., the United States, European Union) and emerging market (e.g., China, India, Brazil, Russia) debt.

Crossover Investing and Risk

Whether they are active in equity or debt markets, the risk for corporate investors is that a change in sentiment or perceived risk could cause investors to suddenly pull back from a given market sector. In this case, asset classes and market sectors with a high proportion of crossover investors will be exposed to the negative impact on valuations and potential financing difficulties that result from a sudden drop in investors' appetite for risk.