Key Highlights
- In investment banking, a haircut refers to a deliberate reduction in an asset’s value to reflect risk, volatility, or uncertainty.
- Haircuts are commonly used in collateralized lending, distressed M&A, and debt restructuring to ensure parties aren’t overexposed to potential losses.
- Factors like market volatility, liquidity, credit risk, and recovery value all influence the size of the haircut applied in deals.
Haircut? No, Not the Salon Kind
No, this isn’t about trimming your fade before a client meeting.
In banking, a “haircut” isn’t about grooming, it’s about risk.
Specifically, it’s the markdown investors and lenders apply to asset values when reality doesn’t match the rosy assumptions.
Haircuts show up everywhere: in M&A deals, distressed debt, loan collateral, and even sovereign defaults. If you want to think like a banker, you need to understand how and why these value cuts happen.
Let’s break it down.
What Is a Haircut in Investment Banking?
In investment banking, a haircut is a markdown from an asset’s face value or theoretical value to account for risk.
It shows up all over finance.
In M&A deals, buyers might haircut a seller’s valuation, if they sense the forecasts are flaky.
In loan financing, lenders apply haircuts to collateral, they lend less than the asset’s full value. In restructuring, creditors agree to take haircuts on debt (accept less than they’re owed).
Even in private equity secondaries or “discount-to-NAV” deals, buyers will demand a haircut off a fund’s stated NAV.
The concept is always a protective discount.
Let’s say your discounted cash flow (DCF) analysis for a company shows an enterprise value of $500 million. But the buyer thinks that outlook is too rosy.
They offer $350 million, citing “market conditions” or “uncertainty about next year’s earnings.” Guess what – that $150 million difference is a haircut for risk.
How Do Haircuts Actually Work in Deals?
So how do these haircuts show up in real investment banking scenarios?
Let’s look at a few common deal contexts where haircuts are part of the game:
Collateralized Lending (Loans & Repos)
When banks lend money against assets, they rarely lend 100 cents on the dollar.
Instead, they lend some fraction, maybe 70–95%, of the asset’s value.
The haircut is the rest.
For instance, if you pledge $1 million in bonds for a loan, a conservative bank might lend you $950,000, a 5% haircut on that collateral.
If the collateral is riskier, they might lend only $800,000 (20% haircut) or less.
In real estate financing, it’s routine to see 70% loan-to-value ratios (meaning a 30% haircut).
Lenders do this so that if things go south (bond prices fall or the building’s value drops), they still have a buffer.
The haircut protects the lender from loss if they have to sell the collateral quickly at a discount. In short, banks haircut collateral because “stuff happens.”
Distressed M&A and Deals
In acquisitions, especially of troubled companies, buyers apply valuation haircuts to the seller’s numbers.
If due diligence uncovers issues, maybe, declining margins or an over-optimistic forecast, the buyer will slash the valuation accordingly.
For example, during high-uncertainty periods you might see deals where a target’s last-year valuation was, say, $1 billion, but now it sells for $700 million due to a tougher market, a $300M haircut to expectations.
Restructuring & Distressed Debt
When companies go bankrupt or restructure their debt, creditors often agree to take a haircut, meaning they accept less than the full amount owed.
In restructuring talks, phrases like “creditors will need to take a 30% haircut” are common.
In corporate restructurings, you might hear “lenders will get 70 cents on the dollar”, implying a 30% loss (haircut) on their claims.
How Are Haircuts Calculated?
Here’s the fun part: there’s no universal formula for haircuts, it’s more art than science. Every lender or dealmaker might size the haircut a bit differently.
However, there are common factors that everyone considers when deciding how big a haircut to take:
Market Volatility of the Asset
If the asset’s price swings around a lot, expect a bigger haircut.
A stable asset might get a tiny haircut (maybe 0–5%), but a volatile stock or commodity could get a hefty cut.
As Investopedia notes, if collateral is more prone to big price moves, the lender will “generally require a greater haircut”.
They need that extra cushion because a volatile asset could drop in value overnight.
Liquidity
How quickly and easily can the asset be sold?
If it’s something that can be sold in a snap with minimal loss (e.g. large-cap stocks or Treasuries), the haircut can be small.
But if the asset is illiquid, let’s say a rare bond, a loan, or real estate that might take months to offload, the haircut will be larger.
Credit/Default Risk
The riskier the asset or the borrower, the deeper the cut.
If there’s a real chance the borrower might default or the asset could permanently lose value, let’s say a bond from a shaky company, a larger haircut is justified.
For example, a highly rated corporate bond might get a moderate haircut (maybe 5–10%), whereas a junk bond from a distressed issuer might get a 30%+ haircut because lenders doubt they’ll recover full value in default.
The borrower’s own creditworthiness matters too, if a borrower has a weak credit score or financials, a bank might increase the haircut on even good collateral, figuring the odds of needing to seize and sell that collateral are higher.
Recovery and Resale Value Assumptions
In lending, banks use models or historical data to guess what they’d recover if they had to liquidate the collateral.
If historically a certain type of loan only recovers 50 cents on the dollar in a bust, the bank might apply a 50% haircut up front when lending.
This is tied to volatility and liquidity but is more scenario-driven – e.g., “In a recession, we think this inventory would only fetch half price, so we’ll lend at 50% of its value now.”
Similarly, in M&A valuations, if a buyer thinks the target company’s real value under tougher assumptions is $400M instead of the optimistic $500M, they’ll haircut the valuation by that $100M gap.
Examples of Haircuts in Investment Banking
Let’s cement this concept with real-world examples across different deal types.
Here are a few recent cases that show haircuts in action (with numbers):
Distressed Debt Trading at a Big Discount:
When a company is in trouble, its loans or bonds often trade for far less than face value.
For example, Wellpath, a prison healthcare firm had a $110 million junior loan trading at around 40 cents on the dollar in late 2024. That implies investors anticipated roughly a 60% haircut on that debt (they expected to recover only 40% in a restructuring).
Sovereign Debt Restructuring
Haircuts aren’t just for companies, countries sometimes need them too.
A very recent example is Ghana’s debt restructuring in 2023-2024, where international bondholders agreed to a 37% haircut on $13 billion of debt.
The Ghana deal shows why haircuts happen: debt became unsustainable, so creditors take a cut so that the country can regain stability.
In sovereign crises, “taking a haircut” is often the only way to get the debt to a payable level.
Private Equity Sale at Discount to NAV
In the current market, even private equity firms experience haircuts when selling assets or fund stakes.
For instance, throughout 2022–2023, many PE secondary deals (where investors sell their fund positions) cleared at only 80–90% of the fund’s stated net asset value.
According to BlackRock, secondary buyers in 2023 paid about 85% of NAV on average for high-quality portfolios.
That’s effectively a 15% haircut to the sellers.
Real estate funds saw even bigger discounts – some real estate-heavy portfolios were marked at ~70% of NAV (30% haircut) due to weak property markets.
Loan Portfolio Markdowns in M&A
Haircuts can pop up in bank M&A deals too, via write-downs of the target’s assets. A headline from 2025: “Bank Deal’s $867 Million Haircut Exposes Lingering Pain.” Columbia Banking System acquired Pacific Premier Bancorp and, as part of the deal, planned $867 million of write-downs (haircuts) on Premier’s loans and securities.
Why such a huge cut? Rising interest rates had eroded the market value of the target bank’s loan book and bond portfolio, creating unrealized losses.
The buyer essentially haircut the value of those assets by nearly $867M to reflect reality .
In percentage terms, that was a big chunk of Pacific Premier’s assets, a clear sign of risk adjustment.
This example shows that even in a merger between healthy banks, the acquirer will mark down (haircut) the asset values to avoid nasty surprises later.
It’s a way of baking in a margin of safety for potential credit deterioration.
Why Haircuts Matter More Than You Think
Haircuts aren’t just quirky finance lingo, they’re the invisible lever behind deal pricing and risk management.
For finance students and new bankers, understanding haircuts is hugely important.
Because haircuts price risk – they’re not just random discounts. They tell you what people really think something is worth when push comes to shove.
So, remember: when evaluating any deal, loan, or investment, always consider the haircut
Also next time you’re in a meeting and someone presents an asset’s value, try asking: “What kind of haircut are we assuming here?”
I guarantee you’ll get approving nods.
It shows you’re thinking about risk like a true professional.
In investment banking, that one smart question about haircuts can make you sound 10x smarter, and more importantly, it means you’re thinking like an investor, not just a spreadsheet jockey.