What a difference six months have made for private equity. Last year, the industry was being slated for its supposedly outrageous profits and cavalier attitude. Peter Linthwaite, chief executive of the private-equity umbrella group the British Venture Capital Association, did such a bad job in front of the Treasury Select Committee that he abruptly resigned. But since then the landscape has dramatically changed because of the credit crunch.

Private equity is no longer in the firing line - even if some, like Guy Hands and his fellow suits at Terra Firma who have taken over music company EMI, still get a bit of stick. Instead, it is foolish bankers who lent too much who are being pilloried.

The problem for private-equity firms, of course, is that the turmoil in the credit markets means they can no longer borrow as cheaply as before to finance their highly leveraged deals. That is the reason for the collapse of a planned £9.5 billion buyout of US radio giant Clear Channel. And there is also less cash and fewer would-be buyers around when private equity wants to sell off businesses - witness the rumoured row between Apax Partners and Robert Tchenguiz over whether to sell their stake in supermarkets chain Somerfield. "That's exactly the sort of deal you would have expected to have happened quite easily nine months ago," says one source.

Those working in private equity admit that big-money deals at the top of the market, the £1 billion-plus category, have practically dried up.

However, the picture in the middle-market, between £50 million and £500 million, is less gloomy - at least for now. Private-equity group 3i said in an upbeat trading statement yesterday that it still expected to his its target of an annual 20% return. Chief executive Philip Yea added that the firm has not been badly affected yet by the recent economic turmoil, citing its "focus on the mid-market and our international breadth".

Andrew Roberts, a partner in the private-equity team at law firm Travers Smith, backs up that view. His firm has worked on big deals in the past - including a role in last year's huge £11 billion buyout of Alliance Boots - but he says all the activity now is lower down the scale.

"We've seen a rash of deals in the £50 million-£500 million sector," says Roberts. "A lot of that has been driven by management wanting to get out by 5 April and take advantage of the deadline for 10% taper relief." That tax concession will be a lot less generous in future, following changes in the Budget.

The recent sales to private-equity firms of the Pret A Manger sandwich chain, Kurt Geiger shoes and the Dreams bedding firm are all examples of management wanting to exit before 5 April. Optimists say valuations are holding up well. And the big players in private equity are said to be taking a lot more interest in the mid-market because of its relative buoyancy.

However, what happens after 5 April remains to be seen. Roberts of Travers Smith doesn't see a lot of deals happening in the near future: "In terms of our pipeline, it's been drier than for a long time," he says.

The key problem is that debt has suddenly got a lot more expensive. Experts say that six or nine months ago, the financing for a deal could be put together with, say, 80% debt. Now it's more like 50%. And whereas before, on a small deal, a private-equity firm might only need to borrow from one bank, now they may have to go to two or three.

When it comes to selling, similar problems occur. The buyer wants to conduct a lot more due diligence - no more rushing through deals in a matter of days. Private-equity firms are facing up to the fact they may have to sit on their assets for longer before selling.

"Last year was a fantastic year to exit businesses. And we exited six last year for about £400 million," says Charlie Johnston, director at private-equity firm ECI Partners. This year, he suggests, ECI won't be selling so much - perhaps around £200 million worth.

Johnston argues that good businesses will still command a decent price when it comes to selling. And so-called trade buyers - mainly big Footsie-type companies - are now said to be sniffing around in the hope of snapping up bargains.

The real challenge for private-equity firms is identifying their next big investments. They have raised lots of cash and they need to do something with it. However, these uncertain times call for a more cautious strategy. So firms such as 3i are cutting back on venture capital - funding new businesses which are inherently risky. Instead, they are putting up more money for co-investments, sticking cash into an existing business with a more stable outlook.

Ironically, given the crisis in the credit markets, buying secondary debt - which other firms want to offload quickly at a big discount, say of 20% - is tipped as another growth area for private equity. Emerging markets look more attractive. 3i announced yesterday it had raised £1 billion for a new fund to invest in India.

But most private-equity funds have strict criteria about investing in a specific sector or country. If opportunities dry up, funds face the prospect of downsizing and handing that cash back to investors.

There is no hiding from the fact these are tough times - not just in the City but on the High Street. Merrill Lynch suddenly sold its private-equity stake in Debenhams this week, sending the shares diving. And any existing business that borrowed big in better times and now needs to renegotiate its debt financing could find itself in deeper waters. Shoes chain Dolcis collapsed into administration in January and books chain The Works crashed last month.

Roberts, the lawyer at Travers Smith, forecasts the next six months could be "very, very quiet" for private equity. "I think a lot of people are planning a long summer holiday," he says.

But it may not feel that relaxing.