"The private equity market for healthcare is all going to be very difficult," says Dominic Hollamby, Global Head of Healthcare Investment Banking at N M Rothschild, and an acknowledged guru on the healthcare services sector. He expects multiples to come back sharply, as banks lend less. This, in turn, means that sellers will be disappointed: "People always want to have yesterday's price today, so there will be a degree of scelorosis."

Worst hit are big deals, particularly any heavily based on property. But, generally, healthcare services is likely to hold up better than pharmaceuticals and medtech, where there is more competition from industry players with deep pockets.

Philipp Schwalber at HG Capital says the market is very quiet as it readjusts to the new post-credit crunch world: "People who were looking to sell are backing out because multiples have fallen from 11-13 times EBITA to 8-9 times EBITA."

Conversely, distressed companies have yet to be put up for sale: "There are a number of businesses which have such high debt that they are effectively owned by the banks, such as Four Seasons. The banks won't want to run them, so they will typically sell them on to private equity."

Marcus Bracklo, who runs Frankfurt-based Baigo Capital, which is the first pan-European healthcare fund, says that deals below €100m have been less badly hit. Even here, the credit crunch has had an impact.

Bracklo says banks are now willing to lend 4-5 times EBITA, rather than 5-6 times. He also says that deals take longer, and he agrees that sometimes would-be sellers are walking away: "Last year, almost no one refused the final deal, now maybe a quarter to a third of deals break down."

Yet Schwalber says the underlying level of interest in healthcare among private equity companies remains high: "There are a lot of people with money to invest and active portfolios. I see little sign of a downturn in competition."

Early August saw so much activity in healthcare services, that you could be forgiven for thinking that the credit crunch didn't exist.

BC Partners sold Swiss hospital operator Hirslanden Group to South-African firm Medi-Clinic for €2.2bn; Apax sold UK care provider Healthcare at Home to Hutton Collins for £250m; and Qatar-based Three Delta acquired specialist UK healthcare provider Care Principles in a £270m deal from 3i.

But Hollamby suggests these are deals closed "before the holidays", and probably originated before the credit crunch really bit.

However, no one says the market will come to a complete standstill.  Alan Mackay, Head of Global Healthcare at 3i, takes a long-term view: "Sure, deals will be done on a different basis over the next 24 to 36 months, less debt and more equity, but healthcare remains a fantastic place to be. Demand is growing as the older get wealthier. Meanwhile, new technologies spark better and more effective ways of doing things."

So where will be the deals be done?

Schwalber expects a stream of distressed sales. Many of these will be in the UK, but he says Poland and Spain also have a lot of providers with high debt levels: "A lot of Spanish healthcare groups are owned by building contractors and property developers and are likely to be sold off."

Or take Poland. Here many local operators have found themselves competing with private equity backed players, such as Alliance Medical in diagnostics, and Medicover and Mid Europa's acquisitions in the corporate subscriptions market. Smaller rivals, faced by a moribund stock market, and with much debt, have little choice but to seek out private equity on whatever terms they can get it.

Hollamby eyes the French, German and Italian markets with much interest: "Bismarckian models just work much better, and have huge private sectors compared to, say, the UK." But there are big barriers in Germany for private equity investors. Hollamby says: "German private businesses just don't tend to be sold. They are usually run by wealthy people who don't need cash."

Others say that the big headache in Italy remains corruption. Said one: "It is not tax problems, but you uncover various naughtinesses when it comes to reimbursement by the state that makes it very hard to make acquisitions."

Bracklo at Baigo is keen on German speaking Europe (DACH), the Nordics and France. And he doesn't think German's don't sell businesses, pointing out that in 2007 there were 280-290 healthcare deals (including medtech and pharma). Of that, 75 were in the UK, 64 DACH, 37 in France, 34 in the Nordics and 15 in Eastern Europe.

That leaves Eastern Europe. But there are caveats to this high growth market. For starters, points out Hollamby, these are "tiny economies" compared to Western Europe. Bigger private equity players, such as Cinven, admit that there are probably no deals large enough to meet their criteria.

So which business models have the most appeal?

Rationalisation plays, such as labs and pharmacies, are still hot. Taking stakes in pharmacy chains before liberalisation is seen as a quick way to make money. There is also a lot of interest in primary care, dentistry and preventative healthcare. Hospitals are generally seen as less attractive because of the property risk, high cost base, the presence of some big national operators and the danger of government intervention.

Overall, Mackay at 3i remains an optimist, simply saying: "Good quality healthcare companies are easy to fund." He says that 3i pulled out of property-backed deals 4 years ago, when it sold Westminster Healthcare. "We saw that traditional hospitals would face a squeeze, as wages rose and payors kept their rates low." For him, private equity comes down to innovation: "The UK has 1,000 operating theatres, all with different demand utilisation. But none of them are functioning 24x7. Come up with a solution to that and you've really cracked it."

Bracklo has raised €100m to invest exclusively in healthcare. As the downturn gathers pace, he is shopping for things that will save payors money, such as generic pharmaceutical suppliers, minimal invasive surgery and outsourcing. He is also interested in services that people are paying for out of their own pocket, such as over the counter medicines or elective surgery to correct short sight: "The sector where the consumer pays is the fastest growing part of the market."