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The end of the Indian summer: the economic success of India has led to a glut of private equity money flooding the market, but, as Kamalakshi Mehta reports, the good times could be coming to an end.

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Private equity investment has taken off in India over the last few years. Indian companies raised more than US$14bn (excluding real estate deals) though private equity in 2007, up from US$7.5bn in 2006 and US$2.3bn the year before, according to Venture Intelligence, an Indian research company. The amounts raised through private equity far outpaced those raised via public offerings. And the number of PE deals--396 in 2007--was the highest in Asia.

Rapid economic growth, booming stock markets and an increasingly confident corporate sector looking for expansion have fuelled private equity activity. And while markets seemed to be going in just one direction, everyone did well. But even as PE firms unanimously declare their commitment to the Indian market, a cautious note is creeping in. The global slowdown and recent stock market volatility has taken the shine off deals, and many predict that the party is over, at least for now.

"The one-way bull market has spoilt things," says Rahul Bhasin, managing partner at Barings Private Equity Partners India. "Private equity has underpriced risk. We are likely to see a correction and it's not going to be fun." If PE firms have slipped up on their due diligence, the test is going to come in coming months, as they seek exits for investments made in headier times at high valuations. But while the industry could be adversely affected in the short term, the prospects look bright over the longer term. The macroeconomic fundamentals, together with the oft-cited "soft" attributes of a democratic government, the availability of English-speaking professionals, a long history of entrepreneurship--will all continue to make India an attractive investment destination.

However, all the players in the area may not survive the short term, say industry insiders. Depending on your classification of private equity and your source of information, there could be more than 300 private equity investors in the country. There are all the global heavyweights including Warburg Pincus, Blackstone, General Atlantic, the Carlyle...