Soviet threat to pension funds

Perhaps it was just another productive day down the Kazakhstan copper mines. Kazakhmys gained 2.5% yesterday, making it 7% since joining the FTSE 100 index on Monday this week and 36% since flotation in October.

The price of copper has risen strongly over the past couple of months but Kazakhmys' shares are also being squeezed higher for technical reasons. The standard market cliche - "more buyers than sellers" - is not as superficial as it sounds in Kazakhmys's case. Two thirds of its shares are in the hands of three directors, which doesn't leave many for old-fashioned investing institutions to chase.

But chase they must, at least to a degree: it's hard simply to ignore a FTSE 100 stock, even one based in Kazakhstan. Funds that track indices (such as the 100 or All-Share) are obliged to buy. Those active managers whose performance is measured against those same indices are tempted to buy to avoid being tripped up by an oddity within their benchmark. It wouldn't matter too much if Kazakhmys were an isolated case. But Novolipetsk, a Russian steel maker, has issued a prospectus for a £5bn float and its founder plans to keep about 80% of the stock. Other Russians, including oil giant Rosneft, aluminium group Rusal and Vneshtorgbank, are also said to be considering floating in London. All, potentially, could end up in the FTSE 100.

The blue-chip index long ago ceased to reflect the British economy, but these foreign arrivals threaten to turn into a very odd beast. Given that the FTSE 100 is the prime location for equity investment by UK pension funds, this is an issue that affects most people in this country. Three important British companies have departed this year, or will do soon, from the FTSE: P&O, Allied Domecq and O2. Their effective replacement by a collection of companies from Russia and former Soviet republics can hardly advance the safety of our pensions. Novolipetsk's prospectus contains 25 pages of risk factors describing the dangers of doing business in Russia and, like other companies based outside Britain, the newcomers will not be obliged to comply with the City's combined code of corporate governance.

Indeed, London's popularity owes much to the fact that it is seen as a soft touch in terms of regulation. The US introduced the Sarbanes-Oxley Act, obliging directors to swear to the veracity of their accounts, after the Enron scandal, and London has become the place to be.

The London Stock Exchange, as a commercial business owned by shareholders, seems to want to exploit the disparity. Its executives conduct overseas expeditions to places such as Russia in the name of promoting London as a world-class capital market.

That may sound a worthy ambition, but not if the FTSE 100 is ultimately stuffed with companies that do not have to give a fig for conventional governance rules. The managers of our pensions (quite rightly) worked themselves into a fine tizz over the £250,000 payment to Lord Hollick as he departed United Business Media. But they will be virtually powerless to quiz Novolipetsk about why it "has engaged and may continue to engage in transactions with related and other parties that may present conflicts of interest".

Private war chest

A couple of private equity-backed companies collapse (like Unwins and MVC) and another one or two (like the Spirit pub company) fail to provide the returns the sector is used to - and there are suddenly siren voices saying the glory days of private equity are over.

Not so, says, Bob Wigley, master of Merrill Lynch everywhere but the US.

Mr Wigley has put together some musings on what 2006 might hold and one of his predictions is that private equity will get bigger and more ambitious. Major European private equity funds have raised £35bn this year. Leverage that up four to five times with debt and it creates a £140bn-£180bn "war chest".

The really big corporates have always been regarded as fairly safe from would-be private equity predators; their market values put them beyond the venture capitalists' reach. In the UK, until Philip Green's potential £10bn private equity-backed bid for M&S, £3bn was about as big as private equity deals went.

Now, though, private equity groups are more willing to invest together as syndicates - which "means that even large cap companies are now legitimate targets", says Mr Wigley. It will do a few big corporates no harm at all to have to look over their shoulders, but whether the trend is good for investors is unclear.

There is a real risk that pension funds which have allotted cash to a variety of private equity firms, in order to spread their risk, will find their cash concentrated in a small number of projects where their selected groups are working together as a syndicate. There is no obvious way out to reduce that risk.