Abu Dhabi's Shift to Carried Interest: A Game-Changer for Talent and Performance in Sovereign Wealth Funds

In the high-stakes world of global finance, the battle for top talent has never been fiercer. For decades, Wall Street and private equity firms have dominated the talent pool with their performance-based compensation models, particularly the “2 and 20” structure. But now, a seismic shift is underway in Abu Dhabi, where sovereign wealth funds (SWFs) like Mubadala Investment Company and the Abu Dhabi Investment Authority (ADIA) are rewriting the rules of the game. By adopting carried interest structures—often in the form of “phantom” or “shadow” carry—these funds are not only attracting Wall Street's best and brightest but also redefining how investment performance is tied to compensation. This strategic overhaul is proving to be a win-win: for the funds, it's a way to align talent with long-term value creation; for investors, it's a glimpse into a future where SWFs could outperform traditional private equity players.

The Traditional Model vs. Abu Dhabi's Innovation

For years, SWFs have relied on low-tax environments, lifestyle perks, and competitive base salaries to lure talent. But in a world where private equity professionals can earn tens of millions through carried interest, these tactics fell short. Enter Abu Dhabi's bold experiment: performance-based compensation tied to investment outcomes. Unlike the rigid “2 and 20” model, where 2% of assets under management (AUM) is charged as a management fee and 20% of profits is carried interest, Abu Dhabi's approach is more dynamic.

Mubadala Capital, for instance, has pioneered “phantom carry,” a structure where employees receive payouts based on the success of their investments without holding actual equity stakes. This model mirrors the upside potential of traditional carry but avoids diluting ownership. Similarly, Lunate, a fund backed by ADIA, has adopted tiered carry structures that reward employees more aggressively as investment returns exceed predefined thresholds. These innovations are not just about attracting talent—they're about creating a culture where performance is the currency of success.

Talent, Performance, and the Bottom Line

The results? A surge in high-caliber professionals joining Abu Dhabi's ranks. Mubadala Capital has already created multimillionaires among its senior teams, while MGX, a newer fund, has poached talent from Apollo Global Management and Warburg Pincus. The impact on fund performance is equally striking. In 2024 alone, Mubadala and its subsidiaries deployed $29.2 billion, a 67% jump from $17.5 billion in 2023. This growth isn't just about scale—it's about quality. By focusing on sectors like artificial intelligence, sustainable energy, and healthcare, these funds are positioning themselves to capitalize on the next wave of global innovation.

But how does this translate to investor returns? Consider the metrics. Traditional SWFs often prioritize capital preservation over aggressive growth, but Abu Dhabi's new model is designed to reward risk-taking and innovation. For example, Mubadala's shift toward larger ownership stakes in portfolio companies—rather than minority positions—requires a team with deep private equity expertise. And with compensation tied to the success of these bets, the incentive to execute flawlessly is immense.

A Blueprint for the Future

Abu Dhabi's approach is part of a broader global trend. As private markets evolve, investors are demanding more transparency, liquidity, and performance alignment. The Middle East's SWFs, with their vast capital and strategic vision, are now leading the charge. By adopting hybrid and tiered waterfall structures—where carried interest increases as returns exceed benchmarks—these funds are creating a framework that rewards excellence while protecting downside risk.

For investors, this means two things: first, Abu Dhabi's SWFs are likely to outperform traditional private equity firms in the long run, given their access to capital and talent; second, the sectors they're targeting—AI, clean energy, and healthcare—are poised for explosive growth.

The Verdict: A Strategic Masterstroke

Abu Dhabi's shift to carried interest isn't just a compensation reform—it's a strategic masterstroke. By aligning talent incentives with fund performance, these SWFs are building a pipeline of high-achieving professionals who can execute complex deals and drive long-term value. For investors, this means a new era of SWF-led growth, where performance is no longer a byproduct but a core design principle.

If you're looking to capitalize on this trend, consider the following:
1. Sector Exposure: Invest in ETFs or funds focused on AI, renewable energy, and healthcare, the sectors where Abu Dhabi's SWFs are doubling down.
2. Private Market Access: Look for opportunities to co-invest with Abu Dhabi-backed funds, which are increasingly open to strategic partnerships.
3. Long-Term Horizon: These funds are built for decades, not quarters. Patience will be rewarded as their performance-based models mature.

In the end, Abu Dhabi's carried interest revolution is more than a game-changer—it's a glimpse into the future of global finance. As the lines between SWFs and private equity blur, one thing is clear: the best-performing funds will be those that reward talent not just with salaries, but with the upside of success.