Carried Interest in Sovereign Wealth Funds: How Abu Dhabi is Leading a Compensation Revolution

The investment world is undergoing a quiet but profound transformation, and one of the most intriguing shifts is happening in an unlikely place — sovereign wealth funds. Long known for conservative structures and fixed compensation models, these massive, state-backed investment entities are beginning to borrow strategies from private equity.

At the heart of this shift is carried interest — a performance-based form of compensation that rewards employees based on the returns they generate. While this model has been a staple of private equity firms in London and New York for decades, it has been almost absent in sovereign wealth funds due to their unique funding structures. But that is changing, and Abu Dhabi is emerging as the global testing ground.

Entities like Mubadala Capital, Lunate, and the Mubadala Investment Company are embracing carry-like pay models to attract and retain world-class talent. This is not a superficial change; it’s a strategic rethinking of how sovereign wealth funds compete for expertise in an increasingly crowded investment landscape.

Understanding Carried Interest and Why It Matters

Carried interest is, at its core, about alignment. It ensures that the people managing investments have a personal stake in their success.

The Private Equity Blueprint

In traditional private equity firms, carried interest — or “carry” — is typically set at 20% of the profits above a certain return threshold. For example, if a fund delivers exceptional returns for its investors, the professionals managing those investments receive a substantial share of the upside. This not only incentivizes performance but also rewards long-term value creation.

According to Investopedia, carried interest has been a cornerstone of private equity’s ability to attract elite dealmakers, particularly in the finance capitals of London and New York. The model aligns investor goals with the ambitions of the fund’s managers, fostering a results-driven culture.

Why Sovereign Wealth Funds Have Been Different

Sovereign wealth funds (SWFs) have historically operated under a different set of rules. They typically manage capital generated from a nation’s natural resources, trade surpluses, or other state-owned assets — not from third-party investors.

The Funding Model Challenge

Because there is no pool of outside investors expecting a share of profits, the traditional private equity carry structure doesn’t fit neatly into SWFs’ operations. Instead, compensation in these entities has often been fixed, with bonuses tied to annual performance but lacking the long-term incentives that define private equity pay.

This has posed a talent challenge. In a competitive investment world, why would top-tier fund managers leave lucrative private equity roles — where performance can mean multi-million-dollar payouts — for more predictable, but potentially less rewarding, sovereign fund positions?

Abu Dhabi’s Innovation in Compensation

Over the past few years, Abu Dhabi has quietly begun experimenting with a hybrid model.

Leading Entities Taking the Leap

Mubadala Capital, Lunate, and the Mubadala Investment Company have rolled out carry-like incentives for select investment teams. These aren’t exact replicas of private equity’s 20% carry, but they borrow the core principle: reward those who generate exceptional returns with a proportionate share of the upside.

This shift represents more than just a pay raise. It’s a recognition that sovereign funds can’t rely solely on national prestige or job stability to compete for the best minds in global finance. In an era where investment opportunities span continents and asset classes, talent is as mobile as capital itself.

The Strategic Rationale for Carried Interest in SWFs

Introducing performance-linked compensation into SWFs does more than attract talent — it changes the behaviour of investment teams.

Alignment and Accountability

When managers know that their personal earnings are directly tied to the fund’s performance over multiple years, it fosters a culture of strategic thinking and disciplined risk-taking. This is particularly important for sovereign funds, which often face political pressure to invest domestically or in politically strategic assets.

By tying compensation to measurable investment outcomes, SWFs can create an environment where commercial and national objectives work in tandem rather than at cross purposes.

Impact on Global Talent Competition

The introduction of carried interest into sovereign wealth funds is already creating ripples in the recruitment market.

From London to Abu Dhabi

For years, top investment professionals have flocked to private equity hubs like London and New York, drawn by the lucrative potential of carry-based compensation. Now, Abu Dhabi is positioning itself as a third pole in this elite talent triangle, offering competitive pay packages coupled with exposure to some of the world’s largest investment mandates.

The shift is particularly timely given the rising interest in alternative investment hubs and the global diversification of capital flows.

Broader Implications for Sovereign Funds Worldwide

Abu Dhabi’s experiment could become a blueprint for other SWFs.

The Performance Culture Shift

By introducing carry-like structures, sovereign funds can shift from a bureaucratic mindset to a performance-driven culture without abandoning their strategic and political objectives. If successful, this approach could increase returns for national stakeholders while modernizing the operational DNA of these entities.

As highlighted in The Financial Times, performance-based pay models are becoming a necessary evolution for funds seeking to compete in the global market, especially as alternative investments gain prominence.

Risks and Considerations

While the potential benefits are clear, the introduction of carried interest in sovereign wealth funds is not without challenges.

Balancing National and Commercial Goals

Sovereign funds often have mandates that go beyond pure profit — such as supporting domestic industries, funding infrastructure, or achieving political objectives. Performance-based pay must be structured carefully to ensure these broader missions aren’t sidelined in the pursuit of high returns.

The Future of Compensation Models in Sovereign Wealth Funds

The carried interest in sovereign wealth funds trend suggests we’re at the start of a larger transformation in how these entities think about talent and performance.

Hybrid Models Ahead

Future structures may combine the stability of fixed sovereign pay with the upside potential of private equity-style incentives. Such hybrid models could create a balanced framework that rewards exceptional performance while maintaining the long-term stability these funds are known for.

Conclusion: A Turning Point for Global Investment Talent Strategies

Abu Dhabi’s adoption of carried interest in its sovereign wealth funds is more than a compensation tweak — it’s a strategic pivot that could reshape the global investment talent market. By blending private equity-style rewards with sovereign fund mandates, these entities are positioning themselves to compete head-to-head with the world’s most prestigious investment firms.

If the experiment succeeds, expect to see similar models adopted by sovereign funds from Singapore to Norway — and a new era of talent competition that transcends borders.

FAQs – Carried Interest in Sovereign Wealth Funds