Alternatives Research Infrastructure Marketing Material April 2021 PRIVATE INFRASTRUCTURE DEBT STRATEGIC OUTLOOK Risks & opportunities in an era of economic uncertainty and sustainability _ Investors increasingly complement IG private infrastructure debt portfolios with high yield strategies, where returns and risks are higher, requiring more thorough credit analysis, particularly at a time of macroeconomic uncertainty. _ Infrastructure debt defaults and credit spreads are resilient, but have historically been connected to economic cycles, and we observe a similar pattern today. _ The effects of Covid-19, decarbonisation and ESG integration are key strategic factors, and may increasingly IN A NUTSHELLIN influence the credit profile of infrastructure debt. The brand DWS represents DWS Group GmbH & Co. KGaA and any of its subsidiaries, such as DWS Distributors, Inc., which offers investment products, or DWS Investment Management Americas, Inc. and RREEF America L.L.C., which offer advisory services. There may be references in this document which do not yet reflect the DWS Brand. Please note certain information in this presentation constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this presentation report may differ materially from those described. The information herein reflects our current views only, is subject to change, and is not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. For Professional Clients (MiFID Directive 2014/65/EU Annex II) only. For Qualified Investors (Art. 10 Para. 3 of the Swiss Federal Collective Investment Schemes Act (CISA)). 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Such securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 of Bermuda which regulates the sale of securities in Bermuda. / 1 Table of Contents Executive summary .......................................................................................................3 Strategic themes ............................................................................................................4 1 / Market environment ..................................................................................................5 2 / Macroeconomic outlook and private infrastructure debt ......................................... 11 3 / Infrastructure debt credit outlook ............................................................................ 18 4 / ESG and infrastructure credit risk ........................................................................... 21 Research & strategy—alternatives .............................................................................. 25 The opinions and forecasts expressed are those of Private Infrastructure Debt Strategic Outlook and not necessarily those of DWS. All opinions and claims are based upon data at the time of publication of this article (April 2021) and may not come to pass. This information is subject to change at any time, based upon economic, market and other conditions and should not be construed as a recommendation. / 2 Alternatives Research | APRIL 2021 Executive summary Market environment Private infrastructure debt has experienced strong growth in recent years, providing a source of duration, diversification and return premium in a lower yielding investment environment. With demand from long-term, buy-and-hold investors increasingly chasing credit risk assets, we have recently observed healthy, albeit tighter illiquidity premia for investment grade (IG) private infrastructure debt. Investors increasingly focus on complementing IG strategies with sub-investment- grade (HY) private infrastructure debt. HY private infrastructure debt spreads are higher than in IG, but HY exposes investors to higher levels of credit risk over IG, particularly at a time of increased macroeconomic uncertainty. Stronger entry returns, a shorter duration, and supportive equity cushions in the infrastructure market despite Covid-19, appear to be mitigating factors, supporting HY portfolio allocations from a risk-adjusted perspective. Macroeconomic environment In this report, we analyse how private infrastructure debt default rates and credit spreads have historically behaved across macroeconomic cycles, to derive some strategic guidance on the future evolution of returns across different scenarios. In 2020, Covid-19 has caused a deep economic downturn, with central banks boosting their expansionary monetary policy via interest rates reductions and quantitative easing, driving bond yields lower. Global debt has exceeded a record USD 200 trillion in 2020, over 265% of GDP, an unchartered territory, but the recovery should contribute to easing debt levels in 2021.1 Despite our expectations of interest rates remaining lower for longer, the timing of the recovery remains unclear, and may pose upside pressure on yields, via monetary policy or higher inflation, and to infrastructure credits via increased country risk, leverage and debt servicing costs. Credit outlook We provide an indication of the short-term and long-term credit outlook by infrastructure sector. The credit profile of infrastructure debt has been resilient so far, despite Covid-19. In 2020, we have observed a widening in credit spreads, particularly for assets affected by the pandemic, such as passenger transportation. Liquidity conditions have remained supportive, but we cannot exclude that lenders may increasingly reflect the higher perceived level of credit risk in spreads and ratings for sectors affected by the pandemic. From a business fundamental perspective, the full credit effects of Covid- 19 on private infrastructure may take time to fully emerge. Supercycle Several megatrends, such as decarbonisation, energy transition and digitalisation may support the investment pipeline over the coming years. These long-term trends may represent an opportunity for growth, but also a source of credit risk. In this regard, we note that despite stronger historical resilience, long-duration IG debt may be more exposed to long-term uncertainty related to these megatrends, particularly today, as a relatively flat yield curve may not fully compensate for some long-term uncertainty. HY private infrastructure debt may be more favourably positioned to de-risk the credit effects of megatrends, due to the lower duration of loans, particularly for amortizing debt structures. Incorporating ESG We observe increased interest from investors in incorporating ESG factors in private infrastructure debt underwriting and reporting, a process increasingly supported by regulation. In this report, we provide an update on the policy and regulatory evolution contributing to the incorporation of ESG in infrastructure debt investment. We provide a summary overview of key ESG risks and how these may impact credits from a financial risk materiality perspective. ESG risks, and particularly climate risks, may represent potential threats to the credit profile of long duration infrastructure debt, translating into lower margins and equity cushions, higher default rates and credit losses, particularly for assets exposed to the risk of becoming stranded. A structured ESG approach may help mitigating risks, support credit selection, and provide an opportunity for superior risk- adjusted returns. In the future, as methodologies mature, we expect infrastructure debt strategies to increasingly focus on ESG from a double materiality perspective, linking lending to ESG impact, such as net zero emissions targets. 1 S&P Global, “Global Debt Leverage: Near Term Crisis Unlikely, Even As More Defaults Loom”, 10 March 2021. Past performance is not a reliable indicator of future returns. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. / 3 Alternatives Research | APRIL 2021 Strategic themes STRATEGIC THEMES FOR PRIVATE INFRASTRUCTURE DEBT INVESTMENT Market dynamic: We see continued growth in private infrastructure debt fundraising, despite Covid-19. Transaction volumes reduced in 2020, but we expect 2021 to provide a robust set of opportunities diversified by sector, credit risk and 1 geography. In the medium term, we expect a strong policy stimulus focused on energy transition and digitalisation to contribute to a growing pipeline of transaction opportunities. Risk profile: We observe a rapid growth of private infrastructure debt allocations. IG infrastructure debt represents a building block of institutional investors’ portfolios. However, we expect investors to increasingly complement strategies 2 based on IG infrastructure debt with HY debt, and to move lower in the capital structure to junior infrastructure debt, seeking higher entry yields and risk-adjusted returns. Market Environment Return and risk: In 2020, monetary