Investment management firm Baron Funds has released its third-quarter 2025 investor letter for the Baron Small Cap Fund, revealing insights into its portfolio performance and notable investments. During this quarter, the fund reported a modest gain of 0.54% for its Institutional Shares, significantly lagging behind the Russell 2000 Growth Index, which achieved a return of 12.19%. Year-to-date, the fund’s performance stood at 0.91%, while the index reflected a gain of 11.65%.
A focal point in the letter was Legence Corp. (NASDAQ:LGN), a company that specializes in engineering and installation services for mission-critical systems in buildings. As of November 6, 2025, Legence shares closed at $36.54, placing the company’s market capitalization at approximately $3.844 billion. The stock has shown a robust one-month return of 16.93%, drawing attention from investors.
Legence Corp: A Promising Investment
In its analysis, Baron Funds noted that it initiated a position in Legence when the company went public in September 2025. The firm described Legence as a leading provider in its field, serving over 60% of the companies listed in the Nasdaq-100 Index. These clients predominantly belong to high-growth sectors that require technically advanced building systems, such as data centers, pharmaceutical companies, and educational institutions.
Baron Funds highlighted that Legence is well-positioned for substantial growth as demand increases for energy-efficient and sustainable facilities. The company’s service offerings encompass complex systems, including HVAC, process piping, and various mechanical, electrical, and plumbing (MEP) components.
Legence boasts a workforce of 1,200 MEP engineers and energy consultants, complemented by a team of approximately 3,400 technicians, including HVAC and plumbing service workers. This extensive expertise allows Legence to offer both design and build services on a national scale, a competitive advantage over regional firms that typically provide either engineering or installation services.
Long-Term Client Relationships
The strength of Legence’s business model is underscored by its long-standing relationships with its top clients, which average over 26 years. This durability demonstrates the value Legence brings to its partnerships and its capability to adapt to evolving industry demands.
Despite the potential that Legence Corp. presents, it did not feature on Baron Funds’ list of the 30 Most Popular Stocks Among Hedge Funds. The firm expressed its belief that other investments, particularly in the AI sector, may yield higher returns in a shorter timeframe.
Investors seeking alternatives with significant upside potential are encouraged to explore reports highlighting promising AI stocks, which may surpass Legence Corp. in terms of future growth.
In conclusion, while Legence Corp. is carving a niche in the engineering sector with its innovative solutions for critical systems, investors should consider a diverse portfolio approach, weighing the potential risks and rewards within the current market landscape.
