The AI Infrastructure Shift: Why Baron's Exit from SBAC Signals a New Investment Era

The Baron Small Cap Fund's recent decision to divest its long-held stake in SBA Communications Corp (SBAC) marks a seismic shift in its investment strategy—one that investors should heed as a clarion call for repositioning portfolios toward the next wave of growth. After 21 years, the fund sold its remaining SBAC holdings in Q1 2025, capitalizing on a 21.9% annualized return to fund a strategic pivot toward AI-driven infrastructure plays. This move, rooted in the conviction that artificial intelligence represents the “greatest investment opportunity of our lifetime,” underscores a broader market realignment. Let's dissect the rationale and its implications.

The SBAC Exit: A Profitable Run, But the Party's Over

SBA Communications, a leading tower operator, delivered extraordinary returns for Baron's investors, generating over $350 million since 2004. Yet the fund's exit signals a deliberate shift away from legacy infrastructure toward assets critical to powering AI's exponential growth.

While SBAC's fundamentals remain intact, the fund's focus is now on companies positioned to solve AI's most pressing bottleneck: energy. Data centers for large language models consume energy equivalent to small cities, and Sam Altman and Elon Musk have both warned of looming shortages. Baron's portfolio managers recognize that AI's scalability hinges on infrastructure—not just silicon chips, but power grids and energy logistics—and they're reallocating capital accordingly.

The Strategic Shift: Betting on Energy Infrastructure for AI

The fund's Q1 letter highlights a “little-known company” with a debt-free balance sheet, cash reserves equal to 30% of its market cap, and expertise in nuclear energy and LNG exports. This firm is uniquely positioned to profit from three trends:
1. AI's Energy Demand: Data centers require massive power, and this company owns critical infrastructure to meet it.
2. U.S. LNG Exports: Benefiting from Trump-era policies and global energy shifts.
3. Onshoring Manufacturing: Infrastructure rebuilds driven by tariffs and geopolitical tensions.

Baron's emphasis is clear: AI's success is not just about software—it's about the energy “toll booths” enabling it. The unnamed company trades at under 7x earnings—a valuation anomaly in today's market—while hedge funds quietly accumulate its stock. This is a low-risk, high-reward asymmetry rarely seen in growth investing.

Why Investors Must Act Now

The fund's Q1 performance—a 9.07% decline—may deter the faint-hearted, but the broader story is one of strategic discipline. Baron trimmed overvalued tech names like Vertiv (VRTX) and Guidewire (GWRE), while doubling down on its top conviction stocks. The lesson? Lagging indices are no excuse to cling to yesterday's winners.

Consider these implications:
- Geopolitical Tailwinds: U.S. energy dominance and AI adoption are now intertwined.
- Valuation Sweet Spots: The fund's target infrastructure plays are priced for stagnation, not growth.
- Risk Mitigation: Energy infrastructure offers lower volatility compared to direct AI tech plays.

The Bottom Line: Follow the Fund's Lead

Baron's exit from SBAC isn't about pessimism—it's about proactive capital allocation. Investors who ignore this shift risk being left behind in a market increasingly defined by AI's energy demands. The fund's focus on infrastructure isn't just a sector call—it's a paradigm shift.

Act now:
1. Sell or trim legacy infrastructure holdings (e.g., tower operators, traditional utilities).
2. Target energy infrastructure firms with exposure to AI's power needs.
3. Prioritize cash-rich, low-debt companies with strategic stakes in AI-driven ventures.

The next decade will reward those who recognize that AI's true engine isn't code—it's energy. Baron's move is a masterclass in preparing for what's next. Don't miss the train.

This article reflects an analysis of public information and is not financial advice. Consult a professional before making investment decisions.