Sporting Ranch Capital is a new kind of private equity fund. It targets recreational ranch land in the Rocky Mountains, buying rundown ranches in all-cash deals and bringing in a team of experts, CFI Global Fisheries Management, to rehabilitate the rivers and streams into thriving fisheries.
Sporting Ranch Capital doesn't typically fix up or build homes or farm structures. It just refurbishes the landscape. Once that's finished, the resulting investment-grade fishery is then flipped to wealthy buyers looking for trophy retreats.
It's an unusual investment strategy, to be sure, but like other kinds of U.S. real estate, recreational ranch land values nosedived in the downturn, shedding as much 50 percent from the peak in certain markets. The properties that have shown the most resilience have been those with pristine resources located near high-end resort communities—a double threat that's hard to find.
It got Ellis, a former Morgan Stanley institutional sales manager, thinking that big upside could be had in cleaning up discounted, degraded property with water rights in a prime location.
"We are still in '02 valuations here in the Rocky Mountain West so I can make the great buys, still find the undervalued assets, the denigrated cattle ranches," he said. "Sourcing inventory is key and it's very difficult. So our issue has never been to access the capital, it's capital deployment."
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The concept got the attention of a number of deep-pocketed investors, a majority of them from Texas and ranch owners themselves. But none more so than T. Boone Pickens. The energy maven bought into the fund in its infant stages, becoming a partner on the condition that Ellis quit his Wall Street job and focus on the ranches full time.
"He offers me unlimited resources in anything I need," said Ellis. "He couldn't be a better partner."
Sporting Ranch Capital's first fund launched in 2012, raising and deploying $30 million. Now closed, it boasts properties in Idaho, New Mexico, Colorado, Wyoming and the Freestone River Ranch, in Utah.
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Now it's raising $50 million for its second fund. And interest isn't just coming from wealthy energy entrepreneurs anymore; in the last two months, a "significant" number of Wall Street investors have begun inquiring about the boutique venture. The minimum buy-in: $1 million.
It's not necessarily surprising. With geopolitical tensions in places like Ukraine, emerging market selloffs in countries like Turkey and U.S. stocks' choppy start to 2014, more investors are seeking out hard assets as an opportunity to diversify a portfolio, hedge against inflation and pursue a solid return in something unrelated to the equity markets.
But as the recovery picks up in housing, pushing prices higher and cap rates lower, real estate funds are getting increasingly creative in their quests for attractive returns.
A growing number of funds are focusing on farmland, hoping to bank on the agriculture boom of the past five years. So many in fact, that the Oakland Institute estimates that $10 billion in institutional capital has been dedicated to farmland.
In addition to the rapid institutionalization of the REO-to-rental market, some funds are now targeting secondary housing, like Occasio Funds, which invests in the luxury vacation home market.
And when it comes to ranch land, Sporting Ranch Capital isn't even alone. Beartooth Capital Western Ranches, based in Bozeman, Mont., also buys and restores recreational ranches, banking on land conservation for returns.
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Sporting Ranch Capital hasn't flipped any properties yet. The first three finished ranches will hit the market this spring. Ellis "conservatively" projects annualized returns in the low-to-mid teens for his investors. That's net of management fees and without factoring in market appreciation.