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Private equity's Wild West play

"Look at that fish!" exclaims Jay Ellis, wading into the 34 degree water to scoop up an 18-inch brown trout. The Texas resident may be far from home on this Kamas, Utah, ranch but he still knows all the best fly-fishing holes.

As he should. Ellis has been restoring this 204-acre Park City-area property for more than a year, enlisting a team to clean up the overgrazed fields and revitalize the streams. But fly-fishing isn't just a folly for this outdoorsman; it's a chance to keep tabs on the ranch's most valuable residents, the trout population.

Come springtime, Freestone River Ranch will be listed for sale, likely touting a $10 million price tag. It will be one of the first finished offerings from Sporting Ranch Capital, the budding investment venture that Ellis started in 2012.

Mountains Development: View from the stretch of highway between Park City and Freestone River Ranch
Brad Quick | CNBC
Mountains Development: View from the stretch of highway between Park City and Freestone River Ranch

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."

(Read more: Private equity salivates at bullish 'middle market')

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.

(Read more: Red flags for private equity investors)

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.

(Read more: Tiger 21 founder: Super-rich clients looking toward private equity in 2014)

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.

Sporting Ranch Capital's Jay Ellis (r) on one of his PE fund's ranches near Park City, Utah. CNBC's Morgan Brennan holds a brown trout.
Brad Quick | CNBC
Sporting Ranch Capital's Jay Ellis (r) on one of his PE fund's ranches near Park City, Utah. CNBC's Morgan Brennan holds a brown trout.

"Our fund is different in a way from a typical private equity fund," added Ellis. "I mean, our fund is an eight-year final with two one-year extensions. However, each time we monetize an asset we send out a distribution—so your capital is not locked up for the entire duration."

That's probably a good thing. After all, like other kinds of luxury real estate, a trophy sporting ranch—and its accompanying trophy price—is still subject to a buyer.

"The average ranch listing is about two years—even during the healthiest of market conditions," said Carlos Ordonez of Live Water Properties, the ranch brokerage that will represent Sporting Ranch Capital's properties. But, "I would think a property like Freestone River Ranch would sell quicker, given the meticulously enhanced, turnkey nature of the property."

In the meantime, fund investors get to enjoy a perk. While the fund's properties are being rehabbed and marketed for sale, investors can take advantage, visiting the properties to go fly-fishing, game hunting and skeet shooting. It's what Ellis playfully calls the "trout dividend."

But as Ellis releases his wintertime catch back into the chilly Upper Provo, it's clear investors on Wall Street or back in Texas aren't the only ones cashing in on the trout dividend. "I've been fly-fishing, hunting all my life," said Ellis. "To be able to make this an occupation as well as a great private equity fund has been a dream."

—By CNBC's Morgan Brennan. Follow her on Twitter @MorganLBrennan