OTTAWA - A federal government bank that buys into fledgling firms with huge growth potential is too patient with losers, says a newly released study.

The Business Development Bank of Canada should cut its losses more often, abandoning the dogs in its portfolio in favour of the stars, the independent report recommends.

"BDC seems to have some difficulty to walk away from non-performing investments to concentrate on winners," say the authors. "Build winners, walk away from losers."

The study was ordered by the Conservative government following years of lacklustre performance by the Crown-owned bank's venture-capital division.

Canada's venture-capital industry, barely two decades old, has been struggling since the dot-com meltdown of 2001, leaving the bank as one of the bigger and more active players.

Venture capital refers to money used to buy an ownership stake in start-up companies, often high-tech firms, in the hope of huge payouts when a breakthrough product or service takes off in the marketplace. Such high-risk investments in the United States have proven to be gold mines in the cases of Google, Intel and Apple.

Canada's record is poorer, and BDC's balance sheet for its venture-capital division has recorded operational losses for at least the last six years.

The bank's last annual report showed $600 million invested in the sector, about $533 million directly with individual companies and the rest pooled in larger funds. The venture-capital division represents less than 10 per cent of the bank's business, which is focused on more traditional lending arrangements.

In 2001, the Liberal government directed the bank to focus its venture capital on knowledge-based industries, such as technology and life sciences; on the commercialization of research; and on firms in their earliest stages.

Since then, the venture-capital division has started to rack up a series of annual operating losses - $33.6 million in 2006-2007, the last year reported.

In July 2006, then-industry minister Maxime Bernier ordered an external evaluation of the strategy, and the bank paid two consultants $102,000 to analyze its performance and survey industry players.

Censored versions of their report and related material were obtained by The Canadian Press under the Access to Information Act.

The consultants were generally supportive of the BDC strategy, noting that the bank's ho-hum returns mirror the lacklustre performance of all venture capital in Canada.

"BDC's net returns are slightly below the industry average," consultants Gilles Durufle and Gabriel Youssef wrote. "They have not bounced back since the burst of the bubble."

The pair's survey of business people found respect on the street for the bank's managers, though there were concerns raised about lack of entrepreneurship and operational experience.

A spokesman for the bank said he accepts the consultants' recommendation about bailing out of losers more often.

"Maybe sometimes we were a little too patient," Jacques Simoneau, executive vice president of investments, said in an interview from BDC headquarters in Montreal.

"And we tried a little too long, as opposed to a typical venture capitalist who would be there only for profit, who might cut loose."

Since the report was written, the bank has instituted a systematic triage process to identify problem companies in the portfolio "so that we can take action earlier," Simoneau said.

At the same time, the bank faces a delicate balancing act because its mandate is to help promising young companies bring stellar products to market, which takes patience, he said. Investments are generally held for longer than five years.

In the meantime, the BDC has quietly dropped venture-capital results from its list of key corporate performance indicators for all future years.

The so-called 10-year internal rate of return (IRR), a standard yardstick of success in the industry, was actually negative and below target for the bank in 2006-2007.

"The nature of BDC's early-stage patient capital role means that comparing our IRR to the industry's is not an appropriate or useful key performance indicator," says the annual report.

The current industry minister, Jim Prentice, has sent a letter to the bank setting out fresh priorities. BDC spokeswoman Johanne Bissonnette says the document will be made public in the coming weeks.

The modern-day Business Development Bank was created by legislation in 1995, although it has existed under different names since 1944.

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