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IPO market: Back with a bang or heading for blowout?

Cheer has returned to London's initial public offering (IPO) market, but investors may want to watch out for froth as they crack open the champagne bottles.

"It feels like we're back to something that has some real legs to it," Alasdair Warren, head of EMEA financial sponsors coverage at Goldman Sachs, told CNBC.

Over $24 billion was raised in European IPOs by the end of October, more than double the amount raised at the same time in 2012. Andalmost half of that was raised on the London Stock Exchange.

As the market has returned to health, investors are being warned to try and avoid overexuberance. IPOs, where a company raises money in exchange for a share in the company, can be risky.

(Read more: IPO for latest "wonder material)

"It's the natural cycle we're seeing here. We've got to be careful that it's not got too overheated already," Martin Gilbert, chief executive of Aberdeen Asset Management, one of Europe's largest fund managers, told CNBC.

Royal Mail, real estate agent Foxtons, Madame Tussauds owner Merlin Entertainment and insurer Direct Line are among the most high-profile flotations on the London market this year, and all have performed well since the launch of their IPOs. There has even been an investigation launched by the U.K. government into whether Royal Mail, formerly government-owned and the largest European IPO to price as of the end of October, was sold off too cheaply.

(Read more: Royal Mail share offer)

Many of the businesses which have been listed in recent months had been owned by private equity houses or other large owners, like Royal Bank of Scotland in the case of Direct Line. There are risks to investors that these owners are clearing the less attractive assets out of their cupboard.

"There's definitely froth in the market. Private equity are there to exit when they get a chance. I would be cautious about buying when they're selling," Gilbert warned.

The rebound has come from businesses which had been aiming to come to the market for a while, rather than a "clear out" of under-performing businesses, Warren argued.

"It's less clearing out and more that there are a number of pretty high quality businesses…and it's those businesses that are attracting the best valuations," he said.

(Read more: U.K. IPOs surge)

Shareholders seem to have benefited in the short term from the most recent round of IPOs.

The average 1-day return for LSE listed IPOs stood at 6.5 percent in 2013 at the start of November, the highest level since 2003. Smaller insurer Esure has been less successful, with 20 percent off its valuation since its flotation in March.

Europe's boom has been fueled partly from inflows from U.S. investors, who are awash with cheap capital after a succession of loose monetary policy manoeuvres by the U.S. Federal Reserve.

"When you look at where investment flows are coming from, it's no surprise that over 50 percent of the interest we've seen in European IPOs this year is coming from America," Warren said.

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.

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