We started out that way, but went to a separate server. The issue was with
the backup and restore. When we began using it, if you had to restore any
part (a single directory, say), you would have to restore the whole space.
(We did once...that's all it took.) And, you had to have room on the AS/400
for twice the space of the INS because on the restore it wrote to a
temporary space, then wrote to the INS itself. This all might have changed
by now.
I don't recall any performance issues, though.
Xe, SP 22_D1, Update 6, ES=AS/400 V5R2, CO=AS/400, Thick & Citrix Clients