Significance γ-secretase activating protein (GSAP) has emerged as a key regulator of γ-secretase. In cells, GSAP exists primarily in the form of a 16-kDa fragment known as GSAP-16K. In this study, we report the finding that GSAP-16K undergoes phase separation in vitro and in cells. Importantly, the outcome of GSAP-16K phase separation directly regulates the protease activity of human γ-secretase. Through direct interaction with the substrate amyloid precursor protein–C-terminal 99-residue fragment, GSAP-16K in dilute phase favors the production of β-amyloid peptide 42 (Aβ42) but not Aβ40. These observations not only explain how GSAP activates γ-secretase but also identify their interaction as a target of potential therapeutic intervention.